**FORM 10-QSB**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

| **ý**                                                                                                                                                                                                                                                                                                          | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                |       |                                                                                                    |
| **For the quarterly period ended  September 30, 2005**                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                |       |                                                                                                    |
| **OR**                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                |       |                                                                                                    |
| **o**                                                                                                                                                                                                                                                                                                               | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                |       |                                                                                                    |
| **For the transition period from                          to                        .** |

 

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

 

**WHITTIERENERGY CORPORATION**

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

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

 

**333 Clay Street, Suite 1100**

**Houston, Texas 77002**

(Address of PrincipalExecutive Offices)

 

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

 

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

 

YES  ý                                                        NO  o

 

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

 

YES  o                                                        NO ý

 

As of November 14, 2005 the Registrant had 3,985,325 shares of its$.001 par value common stock issued and outstanding.

 

 

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**Part I – SummarizedFinancial Information**

**Item 1 – Financial Statements**

 

**Whittier Energy Corporation**

**Consolidated Balance Sheets**

**(In Thousands)**

* *
| ** **                                                     | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                           |       | **(Unaudited)**              |       | **(Restated)**              |       |
| **Assets**                                                     |       |                         |       |                        |       |
| Current assets:                                                |       |                         |       |                        |       |
| Cash and cash  equivalents                                     |       | $                            | 5,827      |                        | $          | 1,461 |   |
| Accounts  receivable, net of allowances                        |       | 8,479                        |       | 2,491                       |       |
| Income tax  receivable                                         |       | —                       |       | 28                          |       |
| Deferred income  tax asset - commodity price hedging contracts |       | 2,855                        |       | 376                         |       |
| Prepaid assets                                                 |       | 1,082                        |       | 108                         |       |
|                                                           |       |                         |       |                        |       |
| Total current assets                                           |       | 18,243                       |       | 4,464                       |       |
|                                                           |       |                         |       |                        |       |
| Investments in partnerships                                    |       | 256                          |       | 284                         |       |
| Investments in marketable securities                           |       | 282                          |       | 1,054                       |       |
| Other assets                                                   |       | 279                          |       | —                      |       |
| Oil and gas properties on the basis of full cost  accounting:  |       |                         |       |                        |       |
| Proved  Properties, subject to amortization                    |       | 78,875                  |       | 23,360                      |       |
| Unproved  properties, not subject to amortization              |       | 23,927                       |       | 2,442                       |       |
| Other equipment  and fixtures                                  |       | 97                           |       | 119                         |       |
| Accumulated depletion, depreciation and amortization           |       | (10,599                      | )          | (6,108                      | )          |
|                                                           |       | 92,300                       |       | 19,813                      |       |
|                                                           |       |                         |       |                        |       |
| Total assets                                                   |       | $                            | 111,360    |                        | $          | 25,615 |   |

 

*Seeaccompanying notes.*

 

2

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* *
| ** **                                                                                                                                                                                    | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                          |       | **(Unaudited)**              |       | **(Restated)**              |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                 |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                                                          |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                              |       | $                            | 5,894      |                        | $          | 2,814 |   |
| Taxes payable                                                                                                                                                                                 |       | 87                           |       | 29                          |       |
| Commodity price  hedging contracts, current portion                                                                                                                                           |       | 8,170                        |       | 1,087                       |       |
| Revolving credit  facility, current portion                                                                                                                                                   |       | —                       |       | 1,650                       |       |
| Total current liabilities                                                                                                                                                                     |       | 14,151                       |       | 5,580                       |       |
|                                                                                                                                                                                          |       |                         |       |                        |       |
| Deferred income tax liability                                                                                                                                                                 |       | 21,237                       |       | 834                         |       |
| Revolving credit facility                                                                                                                                                                     |       | 17,000                       |       | 6,095                       |       |
| Convertible subordinated note payable                                                                                                                                                         |       | —                       |       | 1,787                       |       |
| Asset retirement obligation                                                                                                                                                                   |       | 593                          |       | 121                         |       |
| Commodity price hedging contracts                                                                                                                                                             |       | 3,480                        |       | 737                         |       |
|                                                                                                                                                                                          |       | 56,461                       |       | 15,154                      |       |
|                                                                                                                                                                                          |       |                         |       |                        |       |
| Redeemable,  convertible, cumulative Preferred Stock, Series A, 8% 895,912 shares  issued and outstanding                                                                                |       | 46,066                       |       | —                      |       |
| Commitments and contingencies                                                                                                                                                                 |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                    |       |                         |       |                        |       |
| Common stock,  $.001 par value, 100,000,000 shares authorized, 3,983,659 and 3,841,134  shares issued and outstanding as of September 30, 2005 and  December 31, 2004, respectively |       | 4                            |       | 4                           |       |
| Additional  paid-in capital                                                                                                                                                                   |       | 6,016                        |       | 5,176                       |       |
| Accumulated  other comprehensive income, unrealized gain (loss) on marketable securities,  net of taxes of ($16) and $64, at September 30, 2005 and  December 31, 2004              |       | (30                          | )          | 119                         |       |
| Accumulated  other comprehensive loss, hedging contracts, net of taxes of $3,794 and $634,  at September 30, 2005 and December 31, 2004                                             |       | (7,046                       | )          | (1,178                      | )          |
| Retained  earnings                                                                                                                                                                            |       | 9,889                        |       | 6,340                       |       |
| Total stockholders’ equity                                                                                                                                                               |       | 8,833                        |       | 10,461                      |       |
|                                                                                                                                                                                          |       |                         |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                                                               |       | $                            | 111,360    |                        | $          | 25,615 |   |

 

*Seeaccompanying notes.*

 

3

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**Whittier Energy Corporation**

**Consolidated Statements ofOperations**

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

**(Unaudited)**

 
| ** **                                 | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Three Months  Ended  September 30,  2004** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
|                                       |       |                                              |       | **(Restated)**                                    |       |                                             |       | **(Restated)**                                   |       |
|                                       |       |                                              |       | ** **                                        |       |                                             |       | ** **                                       |       |
| Oil and gas revenues                       |       | $                                                 | 9,595      |                                              | $          | 2,867                                            |       | $                                                | 16,253     |   | $ | 6,942 |   |
|                                       |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Costs and expenses:                        |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Lease operating  expenses                  |       | 1,381                                             |       | 857                                               |       | 3,374                                            |       | 1,996                                            |       |
| Production taxes                           |       | 777                                               |       | 260                                               |       | 1,343                                            |       | 633                                              |       |
| Depreciation,  depletion, and amortization |       | 2,835                                             |       | 701                                               |       | 4,492                                            |       | 1,676                                            |       |
| Ineffective  portion of hedge contracts    |       | 687                                               |       | —                                            |       | 798                                              |       | —                                           |       |
| General and  administrative expenses       |       | 1,186                                             |       | 375                                               |       | 2,042                                            |       | 1,049                                            |       |
|                                       |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Total costs and expenses                   |       | 6,866                                             |       | 2,193                                             |       | 12,049                                           |       | 5,354                                            |       |
|                                       |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Income from operations                     |       | 2,729                                             |       | 674                                               |       | 4,204                                            |       | 1,588                                            |       |
|                                       |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Other income (expense):                    |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Interest and  dividend income              |       | 6                                                 |       | 1                                                 |       | 15                                               |       | 2                                                |       |
| Interest expense                           |       | —                                            |       | (109                                              | )          | (224                                             | )          | (198                                             | )          |
| Gain from sales  of marketable securities  |       | 902                                               |       | —                                            |       | 1,267                                            |       | —                                           |       |
| Impairment of  marketable securities       |       | —                                            |       | —                                            |       | —                                           |       | (645                                             | )          |
| Partnership  income                        |       | 75                                                |       | 47                                                |       | 198                                              |       | 168                                              |       |
|                                       |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Other income (expense)                     |       | 983                                               |       | (61                                               | )          | 1,256                                            |       | (673                                             | )          |
|                                       |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Income before income taxes                 |       | 3,712                                             |       | 613                                               |       | 5,460                                            |       | 915                                              |       |
| Provision for income taxes                 |       | 1,299                                             |       | (11                                               | )          | 1,911                                            |       | 320                                              |       |
| Net income                                 |       | $                                                 | 2,413      |                                              | $          | 624                                              |       | $                                                | 3,549      |   | $ | 595 |   |

 

*See accompanying notes.*

 

4

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| ** **                                                              | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Three Months  Ended  September 30,  2004** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                              | ** ** | ** **                                        | ** ** | **(Restated)**                                    | ** ** | ** **                                       | ** ** | **(Restated)**                                   | ** ** |
|                                                                    |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Basic earnings per share:                                               | ** ** | ** **                                        | ** ** | ** **                                        | ** ** | ** **                                       | ** ** | ** **                                       | ** ** |
| Net income per share                                                    |       | $                                                 | .61        |                                              | $          | . 16                                             |       | $                                                | .91        |   | $ | .17 |   |
| Weighted average  number of shares outstanding (basic)                  |       | 3,954,756                                         |       | 3,829,491                                         |       | 3,885,515                                        |       | 3,535,803                                        |       |
| ** **                                                              | ** ** | ** **                                        | ** ** | ** **                                        | ** ** | ** **                                       | ** ** | ** **                                       | ** ** |
| Diluted earnings per share:                                             | ** ** | ** **                                        | ** ** | ** **                                        | ** ** | ** **                                       | ** ** | ** **                                       | ** ** |
| Net income per share                                                    |       | $                                                 | .19        |                                              | $          | .16                                              |       | $                                                | .47        |   | $ | .17 |   |
| Weighted average  number of shares outstanding (dilutive)               |       | 12,733,270                                        |       | 4,076,075                                         |       | 7,578,127                                        |       | 3,773,846                                        |       |
|                                                                    |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Net income                                                              |       | $                                                 | 2,413      |                                              | $          | 624                                              |       | $                                                | 3,549      |   | $ | 595 |   |
| Diluted net income:                                                     |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Interest on  convertible subordinated note                              |       | —                                            |       | 25                                                |       | 38                                               |       | 28                                               |       |
| Diluted net income                                                      |       | $                                                 | 2,413      |                                              | $          | 649                                              |       | $                                                | 3,587      |   | $ | 623 |   |
|                                                                    |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Dilutive securities outstanding:                                        |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Basic shares  outstanding                                               |       | 3,954,756                                         |       | 3,829,491                                         |       | 3,885,515                                        |       | 3,535,803                                        |       |
| Stock options  and warrants                                             |       | 181,397                                           |       | 246,584                                           |       | 98,039                                           |       | —                                           |       |
| Convertible  subordinated note                                          |       | 67,997                                            |       | —                                            |       | 220,416                                          |       | —                                           |       |
| Series A  preferred stock                                          |       | 8,529,120                                         |       | —                                            |       | 3,374,157                                        |       | 238,043                                          |       |
| Diluted shares  outstanding, assuming conversion of dilutive securities |       | 12,733,270                                        |       | 4,076,075                                         |       | 7,578,127                                        |       | 3,773,846                                        |       |

 

*See accompanying notes.*

 

5

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**Whittier Energy Corporation**

**Consolidated Statements of CashFlows**

**(In Thousands)**

**(Unaudited)**

 
| ** **                                                                            | ** ** | **Nine Months  Ended  September 30, 2005** | ** **  | **Nine Months  Ended  September 30, 2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------|-------------|-------------------------------------------------|------------|
| ** **                                                                            | ** ** | ** **                                      | ** **  | **(Restated)**                                  | ** ** |
| **Cash flows from operating activities**                                              |       |                                            |        |                                            |       |
| Net income (loss)                                                                     |       | $                                               |  3,549 |                                            | $          |  595 |   |
| Adjustments to reconcile net income (loss) to net  cash used in operating activities: |       |                                            |        |                                            |       |
| Depreciation,  depletion, and amortization                                            |       | 4,492                                           |        | 1,676                                           |       |
| Deferred income  tax provision                                                        |       | 1,911                                           |        | 320                                             |       |
| (Gain) on the  sale of marketable securities                                          |       | (1,267                                          | )           | —                                          |       |
| Partnership  income                                                                   |       | (198                                            | )           | (168                                            | )          |
| Impairment of  marketable securities                                                  |       | —                                          |        | 645                                             |       |
| Ineffective  portion of hedge loss                                                    |       | 798                                             |        | —                                          |       |
| Increase in  accounts receivable                                                      |       | (2,640                                          | )           | (1,095                                          | )          |
| Increase in  prepaids and other receivables                                           |       | (822                                            | )           | (53                                             | )          |
| Increase in  accounts payable                                                         |       | 2,150                                           |        | 1,511                                           |       |
| Increase in  taxes payable                                                            |       | 58                                              |        | 86                                              |       |
| Net cash provided from operating activities                                           |       | 8,031                                           |        | 3,517                                           |       |
|                                                                                  |       |                                            |        |                                            |       |
| **Cash flows from investing activities**                                              |       |                                            |        |                                            |       |
| Net investment in oil and gas properties                                              |       | (8,556                                          | )           | (11,364                                         | )          |
| Acquisition of RIMCO Production Company, net of cash  acquired                        |       | (55,377                                         | )           | —                                          |       |
| Proceeds from the sale of oil and gas properties                                      |       | 4,119                                           |        | 525                                             |       |
| Investments in partnerships                                                           |       | (6                                              | )           | (64                                             | )          |
| Distributions from partnerships                                                       |       | 231                                             |        | 217                                             |       |
| Proceeds from sale of marketable securities                                           |       | 1,810                                           |        | 7                                               |       |
| Net cash used in investing activities                                                 |       | (57,779                                         | )           | (10,679                                         | )          |
|                                                                                  |       |                                            |        |                                            |       |
| **Cash flows from financing activities**                                              |       |                                            |        |                                            |       |
| Proceeds from revolving credit facility                                               |       | 21,000                                          |        | 4,050                                           |       |
| Payments on revolving credit facility                                                 |       | (11,745                                         | )           | (690                                            | )          |
| Proceeds from convertible note                                                        |       | —                                          |        | 1,787                                           |       |
| Payments on convertible note                                                          |       | (1,072                                          | )           | —                                          |       |
| Debt issuance costs                                                                   |       | (266                                            | )           | —                                          |       |
| Net proceeds from private placement                                                   |       | —                                          |        | 2,331                                           |       |
| Net proceeds from preferred stock offering                                            |       | 46,066                                          |        | —                                          |       |
| Proceeds from stock option exercises                                                  |       | 131                                             |        | —                                          |       |
| Net cash provided from financing activities                                           |       | 54,114                                          |        | 7,478                                           |       |
|                                                                                       |            |                                                 |             |                                                 |            |  |  |

 

6

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| ** **                                                                                   | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** | **Nine Months  Ended  September 30, 2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                                                         |       |                                            |       | **(Restated)**                                  |       |
|                                                                                         |       |                                            |       | ** **                                      |       |
| Net increase in cash and cash equivalents                                                    |       | $                                               | 4,366      |                                            | $          | 316 |   |
|                                                                                         |       |                                            |       |                                            |       |
| Cash and cash equivalents at beginning of period                                             |       | 1,461                                           |       | 1,037                                           |       |
|                                                                                         |       |                                            |       |                                            |       |
| Cash and cash equivalents at end of period                                                   |       | $                                               | 5,827      |                                            | $          | 1,353 |   |
|                                                                                         |       |                                            |       |                                            |       |
| **Supplemental cash flow disclosure**                                                        |       |                                            |       |                                            |       |
| Interest paid                                                                                |       | $                                               | 706        |                                            | $          | 253 |   |
| ** **                                                                                   | ** ** | ** **                                      | ** ** | ** **                                      | ** ** |
| **Supplemental schedule of non-cash investing  and financing activities**               | ** ** | ** **                                      | ** ** | ** **                                      | ** ** |
| Unrealized loss on marketable securities, net                                                |       | $                                               | 30         |                                            | $          | 2 |   |
| Convertible note issued for purchase of South Texas  properties                              |       | —                                          |       | $                                               | 1,787      |   |
| Repayment of principal on convertible note using  common stock                               |       | $                                               | 715        |                                            | —     |   |
| Value of stock warrants issued for purchase of South  Texas properties                       |       | $                                               | —     |                                            | $          | 135 |   |
| Issuance of  common stock in exchange for settlement of outstanding investment banking  fees |       | $                                               | —     |                                            | $          | 40 |   |

 

*See accompanying notes.*

 

7

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**Whittier Energy Corporation **

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**1.****                                      General**

 

Whittier EnergyCorporation, a Nevada corporation (“Whittier”), is an independent oil and gasexploration and production company engaged in the acquisition, exploration anddevelopment of oil and gas properties in the continental United States. As of September 30,2005, Whittier had five wholly owned subsidiaries, including Whittier EnergyCompany (“Whittier Energy”), a Nevada corporation, Whittier Operating, Inc.(“Whittier Operating”), a Texas corporation, Olympic Resources (Arizona) Ltd.,an Arizona corporation, RIMCO Production Company, Inc. (“RIMCO”), aDelaware corporation, and Vaquero Gas Company, Inc. (“Vaquero”), a Texas corporation.Whittier Operating is a direct subsidiary of Whittier Energy and Vaquero is adirect subsidiary of RIMCO. References to the “Company” refer to Whittier andits subsidiaries.

 

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States have been condensed or omitted. Reference should be made to therelevant notes to the financial statements included in the Company’s AnnualReport on Form 10-KSB for the fiscal year ended December 31, 2004. Theinformation furnished herein was taken from the books and records of theCompany without audit. However, the information reflects all adjustments, whichare, in the opinion of management, normal recurring adjustments necessary forthe fair statement of the results for the interim periods presented. Theresults of operations for the interim period are not necessarily indicative ofthe results to be expected for any future interim period or for the year.

 

In conjunction with the RIMCO acquisition, we adopted the full costmethod of accounting for our oil and gas activities.  The Company believes that the full costmethod of accounting more appropriately reflects the operating results of anindependent oil and gas producer that expends significant amounts of capital onexploration activities in order to discover proved reserves. Accordingly, theCompany believes full cost accounting is the preferred method for thepost-acquisition Company. We arrived at this conclusion based on a number ofconsiderations, including: 1) the material size of the transaction and RIMCO’shistorical use of full cost accounting; 2) the composition of RIMCO’s acquiredassets; 3) the nature of RIMCO’s prospect generation business and technicalpersonnel; and 4) the Company’s anticipated exploration projects and capitalexpenditures subsequent to the Acquisition. Additionally, the full cost method is used by many of Whittier’s peers,and management believes the change will enhance the overall transparency andpeer group comparability of the Company’s financial statements.  The Company’sconversion to full cost accounting is currently under review by the SEC, inconnection with the SEC’s review of Whittier’s registration statements on FormsSB-2 filed on August 8, 2005.  Whittier’sfinancial results have been retroactively restated to reflect the conversion tothe full cost method, which is further described in Note 8.

 

8

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

 
| ** **                                             | ** ** | **Three Months  Ended  September 30,  2004** | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
|                                                   |       |                                              |       |                                             |       |
| Net income, as originally presented                    |       | $                                                 | 560        |                                             | $          | 246 |   |
| Basic net income per share, as originally presented    |       | $                                                 | 0.15       |                                             | $          | 0.07 |   |
| Diluted net income per share, as originally  presented |       | $                                                 | 0.14       |                                             | $          | 0.07 |   |
|                                                   |       |                                              |       |                                             |       |
| Net income , as adjusted                               |       | $                                                 | 624        |                                             | $          | 595 |   |
| Basic net income per share, as adjusted                |       | $                                                 | 0.16       |                                             | $          | 0.17 |   |
| Diluted net income per share, as adjusted              |       | $                                                 | 0.16       |                                             | $          | 0.17 |   |

 

On July 1, 2005, the Company effected a one-for-three reversesplit of its authorized and outstanding shares of common stock. All historicalweighted average share and per share amounts have been restated to reflect thereverse stock split. In addition to the retroactive restatement to reflect theconversion to the full cost method and the one-for-three reverse stock split,certain prior period amounts have been reclassified to conform to the currentperiod presentation, including netting deferred tax assets and liabilities onthe Company’s consolidated balance sheets and reclassifying the Company’sliability for its hedging commodity contracts between current and long-termliabilities. Such reclassifications had no effect on the Company’s net incomeor stockholders’ equity.

 

On June 15, 2005, Whittier completed the acquisition of RIMCOProduction Company, Inc., a privately held Delaware corporation, forapproximately $57.1 million (the “Acquisition”).  The Acquisition was structured as a merger ofRPC Acquisition Company, Inc., a Delaware corporation wholly owned byWhittier, into RIMCO. Upon closing of the Acquisition, Whittier became the soleowner of RIMCO. The existing shareholders of RIMCO received total considerationof approximately $55 million in cash, subject to certain adjustments, which arediscussed below. Whittier is the accounting and legal acquirer of RIMCO. TheAcquisition is further described in Note 14.

 

Contemporaneously with the Acquisition and to fund a portion of thepurchase price, Whittier issued and sold 852,912 shares of Series A 8%Automatically Convertible Preferred Stock (the “Series A Preferred Stock”)for an aggregate offering amount of approximately $50 million. The Company’s Series APreferred Stock is further described in Note 10. Whittier also entered into anew $75 million revolving credit facility with an initial borrowing base of$30.5 million as more fully described in Note 9.

 

9

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**2.****                                      Earnings(Loss) Per Common Share**

 

Basic earnings (loss) per common share is calculated by dividing netincome or loss by the aggregate weighted average number of shares outstandingduring the periods. Diluted earnings (loss) per share considers the dilutiveeffect of the average number of common stock equivalents, consisting of theCompany’s common stock options and warrants and common stock underlying aconvertible note (see Note 9) and preferred stock (See Note 10) that wereoutstanding during the periods.  The Companyhad no anti-dilutive common stock equivalents outstanding for the three and ninemonths ended September 30, 2005, respectively.

 

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

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share–BasedPayment,” a revision of SFAS No. 123, “Accounting for Stock-BasedCompensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees” and amends SFAS No. 95, “Statement of CashFlows.” SFAS No. 123(R) requires a company to recognize equity basedcompensation, including stock option grants, at fair value in the incomestatement, and discontinues accounting for equity based compensation under APBOpinion No. 25, the intrinsic value method. The requirements of thispronouncement are effective for fiscal periods beginning after December 15,2005, for small business filers. Whittier currently accounts for equity basedcompensation using APB Opinion No. 25 under which no compensation cost foremployee stock options has been recognized. SFAS No. 123(R) also requiresthe benefits of tax deductions in excess of recognized compensation cost to bereported as cash flow from financing activities rather than as cash flow fromoperations, as required currently. TheCompany will adopt SFAS No. 123(R) as of January 1, 2006. The Companyis currently evaluating the impact of the adoption of SFAS No. 123(R)on its financial statements.

 

In July 2005, the FASB issued the exposure draft “Accounting forUncertain Tax Positions, a proposed interpretation of FASB Statement No. 109.”The proposed interpretation would apply to all open tax positions under SFAS No. 109.The conclusions in this interpretation apply to the initial recognition of taxbenefits, recognition of tax positions, measurement of tax benefits, andclassification of tax liabilities. The comment period on this exposure draftended in September 2005, and the Company is currently assessing the impact,if any, that this interpretation would have on our financial position andresults of operations. The proposed enactment date would require adoptioneffective December 31, 2005.

 

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

 

The Company accounts for stock based compensation using the intrinsicvalue method under APB Opinion No. 25, “Accounting for Stock Issued toEmployees.” SFAS No. 123, “Accounting for Stock-based Compensation”requires that pro forma information regarding net income and earnings per sharebe determined as if the Company had accounted for its employee stock optionsunder the fair value method as defined in SFAS No. 123. We estimate thefair value for options issued during the period, if any, as of the date ofgrant using the Black-Scholes option pricing model by using weighted averageassumptions, volatility factors of the expected market price of the Company’scommon stock, and the weighted average life expectancy of the options.

 

In December 2003, the Company’s Board of Directors approved a LongTerm Incentive Plan (the “Plan”), which was ratified by the Company’sstockholders in July 2004. The Plan sets aside a total of 520,000 sharesof the Company’s common stock for issuance to the Company’s officers,directors, employees, and consultants. On October 18, 2005, the Company’sstockholders approved expanding the number of shares of common stock availablefor issuance under the Plan to 1,876,000.

 

10

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During January 2004, the Company granted a total of 243,000options to purchase the Company’s common stock at an average exercise price of$5.25 per share to certain directors, officers, and employees of the Company,of which 5,000 options were cancelled in May 2004. The options vestratably over a three-year period from the date of grant and have a term of fiveyears. The fair market value of the net options outstanding on the date ofgrant was estimated to be $1,088,611, or $4.56 per share, using theBlack-Scholes option pricing model with the following weighted averageassumptions: risk free interest rate of 4%, dividend yield of 0%, volatilityfactors of the expected market price of the Company’s common stock of 4.74, anda weighted average life expectancy of the options of 3.5 years. The Companyissued an additional 19,834 options to various employees of the Company duringthe year ended December 31, 2004, with an average exercise price of $4.92 pershare, also subject to three-year ratable vesting with a term of five years.The fair market value of the options on the date of grant was estimated to beapproximately $51,000, or $2.58 per share, using the Black-Scholes optionpricing model using weighted average assumptions applicable on the date ofgrant.  The Company issued an additional39,278 options to various employees and consultants of the Company during the ninemonths ended September 30, 2005, with an average exercise price of $7.75 pershare. The fair market value of the options on the date of grant was estimatedto be approximately $132,000, or $3.36 per share, using the Black-Scholesoption pricing model using weighted average assumptions applicable on the dateof grant. The Company granted a total of 408,213 options to various directors,officers, employees and consultants of the Company on November 3, 2005,with an exercise price of $8.20 per share. The fair market value of the optionson the date of grant was estimated to be approximately $1.6 million, or $3.96 pershare, using the Black-Scholes option pricing model using weighted averageassumptions applicable on the date of grant.

 

For purposes ofpro forma disclosures, the estimated fair value of the options is amortized toexpense over the option’s vesting period. The Company’s pro forma informationis as follows (in thousands):

 
| ** **                                                                                    | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Three Months  Ended  September 30,  2004** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
|                                                                                          |       |                                              |       | **(Restated)**                                    |       |                                             |       | **(Restated)**                                   |       |
|                                                                                          |       |                                              |       | ** **                                        |       |                                             |       | ** **                                       |       |
| Net income under APB No. 25                                                              |       | $                                                 | 2,413      |                                              | $          | 624                                              |       | $                                                | 3,549      |   | $ | 595 |   |
|                                                                                          |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Deduct:  Stock-based compensation expense determined under the fair value method, net  of tax |       | (70                                               | )          | (62                                               | )          | (199                                             | )          | (176                                             | )          |
|                                                                                          |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Pro forma net income                                                                          |       | $                                                 | 2,343      |                                              | $          | 562                                              |       | $                                                | 3,350      |   | $ | 419 |   |
|                                                                                          |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Pro forma basic earnings per share                                                            |       | $                                                 | .59        |                                              | $          | .15                                              |       | $                                                | .86        |   | $ | .12 |   |
|                                                                                          |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Pro forma diluted earnings per share                                                          |       | $                                                 | .18        |                                              | $          | .14                                              |       | $                                                | .45        |   | $ | .12 |   |

 

#### **In the three months ended September 30,2005, 3,336 and 16,664 options to acquire the Company’s common stock at an averageexercise price of $5.82 were exercised and expired unexercised, respectively. Anadditional 1,666 options were exercised in October 2005, at an exerciseprice of $5.10 per share.**

 

11

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#### **5.**                                      Asset Retirement Obligation

#### ** **

As of September 30,2005, the Company had an estimated future abandonment obligation of $592,690,including $554,271 in costs capitalized to oil and gas properties and $38,419in cumulative accretion expense.

 

**The activity related to the Company’sfuture asset retirement obligation for the nine months ended September 30,2005, is as follows (in thousands):**

** **
| ** **                             | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                 | ** ** |
| ** **                             | ** ** | **(in thousands)**                       | ** ** |
| Beginning asset retirement obligation  |       | $                                        | 121        |   |
| Liabilities incurred during the period |       | 453                                      |       |
| Liabilities settled during the period  |       | —                                   |       |
| Accretion expense                      |       | 19                                       |       |
| Ending asset retirement obligation     |       | $                                        | 593        |   |

 

**6.****                                      MarketableSecurities**

 

The Company’s investments in marketable securities are classified as “available-for-sale”in accordance with SFAS No. 115, “Accounting for Certain Investments inDebt and Equity Securities.”  As aresult, these investments are carried at fair market value as of the relevantbalance sheet dates.  Unrealized gainsand losses are excluded from net income and reported in a separate component ofstockholder’s equity as accumulated other comprehensive income.

 

The carrying amount and estimated market value of the investments as ofSeptember 30, 2005 and December 31, 2004 are as follows (inthousands):

 
| ** **                                     | ** ** | **As of September 30, 2005** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                     | ** ** | **Cost**                          | ** ** | **Fair Value** | ** ** |
|                                           |       |                              |       |   |   |
| PYR Energy, Inc., 173,625 Shares          |       | $                                 | 328        |   | $ | 282 |   |
|                                           |       |                              |       |   |   |
| Total                                          |       | $                                 | 328        |   | $ | 282 |   |
|                                           |       |                              |       |   |   |
| ** **                                     | ** ** | **As of December 31, 2004**  | ** ** |
| ** **                                     | ** ** | **Cost**                          | ** ** | **Fair Value** | ** ** |
|                                           |       |                              |       |   |   |
| Chaparral Resources, Inc., 543,850 Shares |       | $                                 | 544        |   | $ | 870 |   |
|                                           |       |                              |       |   |   |
| PYR Energy, Inc., 173,625 Shares          |       | 328                               |       | 184 |   |
|                                           |       |                              |       |   |   |
| Total                                          |       | $                                 | 872        |   | $ | 1,054 |   |

 

12

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The Companyrecognizes any unrealized gain or loss on its marketable securities when thesecurities are sold or when the Company determines that a permanent impairmenthas occurred. As of March 31, 2004, the Company reclassified itsunrealized loss in Chaparral Resources, Inc. (“Chaparral”) as “other thantemporary” and recognized an impairment of $645,476, reducing the Company’sbook basis in the securities to $543,850. The Company has monetized itsinvestment in Chaparral in order to utilize the proceeds for the acquisition,exploration and development of oil and gas properties. During the nine monthsended September 30, 2005, the Company sold 543,850 shares of Chaparral for$1,810,595, realizing a gain of $1,266,745. During the three months ended September 30,2005, the Company sold 277,075 shares of Chaparral for $1,178,953, realizing again of $901,878.

 

The Companyrecorded an unrealized loss as a component of other comprehensive income of $29,716,net of deferred taxes of $16,000, for the nine months ended September 30,2005 and recorded an unrealized gain of $118,708, net of deferred taxes of$63,920, for the period ended December 31, 2004.

 

The Company issubject to certain trading restrictions for its investment in PYR due to SECregulations regarding stock traded by an affiliate of a public company, whichmay limit or prohibit the Company’s ability to dispose of its investment in thefuture. The Company’s President and Chief Executive Officer and an independentdirector currently serve as independent directors on PYR’s Board of Directors,making them both insiders of PYR.

 

A reconciliationof the pre- and post-tax impact of the Company’s marketable securities onaccumulated other comprehensive income for the nine months ended September 30,2005 is as follows (in thousands):

 
| ** **                                                      | ** ** | **Pre-tax** | ** ** | **After-tax** | ** ** |
|-----------------------------------------------------------------|------------|-------------|------------|---------------|------------|
| Accumulated other comprehensive income,  December 31, 2004 |       | $           | 183        |          | $          | 119 |   |
| Reclassified  into earnings                                     |       | (1,267      | )          | (824          | )          |
| Change in fair market value                                     |       | 1,038       |       | 675           |       |
|                                                            |       |        |       |          |       |
| Accumulated other comprehensive loss,  September 30, 2005  |       | $           | (46        | )             | $          | (30 | ) |

 

13

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**7.****                                      Investmentsin Partnerships**

 

**The original cost basis, cumulativedistributions and book value of the Company’s partnership investments as of September 30,2005 and December 31, 2004, were as follows (in thousands):**

** **

** **
| ** **                                                            | ** ** | **Investment  Cost Basis** | ** ** | **Cumulative  Distributions** | ** ** | **September 30, 2005  Net Book Value** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|---------------------------------------------|------------|
|                                                                  |       |                       |       |                          |       |                                        |       |
| KAB Acquisition L.P. - II, 8.0% Limited Partnership  Interest         |       | $                          | 150        |                          | $          | (258                                        | )          | $ | — |   |
| KAB Acquisition L.P. - III, 6.4286% Limited  Partnership Interest     |       | 150                        |       | (207                          | )          | —                                      |       |
| KAB Acquisition L.L.L.P. - IV, 7.2% Limited Partnership  Interest     |       | 150                        |       | (270                          | )          | —                                      |       |
| KAB Acquisition L.L.L.P. – V, 7.5% Limited  Partnership Interest |       | 150                        |       | (177                          | )          | —                                      |       |
| KAB Acquisition L.L.L.P. - VI, 2.1825% Limited  Partnership Interest  |       | 150                        |       | (75                           | )          | 75                                          |       |
| Avalanche Royalty Partners LLC, 8.925% Membership  Interest           |       | 341                        |       | (511                          | )          | —                                      |       |
| Rincon Energy Partners, LLC, 10% Membership Interest                  |       | 181                        |       | —                        |       | 181                                         |       |
|                                                                  |       |                       |       |                          |       |                                        |       |
| Total                                                                 |       | $                          | 1,272      |                          | $          | (1,498                                      | )          | $ | 256 |   |

 
| ** **                                                            | ** ** | **Investment  Cost Basis** | ** ** | **Cumulative  Distributions** | ** ** | **December 31, 2004  Net Book Value** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|--------------------------------------------|------------|
| ** **                                                            | ** ** | ** **                 | ** ** | ** **                    | ** ** | ** **                                 | ** ** |
| KAB Acquisition L.P. - II, 8.0% Limited Partnership  Interest         |       | $                          | 150        |                          | $          | (247                                       | )          | $ | — |   |
| KAB Acquisition L.P. - III, 6.4286% Limited  Partnership Interest     |       | 150                        |       | (178                          | )          | —                                     |       |
| KAB Acquisition L.L.L.P. - IV, 7.2% Limited  Partnership Interest     |       | 150                        |       | (218                          | )          | —                                     |       |
| KAB Acquisition L.L.L.P. – V, 7.5% Limited  Partnership Interest |       | 150                        |       | (139                          | )          | 11                                         |       |
| KAB Acquisition L.L.L.P. - VI, 2.1825% Limited  Partnership Interest  |       | 150                        |       | (52                           | )          | 98                                         |       |
| Avalanche Royalty Partners LLC, 8.925% Membership  Interest           |       | 341                        |       | (432                          | )          | —                                     |       |
| Rincon Energy Partners, LLC, 10% Membership Interest                  |       | 175                        |       | —                        |       | 175                                        |       |
|                                                                  |       |                       |       |                          |       |                                       |       |
| Total                                                                 |       | $                          | 1,266      |                          | $          | (1,266                                     | )          | $ | 284 |   |

** **

**The Company records its book valuein partnership investments at their cost basis, less cumulative cashdistributions from each investment. Cash distributions in excess of basis arerecorded as partnership income and any impairment of partnership investment isrecorded as a charge to income.  TheCompany periodically reviews its partnership investments for impairment bycomparing each investment’s book value against its fair value. Management usesits best efforts to estimate fair value in its partnership investments, basedon the historical and expected future performance of each investment, as wellas consideration of any significant events affecting the underlying assets ofeach partnership, which may limit the Company’s ability to recover itsinvestment. Any resulting impairment is recorded in earnings in the period theCompany determines that an impairment exists. The Company recognizedpartnership income of $74,633 and $197,993 for the quarter and nine months endedSeptember 30, 2005, compared to partnership income of $47,066 and $168,279for the quarter and nine months ended September 30, 2004, respectively.**

** **

**14**

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** **

**8.****                                      Oiland Gas Properties, Equipment and Fixtures**

 

Whittier has adopted the full cost method of accounting for its oil andgas properties.  Previously, the Company followedthe successful efforts method of accounting for its oil and gas activities.  Whittier believes that the full cost methodis preferable for a company more actively involved in the exploration anddevelopment of oil and gas reserves. Additionally, the full cost method is usedby certain of Whittier’s peers and management believes the change will improvethe comparability of Whittier’s financial statements with its peer group.Furthermore, RIMCO used the full cost method of accounting for its operationsand RIMCO’s assets constitute more than 50% of the Company’s total assets.  Whittier’s financial results have beenretroactively restated to reflect the full cost method of accounting.

 

As prescribed by full cost accounting rules, all costs associated withproperty acquisition, exploration, and development activities are capitalized.Exploration and development costs include dry hole costs, geological andgeophysical costs, direct overhead related to exploration and developmentactivities and other costs incurred for the purpose of finding oil and gasreserves. Salaries and benefits paid to employees directly involved in theexploration and development of oil and gas properties as well as other internalcosts that can be specifically identified with acquisition, exploration, anddevelopment activities are also capitalized.

 

In accordance with full cost accounting rules, Whittier is subject to alimitation on capitalized costs. The capitalized cost of oil and gasproperties, net of accumulated depreciation, depletion, and amortization, maynot exceed the estimated future net cash flows from proved oil and gas reservesdiscounted at 10 percent, plus the lower of cost or fair market value ofunproved properties as adjusted for related tax effects. If capitalized costsexceed this limit (the “ceiling limitation”), the excess must be charged toexpense. Whittier did not have any adjustment to earnings due to the ceilinglimitation for the periods presented herein.

 

The costs of certain unevaluated oil and gas properties and exploratorywells being drilled are not included in the costs subject to amortization.Whittier has assessed costs not being amortized for possible impairments orreductions in value. If a reduction in value had occurred, the portion of thecarrying cost in excess of the current value would have been transferred to thecosts subject to amortization.

 

**9.****                                      NotesPayable**

 

The Company’s outstanding debt obligations as of September 30,2005 include $17 million in long-term debt under its Credit Facility. For thequarter ended September 30, 2005, the Company capitalized 100% of itstotal interest incurred of $336,282 to its unevaluated oil and gas properties.For the nine months ended September 30, 2005, the Company incurredinterest expense of $224,496, net of capitalized interest of $481,468.  For the quarter and nine months ended September 30,2004, the Company incurred total interest expense of $108,290, net ofcapitalized interest of $32,868, and $197,338, net of capitalized interest of $55,167.

 

15

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Revolving Credit Agreement

 

In connection with the Acquisition, on June 15, 2005 Whittier enteredinto a $75 million revolving Credit Facility with BNP Paribas as the lead bankand administrative agent. The Credit Facility had an initial borrowing base of$30.5 million. Whittier borrowed $20 million from the Credit Facility topartially fund the Acquisition and to fully repay approximately $8.5 million inprincipal and accrued interest outstanding on the Company’s previous revolvingcredit facility with Compass Bank, as well as $1 million of bank debt held byRIMCO.  The Company repaid $3.0 millionin principal outstanding on the Credit Facility on September 30, 2005. Theborrowing base is subject to review and adjustment on a semi-annual basis.Amounts outstanding under the revolver will bear interest at specified marginsover the London Interbank Offered Rate (“LIBOR”) of 1.50% to 2.25%. Suchmargins will fluctuate based on the utilization of the facility. Borrowingsunder the revolver are secured by first priority liens on substantially all ofour assets, including equity interests in subsidiaries. The Company is subjectto certain financial covenants pertaining to minimum working capital levels,minimum coverage of interest expenses, and a maximum leverage ratio. Inaddition, Whittier is subject to covenants limiting dividends and otherrestricted payments, transactions with affiliates, incurrence of debt, changesof control, asset sales, and liens on properties. All amounts drawn under therevolver will mature June 15, 2008.

 

The Credit Agreement is collateralized by substantially all of theCompany’s assets and the Company is subject to various covenants,representations and warranties as established by the credit agreement. Theprimary covenants agreed to by the Company under the credit agreement, asamended, include the following:

 

**•**                  The Company will maintain a ratio of total debt to consolidatedEBITDAX (net income before interest expenses, taxes, depreciation, depletion,amortization, exploration costs, and other non-cash expenses less non-cashincome and capitalized expenses)forthe most recent period of four fiscal quarters of no greater than  3.5 to 1.0, calculated on a pro-forma basisfor the Acquisition and exclusive of the Company’s Series A PreferredStock; and

** **

•                  The Company willmaintain a current ratio, determined quarterly, of current assets to current liabilities,inclusive of available borrowing base under the Credit Facility and exclusiveof any current portion of principal outstanding under the Credit Facility, thecurrent fair value of outstanding commodity price hedging contracts, and thecurrent balance of asset retirement obligations under FAS 143, of at least oneto one.

 

The Company was in compliance with these covenants as of September 30,2005 and has classified all of its outstanding indebtedness as long-term. TheCompany’s next borrowing base review is scheduled during November 2005.

 

Anticipated future maturities of the Credit Facility as of September 30,2005, are as follows:

 
| **Year**   | ** ** | **Amount**         | ** ** |
|------------|------------|--------------------|------------|
| ** ** | ** ** | **(in thousands)** | ** ** |
| 2005       |       | $                  | —     |   |
| 2006       |       | —             |       |
| 2007       |       | —             |       |
| 2008       |       | 17,000             |       |
|       |       |               |       |
| Total      |       | $                  | 17,000     |   |

 

16

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Convertible Subordinated Note

 

In June 2004, the Company issued a six-year, approximate $1.8million subordinated note bearing interest at a rate of 7% per annum andconvertible into our common stock at a conversion price of $6.00 per share toTexas Independent Exploration Limited and certain of its affiliates inconnection with our acquisition of various operated working interests in threegas fields in South Texas. On July 22, 2005, Texas Independent ExplorationLimited and certain of its affiliates converted $714,936 of the outstandingprincipal on the note into 119,156 shares of Whittier common stock at aconversion price of $6.00 per share. On that same date, Whittier repaid allremaining principal and accrued  intereston the note for approximately $1.1 million in cash.

 

**10.****                               Series A8% Automatically Convertible Preferred Stock**

 

In connection with the Acquisition, Whittier issued and sold 852,912shares of Series A 8% Automatically Convertible Preferred Stock for anaggregate offering amount of approximately $50 million. Whittier receivedapproximately $46.9 million in net proceeds from the offering, in whichWhittier Ventures, LLC, an affiliate of the Company, and certain officers anddirectors participated.

 

Each share of Series A Preferred Stock may be converted at anytime at the holder’s election into 10 shares of Whittier’s common stock andwill automatically convert into 10 shares of its common stock, or a total of8,529,120 shares of common stock, in the event Whittier’s common stock islisted on the Nasdaq National Market. The Company submitted an application tolist its common stock on the Nasdaq National Market on May 16, 2005 andhas taken steps necessary to meet Nasdaq listing requirements, includingeffecting a one-for-three reverse split of its common stock on July 1,2005 to increase its stock price above Nasdaq’s $5.00 minimum bid price andappointing additional independent directors to Whittier’s board. If conversionof the Series A Preferred Stock has not occurred on or before December 31,2005, holders of the Series A Preferred Stock are entitled to receivequarterly dividends accruing from the date of initial issuance at a rate of 8%per annum.

 

As a condition to the offering, the Company agreed to register thecommon stock underlying the Series A Preferred Stock with the U.S.Securities and Exchange Commission (“SEC”) on or before December 12, 2005and to maintain the effectiveness of the registration for two years followingits effective date. The Company filed the required registration statements on August 8,2005. In the event the registration statements are not declared effective on orbefore December 31, 2005, the dividend rate payable on the Series APreferred Stock will increase to 8.5% per annum. If the Series A PreferredStock has been converted into common stock, Whittier will make a quarterlypayment of $0.03 per common share until the Company achieves effectiveregistration with the SEC.

 

The holders of the Series A Preferred Stock may vote on anas-converted basis with the Company’s common stock. If 51% or more of the Series APreferred Stock has not converted by December 31, 2005, the holders of theSeries A Preferred Stock, voting separately as a class, will be entitledto elect two additional members to Whittier’s board of directors and one memberif between 10% and 51% of the Series A Preferred Stock has not converted. TheCompany is required to redeem all of the outstanding Series A PreferredStock on September 14, 2008 at 108% of the liquidation preference,including the face value of any outstanding Series A Preferred Stock plusany accrued and unpaid dividends through the date of redemption.

 

**11.****                               CommodityPrice Risk Hedging Instruments**

 

**The Company held variousderivative instruments, including crude oil and natural gas option agreementsknown as “swaps” and “collars” as of September 30, 2005 and December 31,2004. Swaps are designed to fix the price of anticipated sales of futureproduction, while collars are designed to establish floor and ceiling prices onanticipated sales of future production. The Company entered into the contractsat the time it acquired certain operated oil and gas property interests as ameans to reduce the future price volatility on its sales of oil and gasproduction, as well as to achieve a more predictable cash flow from its oil andgas properties. The Company has designated its price hedging instruments ascash flow hedges in accordance with SFAS No. 133.**

 

17

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

 

Hedging contracts held as of September 30, 2005:

 
| ** **                                   | ** ** | ** **        | ** ** | **Nymex Contract Price** | ** ** | ** **              | ** ** |
|----------------------------------------------|------------|-------------------|------------|--------------------------|------------|-------------------------|------------|
| **Contract Period and Type**                 | ** ** | **Total  Volume** | ** ** | **Floor**                | ** ** | **Ceiling/Swap  Price** | ** ** | **Fair Value** | ** ** |
| ** **                                   | ** ** | ** **        | ** ** | ** **               | ** ** | ** **              | ** ** | **(in thousands)** | ** ** |
|                                         |       |              |       |                     |       |                    |       |   |   |
| **Crude Oil Contracts (barrels)**            |       |              |       |                     |       |                    |       |   |   |
| Swap Contracts:                              |       |              |       |                     |       |                    |       |   |   |
| October 2005  – December 2005 |       | 9,000             |       | N/A                      |       | $                       | 34.75      |   | $ | (283 | ) |
| October 2005  – December 2005 |       | 18,000            |       | N/A                      |       | $                       | 58.10      |   | (148 | ) |
| January 2006  – December 2006 |       | 36,000            |       | N/A                      |       | $                       | 58.00      |   | (302 | ) |
|                                         |       |              |       |                     |       |                    |       |   |   |
| Collar Contracts:                            |       |              |       |                     |       |                    |       |   |   |
| October 2005  – December 2005 |       | 3,000             |       | $                        | 26.00      |                    | $          | 29.20 |   | (111 | ) |
| October 2005  – December 2005 |       | 3,000             |       | $                        | 26.00      |                    | $          | 28.95 |   | (111 | ) |
| October 2005  – December 2005 |       | 4,500             |       | $                        | 31.00      |                    | $          | 36.95 |   | (132 | ) |
| October 2005  – December 2005 |       | 12,000            |       | $                        | 50.00      |                    | $          | 68.20 |   | (40 | ) |
| January 2006  – December 2006 |       | 96,000            |       | $                        | 30.00      |                    | $          | 34.25 |   | (2,983 | ) |
| January 2006  – December 2006 |       | 21,600            |       | $                        | 49.50      |                    | $          | 68.60 |   | (120 | ) |
| January 2007  – December 2007 |       | 54,000            |       | $                        | 47.50      |                    | $          | 69.00 |   | (277 | ) |
| January 2007  – December 2007 |       | 78,000            |       | $                        | 47.50      |                    | $          | 69.25 |   | (394 | ) |
|                                         |       |              |       |                     |       |                    |       |   |   |
| **Natural Gas Contracts (mmbtu)**            |       |              |       |                     |       |                    |       |   |   |
| Swap Contracts:                              |       |              |       |                     |       |                    |       |   |   |
| October 2005                            |       | 35,000            |       | N/A                      |       | $                       | 7.47       |   | (225 | ) |
| October 2005  –December 2005  |       | 30,000            |       | N/A                      |       | $                       | 6.02       |   | (162 | ) |
| November 2005  – March 2006   |       | 150,000           |       | N/A                      |       | $                       | 8.43       |   | (876 | ) |
| April 2006  – October 2006    |       | 210,000           |       | N/A                      |       | $                       | 7.44       |   | (654 | ) |
| November 2006  – March 2007   |       | 150,000           |       | N/A                      |       | $                       | 8.16       |   | (449 | ) |
| April 2007  – October 2007    |       | 210,000           |       | N/A                      |       | $                       | 6.97       |   | (391 | ) |
|                                         |       |              |       |                     |       |                    |       |   |   |
| Collar  Contracts:                           |       |              |       |                     |       |                    |       |   |   |
| October 2005                            |       | 55,000            |       | $                        | 6.75       |                    | $          | 8.40 |   | (234 | ) |
| October 2005–December 2005    |       | 30,000            |       | $                        | 4.00       |                    | $          | 7.20 |   | (139 | ) |
| October 2005–December 2005    |       | 72,000            |       | $                        | 5.75       |                    | $          | 6.75 |   | (355 | ) |
| November 2005  – March 2006   |       | 250,000           |       | $                        | 7.50       |                    | $          | 10.10 |   | (1,102 | ) |
| April 2006  – October 2006    |       | 280,000           |       | $                        | 6.75       |                    | $          | 8.40 |   | (690 | ) |
| January 2006  – December 2006 |       | 120,000           |       | $                        | 5.00       |                    | $          | 6.45 |   | (614 | ) |
| November 2006  – March 2007   |       | 200,000           |       | $                        | 7.25       |                    | $          | 9.75 |   | (449 | ) |
| April 2007  – October 2007    |       | 280,000           |       | $                        | 6.25       |                    | $          | 7.95 |   | (409 | ) |
|                                         |       |              |       |                     |       |                    |       |   |   |
|                                         |       |              |       |                     |       | Total                   |       | $ | (11,650 | ) |

 

18

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Hedging Contracts Held as of December 31, 2004:

 
| ** **                                   | ** ** | ** **         | ** ** | **Nymex Contract Price** | ** ** | ** **               | ** ** |
|----------------------------------------------|------------|--------------------|------------|--------------------------|------------|--------------------------|------------|
| **Contract Period and Type**                 | ** ** | **Total   Volume** | ** ** | **Floor**                | ** ** | **Ceiling/Swap   Price** | ** ** | **Fair Value** | ** ** |
|                                         |       |               |       |                     |       |                     |       | **(in thousands)** |   |
|                                         |       |               |       |                     |       |                     |       | ** ** |   |
| **Crude Oil Contracts (barrels)**            |       |               |       |                     |       |                     |       |   |   |
| Swap Contracts:                              |       |               |       |                     |       |                     |       |   |   |
| January 2005  – December 2005 |       | 36,000             |       | N/A                      |       | $                        | 34.75      |   | $ | (278 | ) |
|                                         |       |               |       |                     |       |                     |       |   |   |
| Collar Contracts:                            |       |               |       |                     |       |                     |       |   |   |
| January 2005  – April 2005    |       | 15,000             |       | $                        | 19.75      |                     | $          | 22.75 |   | (309 | ) |
| January 2005  – December 2005 |       | 12,000             |       | $                        | 26.00      |                     | $          | 29.20 |   | (160 | ) |
| April 2005 –  December 2005   |       | 9,000              |       | $                        | 26.00      |                     | $          | 28.95 |   | (119 | ) |
| January 2005  – December 2005 |       | 18,000             |       | $                        | 31.00      |                     | $          | 36.95 |   | (121 | ) |
| January 2006  – December 2006 |       | 96,000             |       | $                        | 30.00      |                     | $          | 34.25 |   | (682 | ) |
|                                         |       |               |       |                     |       |                     |       |   |   |
| **Natural Gas Contracts (mmbtu)**            |       |               |       |                     |       |                     |       |   |   |
| Swap Contracts                               |       |               |       |                     |       |                     |       |   |   |
| January 2005  – December 2005 |       | 120,000            |       | N/A                      |       | $                        | 6.02       |   | (27 | ) |
|                                         |       |               |       |                     |       |                     |       |   |   |
| Collar Contracts:                            |       |               |       |                     |       |                     |       |   |   |
| January 2005  – December 2005 |       | 120,000            |       | $                        | 4.00       |                     | $          | 7.20 |   | (39 | ) |
| January 2005  - March 2005         |       | 72,000             |       | $                        | 6.20       |                     | $          | 8.40 |   | 23 |   |
| April 2005  - September 2005       |       | 144,000            |       | $                        | 5.75       |                     | $          | 6.05 |   | (34 | ) |
| October 2005  - December 2005      |       | 72,000             |       | $                        | 5.75       |                     | $          | 6.75 |   | (23 | ) |
| January 2006  – December 2006 |       | 120,000            |       | $                        | 5.00       |                     | $          | 6.45 |   | (55 | ) |
|                                         |       |               |       |                     |       |                     |       |   |   |
|                                         |       |               |       |                     |       | Total                    |       | $ | (1,824 | ) |

 

The Company accounts for its derivatives as cash flow hedginginstruments, and recognizes gains or losses on settlement of its hedginginstruments in oil and gas revenues, and changes in their fair value as acomponent of other comprehensive income, net of deferred taxes. The Companyrecognized pre-tax losses in oil and gas revenues of $1,122,515 and $2,253,896 forthe three and nine months ended September 30, 2005, and $465,768 and $970,370for the three and nine months ended September 30, 2004, respectively, dueto realized settlements of its price hedge contracts during the respectiveperiods.

 

At September 30, 2005, the Companyrecorded unrealized losses on cash flow hedging contracts of $7,046,433, net ofdeferred taxes of $3,794,233, in accumulated other comprehensive income.  Comparatively, at December 31, 2004, theCompany recorded unrealized losses of $1,178,036, net of deferred taxes of $634,327in accumulated other comprehensive income. As of September 30, 2005, the Company anticipates $5.3 million ofunrealized losses, net of deferred taxes of $2.9 million, will be reclassifiedinto earnings during the 12 months following September 30, 2005. TheCompany recorded loss from hedge ineffectiveness of $686,223 and $797,517 forthe three and nine months ended September 30, 2005. As of December 31,2004, the Company changed its method of testing the effectiveness of its cashflow hedges from the dollar offset method to regression analysis.

 

19

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The following table details the activity of the cash flow hedges on apre-tax and after-tax basis for the period ending September 30, 2005 (inthousands).

 
| ** **                                                     | ** ** | **Pre-tax** | ** ** | **After-tax** | ** ** |
|----------------------------------------------------------------|------------|-------------|------------|---------------|------------|
| Accumulated  other comprehensive loss, December 31, 2004  |       | $           | (1,824     | )             | $          | (1,178 | ) |
| Reclassified into earnings                                     |       | 2,254       |       | 1,465         |       |
| Change in fair market value                                    |       | (12,069     | )          | (7,852        | )          |
| Ineffective portion of cash flow hedges                        |       | 798         |       | 519           |       |
| Accumulated other  comprehensive loss, September 30, 2005 |       | $           | (10,841    | )             | $          | (7,046 | ) |

 

**12.****                               RelatedParty Transactions**

 

The Company’s Chief Operating Officer, Daniel Silverman, received a4.63% net profits interest (“NPI”) in the Company’s investment in the BeaverDam Creek Field upon completion of the transaction in 2002. The NPI entitled Mr. Silvermanto 4.63% of the Company’s net operational cash flow from the field (i.e.revenues less operating costs and capital investment) after deducting relatedprincipal and interest payments under the Company’s credit facility describedin Note 9. The Company did not make any distributions to Mr. Silverman forthe NPI in 2003 and paid Mr. Silverman a total of $16,408 in net profitsin 2002. In March 2004, the Company acquired the NPI from Mr. Silvermanfor $70,000.

 

The Company entered into a $150,000 consulting agreement with TheWhittier Trust Company, an affiliate of Whittier, for the six-month periodended December 31, 2005.  Under theagreement The Whittier Trust will provide various management advisory servicesincluding financial and market analysis, investor relations and consultationregarding the Company’s disposition of its common stock in Chaparral Resources, Inc.

 

**13.****                               Commitmentsand Contingencies**

 

The Company entered into a rental lease for approximately 2,910 squarefeet of corporate office space in Houston, Texas on April 1, 2004, for arenewable term of 90 months. The renewal option of the lease allows the Companyto extend the term of the lease for one term of five years with written noticenine months prior to the expiration date of the lease. The Company has aone-time option to cancel the lease after the 51st month of theinception of the lease. The lease requires payments of approximately $5,000 permonth. In February 2005, the Company executed a preferential right letter tolease an additional 2,132 square feet adjacent to its existing office lease forapproximately $3,700 per month beginning in June 2005, subject to the samegeneral terms and conditions as the Company’s existing lease.  The Company has not executed an additionallease or assumed control over the additional space as of November 14,2005, however.

 

20

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As a result of the Acquisition, the Company assumed two office leasesheld by RIMCO, including a rental lease in Avon, Connecticut for 6,900 squarefeet, which expired in October 2005 and an office lease in Houston, Texasfor 9,110 square feet, which expires in October 2007. The RIMCOConnecticut lease required payments of $12,075 per month and the RIMCO Houstonlease requires payments of $21,350 per month. Whittier is currently consideringalternatives to consolidate and sublease its corporate office space in Houston,Texas. The Company’s existing future minimum annual lease payments for the nextfive years as of September 30, 2005, are as follows (in thousands):

 
| **Year**   | ** ** | **Amount**         | ** ** |
|------------|------------|--------------------|------------|
| ** ** | ** ** | **(in thousands)** | ** ** |
| 2005       |       | $                  | 91         |   |
| 2006       |       | 316                |       |
| 2007       |       | 274                |       |
| 2008       |       | 60                 |       |
| 2009       |       | 60                 |       |
| Thereafter |       | 110                |       |
| Total      |       | $                  | 911        |   |

 

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

 

On June 15, 2005, Whittier acquired RIMCO Production Company, Inc.,a privately held Delaware corporation, by acquiring all of the outstandingcapital stock of RIMCO, for a total purchase price of $57.1 million. The Acquisitionsubstantially increased our properties, production and undevelopedacreage.  Specifically, we acquiredworking interests in approximately 116 active wells and one unit in 18producing fields principally located in the Gulf Coast region in Texas,Louisiana, and Alabama and added approximately 23.1 billion cubic feet ofnatural gas equivalent of proved reserves, approximately 8.4 million cubic feetof natural gas equivalent of daily production, and significant undevelopedacreage with multiple prospects.

 

The Acquisition was structured as a merger of RPC Acquisition Company, Inc.,a Delaware corporation wholly owned by Whittier, into RIMCO Production Company, Inc.Upon closing of the Acquisition, Whittier became the sole owner of RIMCO. Theexisting shareholders of RIMCO received total consideration of approximately$55 million in cash, subject to certain adjustments, which are discussed below.Whittier will treat the Acquisition as a stock purchase for federal income taxpurposes and is the accounting acquirer. The Company’s interim results for the ninemonths ended September 30, 2005 include RIMCO’s operating results for theperiod from June 15, 2005 through September 30, 2005.

 

The merger agreement contains customary representations and warranties ofthe parties which relate to various aspects of the businesses, financialstatements and other matters of the parties. The representations and warrantiesof RIMCO and Whittier survive the closing for a period of five months and thereis a $2.125 million holdback amount that Whittier can draw underindemnification provisions in the agreement in the event of (i) a breachof representations or warranties, (ii) certain environmental defects, (iii) certainthird party costs to cure title defects, and (iv) any breach ornon-fulfillment of any covenant or agreement on the part of RIMCO. No recoveryfrom the holdback can occur until claims totaling $250,000 have been made.After the deductible has been reached, the entire holdback is available forindemnification. No indemnification is available (a) in excess of theholdback or (b) for title defect claims first asserted after May 18,2005.

 

Whittier funded the Acquisition using a combination of net proceedsfrom a private offering of the Company’s Series A Preferred Stock(approximately $46 million) and net borrowings from a new revolving CreditFacility entered into on June 15, 2005 (approximately $10.5 million).  The Company’s Series A Preferred Stockis more fully described in Note 10 and the Company’s Credit Facility is morefully described in Note 9.

 

21

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The following table presents the allocation of the Company’s $57.1 millionpurchase price, including professional fees and other related acquisitioncosts, to RIMCO’s assets acquired and liabilities assumed, based upon theirfair values as of June 15, 2005:

 
| ** **                          | ** ** | **As of June 15, 2005** | ** ** |
|-------------------------------------|------------|------------------------------|------------|
|                                |       | **(in thousands)**           |       |
|                                |       | ** **                   |       |
| Cash and cash equivalents           |       | $                            | 1,727      |   |
| Accounts receivable                 |       | 3,320                        |       |
| Other current assets                |       | 152                          |       |
| Oil and gas properties, evaluated   |       | 56,104                       |       |
| Oil and gas properties, unevaluated |       | 16,717                       |       |
| Other assets                        |       | 13                           |       |
| Total assets  acquired              |       | 78,033                       |       |
|                                |       |                         |       |
| Accounts payable                    |       | (930                         | )          |
| Asset retirement obligation         |       | (446                         | )          |
| Deferred income tax liability       |       | (19,553                      | )          |
|                                |       |                         |       |
| Total liabilities  assumed          |       | (20,929                      | )          |
|                                |       |                         |       |
| Net assets  acquired                |       | $                            | 57,104     |   |

 

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

 
| ** **                                 | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Three Months  Ended  September 30,  2004** | ** ** | **Nine months  Ended  September 30,  2005** | ** ** | **Nine months  Ended  September 30,  2004** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
|                                       |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Oil and gas revenues                       |       | $                                                 | 9,595      |                                              | $          | 6,424                                            |       | $                                                | 26,171     |   | $ | 20,133 |   |
|                                       |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Costs and expenses:                        |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Lease operating  expenses                  |       | 1,381                                             |       | 1,332                                             |       | 4,249                                            |       | 4,372                                            |       |
| Production taxes                           |       | 777                                               |       | 391                                               |       | 1,891                                            |       | 1,185                                            |       |
| Depreciation,  depletion, and amortization |       | 2,706                                             |       | 1,852                                             |       | 8,096                                            |       | 6,260                                            |       |
| Ineffective  portion of hedge contracts    |       | 687                                               |       | —                                            |       | 798                                              |       | —                                           |       |
| General and  administrative expenses (1)   |       | 1,186                                             |       | 1,092                                             |       | 4,891                                            |       | 3,036                                            |       |
|                                       |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Total costs and expenses                   |       | 6,737                                             |       | 4,667                                             |       | 19,925                                           |       | 14,853                                           |       |
|                                       |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Income from operations                     |       | 2,858                                             |       | 1,757                                             |       | 6,246                                            |       | 5,280                                            |       |
| Other income (expense)                     |       | 983                                               |       | (12                                               | )          | 1,538                                            |       | (549                                             | )          |
|                                       |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Income before income taxes                 |       | 3,841                                             |       | 1,745                                             |       | 7,784                                            |       | 4,731                                            |       |
| Provision for income taxes                 |       | 1,344                                             |       | 611                                               |       | 2,724                                            |       | 1,656                                            |       |
| Net income                                 |       | $                                                 | 2,497      |                                              | $          | 1,134                                            |       | $                                                | 5,060      |   | $ | 3,075 |   |
|                                       |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Basic net income per share                 |       | $                                                 | 0.63       |                                              | $          | 0.30                                             |       | $                                                | 1.30       |   | $ | 0.87 |   |
| Diluted net income per share               |       | $                                                 | 0.20       |                                              | $          | 0.09                                             |       | $                                                | 0.40       |   | $ | 0.25 |   |
| Weighted average shares outstanding:       |       |                                              |       |                                              |       |                                             |       |                                             |       |
| Basic                                      |       | 3,954,756                                         |       | 3,829,491                                         |       | 3,885,515                                        |       | 3,535,803                                        |       |
| Fully diluted                              |       | 12,733,270                                        |       | 12,605,195                                        |       | 12,733,090                                       |       | 12,302,966                                       |       |

 

----

(1)                                  Generaland administrative expenses for the nine months ended September 30, 2005reflect approximately $2.3 million in change of control costs incurred by RIMCOas a result of the Acquisition.

 

23

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

** **

**EXECUTIVEOVERVIEW**

 

Whittier is a rapidly growing independent oil and gas exploration andproduction company primarily engaged in the acquisition, exploration anddevelopment of oil and gas properties in the continental United States.  Thiswas the first full quarter with RIMCO Production Company, Inc. integratedinto the Company’s operations. We now operate in three principal areas—the GulfCoast region, South Texas and the Permian Basin. Financial and operatinghighlights for third quarter 2005 included the following:

 

•                  Integration ofRIMCO operations;

 

•                  Net income of $2.4million, a 287% increase over third quarter 2004;

 

•                  Diluted earningsper share of $0.19, a 19% increase over third quarter 2004;

 

•                  Cash flowsprovided by operating activities of $4.7 million,  a 338% increase over third quarter 2004;

 

•                  A 134 % percentincrease in daily production over third quarter 2004; and

 

•                  Increases of  82% in the average realized crude oil priceand  42% in the average realized naturalgas price over third quarter 2004.

 

Additionally, we have adopted the full cost method of accounting forour oil and gas activities and on July 1, 2005, we effected aone-for-three reverse split of our authorized and outstanding shares of commonstock.

 

***RIMCOAcquisition***

 

On June 15, 2005, we acquired RIMCO Production Company, Inc.,a privately held Delaware corporation, for approximately $57.1 million,including $55 million in cash and $2.1 million in closing costs and net assumedliabilities. As a result of this transaction, we acquired working interests inapproximately 116 active wells and one unit in 18 producing fields principallylocated in the Gulf Coast region in Texas, Louisiana, and Alabama. Thetransaction added approximately 23.1 billion cubic feet of natural gasequivalent (Bcfe) of proved reserves as of December 31, 2004,approximately 8.4 million cubic feet of natural gas equivalent (Mmcfe) of dailyproduction, and significant undeveloped acreage with multiple prospects.  We consider the RIMCO acquisition atransforming event for the Company, shifting us from an “acquire and exploit” focusto a much larger enterprise with a focus on growth through drilling andexploration as well as acquisitions.

 

***Full Cost Method of Accounting***

 

In conjunction with the RIMCO acquisition, we adopted the full costmethod of accounting for our oil and gas activities.  The Company believes that the full costmethod of accounting more appropriately reflects the operating results of anindependent oil and gas producer that expends significant amounts of capital onexploration activities in order to discover proved reserves. Accordingly, theCompany believes full cost accounting is the preferred method for thepost-acquisition Company. We arrived at this conclusion based on a number ofconsiderations, including: 1) the material size of the transaction and RIMCO’shistorical use of full cost accounting; 2) the composition of RIMCO’s acquiredassets; 3) the nature of RIMCO’s prospect generation business and technicalpersonnel; and 4) the Company’s anticipated exploration projects and capitalexpenditures subsequent to the Acquisition. Additionally, the full cost methodis used by many of Whittier’s peers, and management believes the change willenhance the overall transparency and peer group comparability of the Company’sfinancial statements.  The Company’s conversion to full cost accounting iscurrently under review by the SEC, in connection with the SEC’s review ofWhittier’s registration statements on Forms SB-2 filed on August 8, 2005.

 

24

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**LIQUIDITY AND CAPITAL RESOURCES**

 

We finance our business using a combination of cash flow fromoperations, bank debt and the issuance of equity and/or debt securities. Ourfuture liquidity, in both the short and long-term, is principally dependentupon the volume of our oil and gas production and the market price we receiveon future sales of that production as affected by any hedges we may have inplace.

 

Our primary source of cash during the nine months ended September 30,2005 was from funds obtained from financing activities, cash flow fromoperations, and proceeds from the sale of marketable securities and oil and gasproperties.  Proceeds from the issuanceof Series A Preferred Stock and the initial borrowing under our new creditfacility were used for the acquisition of RIMCO.  In addition to these funds, Whittiergenerated cash flows from the sale of natural gas and crude oil, approximately$1.8 million from the sale of common stock in Chaparral Resources, Inc.,and $4.2 million from the sale of our interest in the Big Escambia Creek Field inAugust 2005.  Operating cash flowfluctuations are substantially driven by commodity prices and changes in ourproduction volumes.  Working capital issubstantially influenced by these variables. Fluctuation in cash flow may result in an increase or decrease in ourcapital and exploration expenditures. Total cash flows provided by operating activities of $8.0 million forthe nine months September 30, 2005 were primarily used to fund explorationand development expenditures and to repay outstanding indebtedness.  We repaid a total of $4.8 million in outstandingdebt during the quarter ended September 30, 2005, including $4.1 millionin cash and approximately $715,000 through the issuance of Whittier commonstock at an equivalent price of $6.00 per share.

 

***Operating Activities***

 

We have approximately $7million in available cash and approximately $9.5 million in borrowing capacityunder our new credit facility as of November 14, 2005, after taking intoaccount outstanding letters of credit. Additionally, we are producingapproximately 16 Mmcfe per day and generating net positive cash flows fromoperations.  We have currently identifiedapproximately $15 million in capital exploration and development expenditureson existing oil and gas properties for 2005 (of which approximately $8.6million has been incurred) and an estimated $25 million in additional capitalexpenditures for 2006.  The Company has experienced some delays in itscapital expenditures due to the impact of Hurricanes Katrina and Rita and theeffects of the tightening of drilling rig availability across the industry.  We intend to fund our 2005 and 2006 capitalexpenditures using operating cash flows and additional borrowings under our creditfacility, if necessary.

 

***Financing Activities***

 

New Revolving Credit Facility

 

On June 15, 2005, we entered into a $75 million revolving creditfacility with BNP Paribas as the lead bank and administrative agent (the “CreditFacility”). The Credit Facility has an initial borrowing base of $30.5 million,from which we borrowed approximately $20 million to partially fund the RIMCOacquisition and to repay approximately $8.5 million and $1 million of bank debtheld by Whittier and RIMCO, respectively. The Company repaid $3 million in principal on the Credit Facility on September 30,2005.  The borrowing base is subject toreview and adjustment on a semi-annual basis. Amounts outstanding under the CreditFacility will bear interest at specified margins ranging between 1.50% to 2.25%over the London Interbank Offered Rate. Such margins will fluctuate based onthe utilization of the facility. The Credit Facility is secured by firstpriority liens on substantially all of our assets, including equity interestsin subsidiaries. We are subject to certain financial covenants pertaining tominimum working capital levels, minimum coverage of interest expenses, and amaximum leverage ratio. In addition, we are subject to covenants limitingdividends and other restricted payments, transactions with affiliates, incurrenceof debt, changes of control, asset sales, and liens on properties. All amountsdrawn under the Credit Facility will mature June 15, 2008.

 

On July 22, 2005, werepaid the $1.8 million subordinated convertible note held by Texas IndependentExploration Limited using a combination of cash and equity. We paidapproximately $1.1 million in cash for 60% of the outstanding principal of thenote and $39,272 in accrued interest. We also issued 119,156 shares of commonstock to Texas Independent Exploration Limited upon its conversion of theremaining $714,932 in principal of the note at a conversion price of $6.00 pershare. We funded the retirement of the note using available working capital.

 

25

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Issuance of Series APreferred Stock 

 

On June 15, 2005, we issued 852,912 shares of Series A 8%Automatically Convertible Preferred Stock (“Series A Preferred Stock”) foran aggregate offering amount of approximately $50 million. We receivedapproximately $46.9 million in net proceeds from the offering and used thoseproceeds to fund a portion of the purchase price for the RIMCO acquisition.

 

The Series A Preferred Stock is convertible into an aggregate of8,529,120 shares of Whittier common stock, with each share of Series APreferred Stock convertible into 10 shares of common stock. The Series APreferred Stock will automatically convert in the event Whittier’s common stockis listed on the Nasdaq National Market. The Company submitted an applicationto list its common stock on the Nasdaq National Market on May 16, 2005 andhas taken steps necessary to meet Nasdaq listing requirements, includingeffecting a one-for-three reverse split of its common stock on July 1,2005 to increase its stock price above Nasdaq’s $5.00 minimum bid price andappointing additional independent directors to Whittier’s board.  If conversion of the Series A PreferredStock has not occurred on or before December 31, 2005, holders of the Series APreferred Stock are entitled to receive quarterly dividends accruing from thedate of initial issuance at a rate of 8% per annum.  The Company’s listing application iscurrently pending final approval by NASDAQ.

 

As a condition to the offering, we agreed to register the common stockunderlying the Series A Preferred Stock with the U.S. Securities andExchange Commission (“SEC”) on or before December 12, 2005 and to maintainthe effectiveness of the registration for two years following its effectivedate. Whittier filed the required registration statements on August 8,2005. In the event the registration statements are not declared effective on orbefore December 31, 2005, the dividend rate payable on the Series APreferred Stock will increase to 8.5% per annum. If the Series A PreferredStock has been converted into common stock, Whittier will make a quarterlypayment of $0.03 per common share until we achieve effective registration withthe SEC.

 

In the event the Series A Preferred Stock is not converted intoour common stock on or before September 14, 2008, we are required toredeem all of the outstanding Series A Preferred Stock at 108% of theliquidation preference, including the face value of any outstanding Series APreferred Stock plus any accrued and unpaid dividends through the date ofredemption.

 

***Derivative Instruments and Hedging Activities***

 

We periodically enter into commodity price hedging contracts withrespect to our oil and gas production, including “swaps” and “collars”, inorder to manage our exposure to oil and gas price volatility and achieve morepredictable cash flows. Swaps aredesigned to fix the price of anticipated sales of future production, whilecollars are designed to establish floor and ceiling prices on anticipated salesof future production. We have hedged approximately 70% of our proveddeveloped forecasted production through December 31, 2007. Our derivativecommodity positions outstanding as of September 30, 2005 are in Note 11 toour consolidated financial statements included herein.

 

**CAPITAL COMMITMENTS AND CONTINGENCIES**

 

In connection with our June 2004 acquisition of three gas fieldsin South Texas, we agreed to drill four wells over a two-year period and paycertain drilling costs on behalf of the seller’s retained working interests inthose wells.  Under the terms of the drilling commitment, we agreed todrill two wells each in the Scott & Hopper Field and the North RinconField, or reassign a portion of the undeveloped acreage in each field to theseller of the properties. We have drilled the first two commitment wells - theScott & Hopper #4 during February 2005 and the Cameron 137 #3 in June 2005.  The third commitment well, the Scott &Hopper #5, is expected to begin drilling in early December 2005.  The Scott & Hopper #4 well beganproduction in May 2005.  While theinitial target zone on the Cameron 137 #3 well appears to be non-productive,the Company has additional plans to stimulate the well in December 2005. Weexpect to fulfill our commitment to drill all four wells on a timely basis.

 

**RESULTS OF OPERATIONS**

 

We adopted the full cost method of accounting for our oil and gasproperties as of July 1, 2005. Under this method, all costs incurred inthe acquisition, exploration and development of oil and gas properties arecapitalized into the cost 

 

26

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centers (the amortization base). Such amounts include the cost ofdrilling and equipping productive wells, dry hole costs, lease acquisitioncosts and delay rentals. Costs associated with production and general corporateactivities are expensed in the period incurred. The capitalized costs of ouroil and gas properties, plus an estimate of our future development andabandonment costs, are amortized on a unit-of-production method based on ourestimate of total proved reserves.

 

Results of operations for the nine monthsended September 30, 2005 reflect activity from RIMCO for the period from June 15,2005, the effective date of the acquisition. Pro forma financial informationfor the periods presented in these financial statements for the combinedresults of Whittier and RIMCO as if the acquisition had occurred at thebeginning of each applicable interim period is presented in Note 14 to ourfinancial statements included herein.

 

*For the Quarter Ended September 30,2005 compared with the Quarter Ended September 30, 2004*

 

We generated net income of approximately $2,413,000, or $0.19 perdiluted share, for the quarter ended September 30, 2005, compared to $624,000,or $0.16 per diluted share, for the period ended September 30, 2004. The $1,789,000favorable variance was primarily attributable to higher oil and gas production,the acquisition of RIMCO in June 2005, and higher commodity prices. Thesignificant components of Whittier’s results of operations for the quartersended September 30, 2005 and 2004 are as follows:

 

Oil and Gas Revenues. Oil and gasrevenues increased 235% from approximately $2.9 million, or $33.01 per Boe, forthe quarter ended September 30, 2004 to $9.6 million, or $47.24 per Boe,for the quarter ended September 30, 2005, based upon a 134% increase inproduction and 43% increase in realized commodity prices per Boe after hedgesettlements. Whittier recognized pre-tax losses in oil and gas revenues of $1.1million and $465,768 during the quarter ended September 30, 2005 and 2004,respectively, due to realized settlements of its price hedge contracts.Whittier produced 203,091 Boe during the quarter ending September 30,2005, consisting of 82,604 Bbls of oil and 722,920 Mcf of gas, compared toproduction of 86,856 Boe for the quarter ending September 30, 2004,consisting of 47,774 Bbls of oil and 234,494 Mcf of gas. The increase inproduction was principally due to Whittier’ June 2005 acquisition of RIMCOand other oil and gas property acquisitions, including the May and July 2004acquisition of the Cut Off Field and the June 2004 acquisition of threegas fields in South Texas.

 

Sale of Marketable Securities.During the quarter ended September 30, 2005, we sold 277,075 shares ofChaparral Resources, Inc. for $1,178,953, realizing a pre-tax gain of $901,878.

 

Costs and Expenses. Total operatingcosts and expenses increased by 213% from $2.2 million for the quarter ending September 30,2004 to $6.9 million for the quarter ending September 30, 2005,principally due to Whittier’s increased acquisition, development, andexploration activity from the prior year. The breakdown of variances for thecomponents of operating costs and expenses is as follows:

 

•                  Lease operatingexpenses increased 61% from $857,000 for the quarter ending September 30,2004 to $1,381,000 for the quarter ending September 30, 2005.  Lease operating expenses per Boe, however,fell 31% from $9.87 per Boe for the quarter ended September 30, 2004 to$6.80 for the quarter ended September 2005;

 

•                  Production taxesincreased 199%, from $260,000, or $2.99 per Boe, for the quarter ending September 30,2004, to $777,000, or $3.83 per Boe, for the quarter ending September 30,2005.  The 28% increase in productiontaxes per Boe was attributable to higher taxes incurred on Louisianaproduction, which is based on a percentage of revenue versus actual productionvolumes, and a larger ratio of natural gas production compared to overallproduction from the prior period;

 

•                  Depreciation,depletion and amortization (“DD&A”) increased by 304%, from $701,000, or $8.07per Boe, for the quarter ending September 30, 2004 to $2,835,000, or $13.96per Boe, for the quarter ending September 30, 2005. The 73% increase inDD&A per Boe is related primarily to higher relative production and cost depletionrates from the Company’s South Texas’ property acquisition in June 2004and the RIMCO acquisition in June 2005

 

•                  The Companyrecognized a non-cash loss of $687,000 due to the ineffective portion of thefair value adjustment to our hedge contracts for the quarter ending September 30,2005; and

 

27

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•                  General andadministrative expense increased from $375,000 for the quarter ending September 30,2004 to $1,186,000 for the quarter ending September 30, 2005, reflectingour enhanced operational activity from the prior year, including increasing theCompany’s staff from five to 18 full-time employees as a result of the RIMCOacquisition.

 

*For the Nine months Ended September 30,2005 compared with the Nine months Ended September 30, 2004*

 

We generated net income of approximately $3,549,000, or $0.47 perdiluted share, for the nine months ended September 30, 2005, compared to $595,000,or $0.17 per diluted share, for the comparable period ended September 30,2004. The $2,954,000 favorable variance was primarily attributable to higheroil and gas production, the RIMCO acquisition in June 2005, and highercommodity prices. The significant components of Whittier’s results ofoperations for the nine months ended September 30, 2005 and 2004 are asfollows:

 

Oil and Gas Revenues. Oil and gasrevenues increased 134% from approximately $6.9 million, or $31.49 per Boe, forthe nine months ended September 30, 2004 to $16.3 million, or $42.16 perBoe, for the nine months September 30, 2005, based upon a 75% increase inproduction and 34% increase in realized commodity prices per Boe after hedgesettlements. Whittier recognized pre-tax losses in oil and gas revenues of $2.3million and $970,370 during the nine months ended September 30, 2005 and2004, respectively, due to realized settlements of its price hedge contracts.Whittier produced 385,481 Boe during the nine months ended September 30,2005, consisting of 177,887 Bbls of oil and 1,245,563 Mcf of gas, compared toproduction of 220,468 Boe for the nine months ended September 30, 2004,consisting of 130,699 Bbls of oil and 538,615 Mcf of gas. The increase inproduction was principally due to Whittier’s June 2005 RIMCO acquisitionand other oil and gas property acquisitions, including the May and July 2004acquisition of the Cut Off Field and the September 2004 acquisition ofthree gas fields in South Texas.

 

Sale of Marketable Securities.During the nine months ended September 30, 2005, we sold 543,850 shares ofChaparral Resources, Inc. for $1,810,595, realizing a pre-tax gain of $1,266,745.

 

Costs and Expenses. Total operatingcosts and expenses increased by 125% from $5.4 million for the nine monthsended September 30, 2004 to $12.0 million for the nine months ended September 30,2005, principally due to Whittier’s increased acquisition, development, andexploration activity from the prior year. The breakdown of variances for thecomponents of operating costs and expenses is as follows:

 

•                  Lease operatingexpenses increased 69% from $1,996,000, or $9.05 per Boe, for the nine months endedSeptember 30, 2004 to $3,374,000, or $8.75 per Boe, for the nine monthsended September 30, 2005, reflecting Whittier’s acquisition of RIMCO, 100%increase from four to eight operated properties and additional non-recurringworkover expenditures incurred on Whittier’s operated properties;

 

•                  Production taxesincreased 112%, from $633,000, or $2.87 per Boe, for the nine months ended September 30,2004, to $1,343,000, or $3.48 per Boe, nine months ended September 30,2005. The 21% increase in production taxes per Boe was attributable to highertaxes incurred on Louisiana production, which is based on a percentage ofrevenue versus actual production volumes, and a larger ratio of natural gasproduction compared to overall production from the prior year;

 

•                  DD&Aincreased by 168%, from $1,676,000, or $7.60 per Boe, for the nine months endedSeptember 30, 2004 to $4,492,000, or $11.65 per Boe, for nine months endedSeptember 30, 2005. The 53% increase in DD&A per Boe is related togreater total production and higher overall depletion rates during the currentperiod as a result of the South Texas acquisition in June 2004 and theRIMCO acquisition in June 2005;

 

**•**                  The Companyrecognized a non-cash charge to earnings of $798,000 due to the ineffectiveportion of the fair value adjustment to our hedge contracts for the nine monthsended September 30, 2005;  and

 

•                  General andadministrative expense increased from $1,049,000 for the nine months ended September 30,2004 to $2,042,000 for nine months ended September 30, 2005, reflectingour enhanced operational activity from the prior year, including increasing theCompany’s staff from four to 18 full-time employees as a result of the RIMCOacquisition.

 

28

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Off-Balance Sheet Arrangements

 

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

 

**Forward-Looking Information**

 

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

 

**Item 3.Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

### **Theterm “disclosure controls and procedures” (defined in Rule 13a-15(e))refers to the controls and procedures of a company that are designed to ensurethat information required to be disclosed by a company in the reports that itfiles under the Securities and Exchange Act of 1934 (the “Exchange Act”) isrecorded, processed, summarized and reported within required time periods.  Bryce W. Rhodes, the Company’s principalexecutive officer, and Michael B. Young, the Company’s principal financialofficer, have evaluated the effectiveness of the Company’s disclosure controlsand procedures as of the end of the period covered by this quarterly report,and each of them has concluded that, as of such date, Whittier’s controls andprocedures were effective. There were no changes in the Company’s internalcontrols over financial reporting that occurred during the quarter covered bythis report that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal controls over financial reporting,except that the Company is in the process of integrating the newly acquiredRIMCO Production Company, Inc. into its existing internal controlstructure. The Company acquired RIMCO on June 15, 2005 and is in theprocess of integrating RIMCO’s disclosure controls and procedures whereappropriate.**

### ** **

**Part II—Other Information**

 

**Item 2. Unregistered Sales of Equity Securitiesand Use of Proceeds**

** **

On July 22, 2005, the Company issued 119,156 shares of common stock,par value $.001 per share, to Texas Independent Exploration Limited (“TIE”)upon TIE’s conversion of $714,932 in principal of the $1.8 million subordinatedconvertible note held by TIE, at a conversion price of $6.00 per share. TheCompany paid the remaining principal amount of the note in cash. The shares ofcommon stock were issued to TIE pursuant to an exemption from registrationunder Section 4(2) of the Securities Act of 1933, as amended. No underwriterwas used in connection with the issuance of common stock to TIE.

 

**Item 4.Submission of Matters to a Vote of Security Holders**

 

The Company’s 2005 AnnualStockholders’ Meeting was held on Tuesday, September 27, 2005, but due tothe impact of Hurricane Rita on transportation to and from the Houston area,the meeting was adjourned without any action being taken. The Company reconvenedthe meeting on Tuesday, October 18, 2005, and four proposals weresubmitted to the stockholders of the Company. Proxies were solicited by theBoard of Directors of the Company pursuant to Regulation 14A under theSecurities Exchange Act of 1934. There was no solicitation in opposition to theBoard of Directors’ nominees as listed in the proxy statement and all suchnominees were duly elected.

 

29

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The results of the stockholders’votes were as follows:

 

1.                                       Election of seven directors to theCompany’s Board of Directors:

 
| ** **          | ** ** | **Number of Shares  Voting FOR Election  As Director** | ** ** | **Number of Shares  WITHHOLDING  AUTHORITY  To Vote for Election  As Director** | ** ** |
|---------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Common Stock**                                       | ** ** | **Series A   Preferred Stock**                                             | ** ** | **Common Stock** | ** ** | **Series A   Preferred Stock** | ** ** |
| ** **          | ** ** | ** **                                             | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| James A. Jeffs      |       | 2,824,255                                              |       | 433,987                                                                         |       | 101 |   | None |   |
|                |       |                                                   |       |                                                                            |       |   |   |   |   |
| Bryce W. Rhodes     |       | 2,824,255                                              |       | 433,987                                                                         |       | 101 |   | None |   |
|                |       |                                                   |       |                                                                            |       |   |   |   |   |
| Charles O. Buckner  |       | 2,824,255                                              |       | 433,987                                                                         |       | 101 |   | None |   |
|                |       |                                                   |       |                                                                            |       |   |   |   |   |
| David A. Dahl       |       | 2,824,255                                              |       | 433,987                                                                         |       | 101 |   | None |   |
|                |       |                                                   |       |                                                                            |       |   |   |   |   |
| David B. Kilpatrick |       | 2,820,756                                              |       | 433,987                                                                         |       | 267 |   | None |   |
|                |       |                                                   |       |                                                                            |       |   |   |   |   |
| Ray R. Seegmiller   |       | 2,824,089                                              |       | 433,987                                                                         |       | 267 |   | None |   |
|                |       |                                                   |       |                                                                            |       |   |   |   |   |
| Arlo G. Sorensen    |       | 2,824,255                                              |       | 433,987                                                                         |       | 101 |   | None |   |

 

2.                                       Approval of an amendment to the Company’sArticles of Incorporation to increase the total number of authorized shares ofcommon stock from 33,333,334 to 100,000,000 shares:

 
| ** **        | ** ** | **Common Stock** | ** ** | **Series A Preferred Stock** | ** ** |
|-------------------|------------|------------------|------------|-----------------------------------|------------|
|              |       |             |       |                              |       |
| For:              |       | 2,817,620        |       | 433,987                           |       |
|              |       |             |       |                              |       |
| Against:          |       | 6,736            |       | None                              |       |
|              |       |             |       |                              |       |
| Abstain:          |       | None             |       | None                              |       |
|              |       |             |       |                              |       |
| Broker Non-Votes: |       | None             |       | None                              |       |

 

3.                                       Approval of an amendment to the Company’sLong-Term Incentive Plan increasing the number of shares of common stock availableunder the Plan to 1,876,000:

 
| ** **        | ** ** | **Common Stock** | ** ** | **Series A Preferred Stock** | ** ** |
|-------------------|------------|------------------|------------|-----------------------------------|------------|
|              |       |             |       |                              |       |
| For:              |       | 2,812,453        |       | 433,987                           |       |
|              |       |             |       |                              |       |
| Against:          |       | 8,903            |       | None                              |       |
|              |       |             |       |                              |       |
| Abstain:          |       | 3,000            |       | None                              |       |
|              |       |             |       |                              |       |
| Broker Non-Votes: |       | None             |       | None                              |       |

 

30

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4.                                       Ratification of the selection of GrantThornton LLP as the independent auditor for the Company for the fiscal yearending December 31, 2005:

 
| ** **        | ** ** | **Common Stock** | ** ** | **Series A Preferred Stock** | ** ** |
|-------------------|------------|------------------|------------|-----------------------------------|------------|
|              |       |             |       |                              |       |
| For:              |       | 2,824,223        |       | 433,987                           |       |
|              |       |             |       |                              |       |
| Against:          |       | 133              |       | None                              |       |
|              |       |             |       |                              |       |
| Abstain:          |       | None             |       | None                              |       |
|              |       |             |       |                              |       |
| Broker Non-Votes: |       | None             |       | None                              |       |

 

 

#### **Item6 – Exhibits and Reports on Form 8-K**

 

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

 

### **Signatures**

### ** **

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

 

Dated:             November 14,2005

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

 

31

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**INDEX TO EXHIBITS**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                                                                                                             |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** |
| **3.1**     | ** ** | **Certificate of Change of Whittier  Energy Corporation, as filed with the Nevada Secretary of State effective  July 1, 2005, incorporated by reference to Exhibit 3.1 to the  Registrant’s Current Report on Form 8-K/A filed July 8, 2005.**                                     |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                  |
| **3.2**     | ** ** | **Certificate of Amendment to the  Articles of Incorporation of Whittier Energy Corporation, as filed with the  Nevada Secretary of State on October 19, 2005, incorporated by reference  to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed  October 20, 2005.** |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                  |
| **3.3**     | ** ** | **Amendment to Certificate of  Designation After Issuance of Class or Series, as filed with the Nevada  Secretary of State on November 1, 2005, incorporated by reference to  Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed  November 1, 2005.**           |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                  |
| **10.1**    | ** ** | **Form of Stock Option Award  Agreement under the Whittier Energy Corporation 2004 Long-Term Incentive  Plan, incorporated by reference to Exhibit 10.1 to the Registrant’s  Current Report on Form 8-K filed November 9, 2005.**                                                  |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                  |
| **31.1**    | ** ** | **Certification of Chief Executive  Officer pursuant to Securities Exchange Act of 1934  Rule 13a-14(a) or 15d-14(a).**                                                                                                                                                                           |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                  |
| **31.2**    | ** ** | **Certification of Chief Financial  Officer pursuant to Securities Exchange Act of 1934  Rule 13a-14(a) or 15d-14(a).**                                                                                                                                                                           |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                  |
| **32.1**    | ** ** | **Certification of Chief Executive  Officer pursuant to Securities Exchange Act of 1934  Rule 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**                                                          |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                  |
| **32.2**    | ** ** | **Certification of Chief Financial  Officer pursuant to Securities Exchange Act of 1934  Rule 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**                                                          |
|             |            |                                                                                                                                                                                                                                                                                                             |  |

 

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