<PAGE>

   As filed with the Securities and Exchange Commission on February 12, 2003
                                                          Registration No. 333-
================================================================================
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549

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

                                   FORM S-4
                            REGISTRATION STATEMENT
                                     Under
                          THE SECURITIES ACT OF 1933

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

                    Plains Exploration & Production Company
            (Exact name of Registrant as specified in its charter)

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

<TABLE>
<S>                             <C>                          <C>
           Delaware                         1311                          33-0430755
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization)  Classification Code Number)
</TABLE>

                         500 Dallas Street, Suite 700
                             Houston, Texas 77002
                                (713) 739-6700
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)

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

                              Timothy T. Stephens
   Executive Vice President of Administration, Secretary and General Counsel
                         500 Dallas Street, Suite 700
                             Houston, Texas 77002
                           Telephone: (713) 739-6700
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

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

                                  Copies To:

<TABLE>
<S>                              <C>                             <C>
    Michael E. Dillard, P.C.            David S. Elkouri                Dallas Parker
        Julien R. Smythe                 Connie D. Tatum            William T. Heller IV
       Akin Gump Strauss         Hinkle Elkouri Law Firm, L.L.C.      Timothy T. Samson
        Hauer & Feld LLP             Suite 2000 Epic Center         Thompson & Knight LLP
711 Louisiana Street, Suite 1900       301 N. Main Street        333 Clay Street, Suite 3300
      Houston, Texas 77002            Wichita, Kansas 67202         Houston, Texas 77002
   Telephone: (713) 220-5800        Telephone: (316) 267-2000     Telephone: (713) 654-8111
</TABLE>

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

    Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective and the
satisfaction or waiver of all other conditions to the merger described herein.
    If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
    If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
    If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

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

                        CALCULATION OF REGISTRATION FEE

================================================================================
<TABLE>
<CAPTION>
                                                       Proposed Maximum   Proposed Maximum
                                        Amount To Be  Offering Price Per Aggregate Offering    Amount of
   Title of Shares to be Registered     Registered(1)      Share(2)           Price(2)      Registration Fee
------------------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>                <C>                <C>
Common stock, par value $0.01 per share  15,977,234         $8.98           $143,419,176        $13,195
------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
/(1)/ Represents the maximum number of shares of Plains common stock estimated
      to be issuable upon the consummation of the merger described herein.
/(2)/ Pursuant to Rules 457(c), 457(f)(1) and 457(f)(3) of the Securities Act
      of 1933, as amended, and solely for the purpose of calculating the
      registration fee, the proposed maximum aggregate offering price is equal
      to (a) 18,796,746, the estimated number of shares of 3TEC common stock to
      be exchanged in the merger, multiplied by (b) $16.13, the average of the
      high and low prices of 3TEC common stock quoted in the consolidated
      reporting system of the NASDAQ as of February 11, 2003, less (c)
      $159,772,337, the estimated amount of cash to be received by 3TEC common
      stockholders in the merger.

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

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

================================================================================

<PAGE>

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This document is not an offer
to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.


                Subject to completion, dated February 12, 2003

                             Plains Logo 3TEC Logo

                   PROPOSED MERGER -- YOUR VOTE IS IMPORTANT

    The boards of directors of Plains Exploration & Production Company and 3TEC
Energy Corporation have agreed upon a transaction in which 3TEC will be merged
into a newly-formed, wholly-owned subsidiary of Plains. We are sending this
joint proxy statement/prospectus to you to ask you to vote in favor of this
transaction and other matters.

    Plains will acquire by merger all of the 3TEC common and preferred stock,
options to purchase 3TEC common stock and a portion of the 3TEC warrants to
purchase common stock, for total consideration estimated at $324 million. In
addition, Plains will assume the balance outstanding on the 3TEC credit
facility which was $99.0 million at January 31, 2003. The 3TEC common stock,
options and purchased warrants will be acquired for an estimated $309 million,
or $16.51 per share, composed of $8.50 per share in cash and $8.01 per share in
Plains common stock, assuming the merger consideration is based on the closing
price of Plains common stock of $9.42 on February 11, 2003. We have provided a
detailed description of the calculation of the purchase price under the heading
"Summary--The Merger" and "Terms of the Merger Agreement--Manner and Basis of
Converting Stock." Holders of 3TEC preferred stock will receive $24.00 per
preferred share, plus accrued dividends to the effective time of the merger,
estimated to be $0.13 per share.

    Plains common stock is listed on the New York Stock Exchange under the
symbol "PXP."

    3TEC common stock is quoted on The NASDAQ National Market under the symbol
"TTEN."

    Your vote is very important. We cannot complete the merger unless the
Plains common stockholders vote to approve the issuance of Plains common stock
and the 3TEC common and preferred stockholders vote to adopt the merger
agreement. Additionally, at the Plains annual meeting, the Plains stockholders
are being asked to approve Plains' 2002 Stock Incentive Plan, increase the
number of Plains shares reserved for issuance under that plan if the merger
occurs, approve the election of four directors to the Plains board, and ratify
the appointment of Plains' auditors for 2003.

    This document is a prospectus relating to the shares of Plains common stock
to be issued in the merger and a joint proxy statement for Plains to solicit
proxies for its annual meeting of stockholders and for 3TEC to solicit proxies
for its special meeting of stockholders. It contains answers to frequently
asked questions and a summary of the important terms of the merger, the merger
agreement, and related transactions, followed by a more detailed discussion.

    For a discussion of certain significant matters that you should consider
before voting on the merger agreement or the issuance of Plains common stock in
connection therewith, see "Risk Factors" beginning on page [      ].

    Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Plains common stock to be issued
in the merger or passed upon the adequacy or accuracy of this joint proxy
statement/prospectus. Any representation to the contrary is a criminal offense.

    This document is dated       , 2003 and is first being mailed to
stockholders of Plains and 3TEC on or about       , 2003.

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY
                         500 Dallas Street, Suite 700
                             Houston, Texas 77002
                                (713) 739-6700

                   NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
                          TO BE HELD ON       , 2003

To the Stockholders of Plains Exploration & Production Company:

    NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of Plains
Exploration & Production Company will be held at       , on       , 2003 at
      , Houston, Texas time, for the following purposes:

    1.  to consider and vote upon a proposal to approve the issuance of Plains
        common stock to the stockholders of 3TEC Energy Corporation as a result
        of the transactions contemplated by the Agreement and Plan of Merger
        dated February 2, 2003, by and among Plains, its wholly-owned
        subsidiary PXP Gulf Coast Inc. and 3TEC Energy Corporation pursuant to
        which 3TEC will be merged with and into PXP Gulf Coast;

    2.  to consider and vote upon Plains' 2002 Stock Incentive Plan;

    3.  to consider and vote upon a proposed adjustment to Plains' 2002 Stock
        Incentive Plan to increase the number of shares of Plains common stock
        reserved for issuance under the plan to 1.5 million shares if the
        merger occurs;

    4.  to elect four nominees to the board of directors to serve until their
        successors are duly elected and qualified or until their earlier death,
        resignation or removal;

    5.  to ratify the selection of PricewaterhouseCoopers LLP as Plains'
        independent auditors for the fiscal year ending December 31, 2003; and

    6.  to transact such other business incident to the conduct of the meeting
        as may properly come before the meeting or any adjournments or
        postponements thereof.

    Only stockholders of record at the close of business on       , 2003 are
entitled to notice of and to vote at the annual meeting or at any adjournments
or postponements thereof. Each share of Plains common stock is entitled to one
vote per share. For all proposals other than the election of directors, the
affirmative vote of a majority of the shares of Plains common stock present and
voting is required, except that broker non-votes will not be counted in
determining whether a quorum exists for purposes of voting on the share
issuance in connection with the merger. The election of directors requires the
affirmative vote of a plurality of shares of Plains common stock present and
voting. A complete list of stockholders entitled to vote at the annual meeting
will be available for examination at Plains' offices in Houston, Texas during
normal business hours by any holder of Plains common stock for any purpose
relevant to the annual meeting for a period of ten days prior to the annual
meeting. Such list will also be available at the annual meeting and any Plains
stockholder may inspect it for any purpose relevant to the annual meeting.

    The board of directors of Plains has unanimously approved and adopted the
merger agreement and the transactions contemplated by it, including the
issuance of Plains common stock to the 3TEC stockholders as a result of such
transactions, declared its advisability, and unanimously recommends that Plains
stockholders vote at the annual meeting "FOR" the issuance of Plains common
stock as a result of the transactions contemplated by the merger agreement and
"FOR" the other proposals described above.

                                          By Order of the Board of Directors,

                                          /s/ James C. Flores

                                          James C. Flores
                                          Chairman of the Board and Chief
                                            Executive Officer

Houston, Texas
      , 2003

   Your vote is important. Even if you plan to attend the annual meeting in
   person, we request that you sign and return the enclosed proxy or voting
   instruction card and thus ensure that your shares will be represented at the
   annual meeting if you are unable to attend. If you do attend the annual
   meeting and wish to vote in person, you may withdraw your proxy and vote in
   person.


<PAGE>

                            3TEC ENERGY CORPORATION
                         700 Milam Street, Suite 1100
                             Houston, Texas 77002
                                (713) 821-7100

                   NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
                          TO BE HELD ON       , 2003

To the Stockholders of 3TEC Energy Corporation:

    NOTICE IS HEREBY GIVEN that a special meeting of stockholders of 3TEC
Energy Corporation will be held at       , on       , 2003 at       , Houston,
Texas time, for the following purposes:

    1.  to consider and vote upon a proposal to adopt the Agreement and Plan of
        Merger dated February 2, 2003, by and among Plains Exploration &
        Production Company, its wholly-owned subsidiary PXP Gulf Coast Inc. and
        3TEC, pursuant to which 3TEC will be merged with and into PXP Gulf
        Coast; and

    2.  to transact such other business incident to the conduct of the meeting
        as may properly come before the meeting or any adjournments or
        postponements thereof.

    Only stockholders of record at the close of business on       , 2003 are
entitled to notice of and to vote at the special meeting or at any adjournments
or postponements thereof. Each share of 3TEC common stock and 3TEC preferred
stock is entitled to one vote per share and each fractional share is entitled
to a corresponding fractional vote. The affirmative vote of a majority of the
outstanding 3TEC common stock and 3TEC preferred stock, each voting separately
as a class, is required to adopt the merger agreement. A complete list of
stockholders entitled to vote at the special meeting will be available for
examination at 3TEC's offices in Houston, Texas during normal business hours by
any 3TEC common or preferred stockholder for any purpose relevant to the
special meeting for a period of ten days prior to the special meeting. This
list will also be available at the special meeting and any 3TEC common or
preferred stockholder may inspect it for any purpose relevant to the special
meeting. Holders of 3TEC common stock and 3TEC preferred stock are entitled to
appraisal rights under the Delaware General Corporation Law with respect to the
merger.

    The board of directors of 3TEC has determined that the merger agreement and
the transactions contemplated by it are advisable and in the best interests of
3TEC and its stockholders, and the 3TEC Board of Directors, with two interested
members abstaining, unanimously adopted the merger agreement, declared the
merger agreement advisable, and recommends that 3TEC stockholders vote at the
special meeting "FOR" approval of the proposal described above.

                                          By Order of the Board of Directors,

                                          /s/ Floyd C. Wilson

                                          Floyd C. Wilson
                                          Chairman and Chief Executive Officer

Houston, Texas
      , 2003

   Your vote is important. Even if you plan to attend the special meeting in
   person, we request that you sign and return the enclosed proxy or voting
   instruction card and thus ensure that your shares will be represented at the
   special meeting if you are unable to attend. If you do attend the special
   meeting and wish to vote in person, you may withdraw your proxy and vote in
   person.


<PAGE>

                               Table of Contents


<TABLE>
<CAPTION>
                                                         Page
                                                         ----
                  <S>                                    <C>
                  QUESTIONS AND ANSWERS ABOUT
                    THE MERGER..........................  iv
                  SUMMARY...............................   1
                   The Companies........................   1
                   The Merger...........................   1
                   Recommendations of the Boards of
                     Directors..........................   3
                   Opinions of Financial Advisors.......   3
                   Board of Directors and Management of
                     Plains Following the Merger........   4
                   The Stockholder Meetings.............   4
                   Record Dates.........................   4
                   Votes Required.......................   5
                   Voting Agreements....................   5
                   Share Ownership of Management........   5
                   Risks Associated with the Merger.....   6
                   Accounting Treatment.................   6
                   Conditions to the Merger.............   6
                   Termination of the Merger
                     Agreement..........................   6
                   Termination Fees.....................   7
                   Interests of Certain Persons in the
                     Merger that Differ from Your
                     Interests..........................   7
                   Acquisition Proposals................   8
                   Material Differences in the Rights of
                     Stockholders.......................   8
                   Comparative Per Share Market Price
                     Information........................   8
                   Summary Selected Historical
                     Consolidated Financial Data........   9
                   Summary Oil and Gas Reserve and
                     Production Information.............  13
                   Summary Unaudited Pro Forma
                     Combined Financial Data of the
                     Combined Company...................  14
                   Summary Pro Forma Oil and Gas
                     Reserve Data of the Combined
                     Company............................  16
                   Comparative Per Share Data...........  17
                  RISK FACTORS..........................  18
                   Risks Relating to the Merger.........  18
                   Risks Relating to the Combined
                     Company After the Merger...........  19
                   Risks Relating to Plains'
                     Reorganization and Spin-off........  27
                  CAUTIONARY STATEMENTS
                    CONCERNING FORWARD-LOOKING
                    STATEMENTS..........................  30
</TABLE>
<TABLE>
<CAPTION>
                                                          Page
                                                          ----
                  <S>                                     <C>
                  MARKET PRICE AND DIVIDEND
                    INFORMATION..........................  31
                   Historical Market Prices of Plains and
                     3TEC................................  31
                   No History of Dividends and No
                     Dividends Expected in the
                     Foreseeable Future..................  31
                  THE STOCKHOLDER MEETINGS...............  33
                   Times and Places......................  33
                   Purposes of the Stockholder
                     Meetings............................  33
                   Record Date and Outstanding
                     Shares..............................  34
                   Quorum and Vote Necessary to
                     Approve Proposals...................  34
                   Proxies...............................  35
                   Solicitation of Proxies...............  36
                   Voting Agreements.....................  36
                   Option Exercise Forbearance
                     Agreement...........................  37
                  PLAINS - THE COMBINED COMPANY..........  38
                  THE MERGER.............................  41
                   Background of the Merger..............  41
                   Reasons for the Merger - 3TEC.........  41
                   Reasons for the Merger - Plains.......  43
                   Opinions of 3TEC's Financial
                     Advisors............................  44
                   Opinion of Plains' Financial Advisor..  60
                   Accounting Treatment..................  67
                   Opinion as to Material U.S. Federal
                     Income Tax Consequences of the
                     Merger..............................  67
                   Board of Directors and Management of
                     Plains Following the Merger.........  68
                   Interests of Certain Persons in the
                     Merger..............................  68
                   Financing for the Merger..............  70
                   Appraisal Rights......................  70
                   Termination of Trading of 3TEC
                     Common Stock........................  70
                  TERMS OF THE MERGER
                    AGREEMENT............................  71
                   Merger................................  71
                   Manner and Basis of Converting
                     Stock...............................  71
                   Representations and Warranties........  77
                   Conduct of Business Pending the
                     Merger..............................  77
                   Additional Provisions.................  78
</TABLE>

                                       i

<PAGE>

<TABLE>
<CAPTION>
                                                           Page
                                                           ----
                 <S>                                       <C>
                  Conditions to Consummation of the
                    Merger................................  79
                  Termination.............................  80
                 MATERIAL U.S. FEDERAL INCOME TAX
                   CONSEQUENCES OF THE
                   MERGER.................................  82
                  Tax Consequences to Holders of 3TEC
                    Common Stock..........................  83
                  Tax Consequences to Holders of 3TEC
                    Preferred Stock.......................  84
                  Tax Consequences to Plains and Plains
                    Merger Subsidiary.....................  84
                  Tax Consequences to 3TEC................  85
                  Tax Consequences to Plains
                    Stockholders..........................  85
                 SELECTED HISTORICAL
                   CONSOLIDATED FINANCIAL AND
                   OTHER DATA.............................  86
                 PLAINS EXPLORATION & PRODUCTION
                   COMPANY UNAUDITED PRO FORMA
                   CONSOLIDATED FINANCIAL
                   STATEMENTS.............................  90
                 MANAGEMENT'S DISCUSSION AND
                   ANALYSIS OF FINANCIAL CONDITION
                   AND RESULTS OF OPERATIONS OF
                   PLAINS................................. 102
                  General................................. 102
                  Corporate Reorganization and
                    Spin-Off.............................. 103
                  Results of Operations................... 104
                  Comparison of Nine Months Ended
                    September 30, 2002 to Nine Months
                    Ended September 30, 2001.............. 104
                  Comparison of Year Ended
                    December 31, 2001 to Year Ended
                    December 31, 2000..................... 105
                  Comparison of Year Ended
                    December 31, 2000 to Year Ended
                    December 31, 1999..................... 106
                  Liquidity and Capital Resources......... 107
                  Capital Requirements.................... 109
                  Commitments and Contingencies........... 110
                  Industry Concentration.................. 111
                  Critical Accounting Policies and Factors
                    that May Affect Future Results........ 112
                  Recent Accounting Pronouncements........ 113
                  Qualitative and Quantitative
                    Disclosures About Market Risks........ 113
                 INFORMATION ABOUT PLAINS................. 117
                  Overview................................ 117
                  Recent Developments..................... 117
</TABLE>
<TABLE>
<CAPTION>
                                                        Page
                                                        ----
                    <S>                                 <C>
                     Oil and Gas Reserves.............. 119
                     Exploitation and Development...... 120
                     Onshore California................ 121
                     Offshore California............... 123
                     Illinois Basin.................... 124
                     Other............................. 124
                     Exploration and acquisition
                       expenditures.................... 124
                     Production and Sales.............. 125
                     Product Markets and Major
                       Customers....................... 125
                     Productive Wells and Acreage...... 126
                     Drilling Activities............... 127
                     Real Estate....................... 127
                     Title to Properties............... 127
                     Competition....................... 127
                     Regulation........................ 128
                     Plugging, Abandonment and
                       Remediation Obligations......... 130
                     Legal Proceedings................. 131
                     Employees......................... 131
                    MANAGEMENT'S DISCUSSION AND
                      ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF
                      OPERATIONS OF 3TEC............... 132
                     General........................... 132
                     Description of Critical Accounting
                       Policies........................ 132
                     Liquidity and Capital Resources... 134
                     Comparison of Nine Months Ended
                       September 30, 2002 Compared to
                       Nine Months Ended September 30,
                       2001............................ 135
                     Comparison of Year Ended
                       December 31, 2001 to Year Ended
                       December 31, 2000............... 137
                     Comparison of Year Ended
                       December 31, 2000 to Year Ended
                       December 31, 1999............... 138
                    INFORMATION ABOUT 3TEC ............ 140
                     Background........................ 140
                     Oil and Gas Properties............ 140
                     Gas and Oil Reserves.............. 141
                     Volumes, Prices and Operating
                       Expenses........................ 142
                     Development, Exploration and
                       Acquisition Capital Expenditures 143
                     Drilling Activity................. 143
                     Productive Wells.................. 143
                     Average Data...................... 144
                     Marketing......................... 144
                     Employees......................... 144
</TABLE>

                                      ii

<PAGE>

<TABLE>
<CAPTION>
                                                           Page
                                                           ----
                 <S>                                       <C>
                  3TEC's Executive Offices................ 144
                 SECURITY OWNERSHIP OF
                   PRINCIPAL STOCKHOLDERS................. 145
                 COMPARISON OF STOCKHOLDER
                   RIGHTS................................. 150
                 DESCRIPTION OF PLAINS CAPITAL
                   STOCK.................................. 153
                  Common Stock............................ 153
                  Preferred Stock......................... 153
                  Delaware Anti-Takeover Law and
                    Certain Charter and Bylaw
                    Provisions............................ 154
                  Limitation of Liability; Indemnification 155
                  Stock Exchange.......................... 155
                  Transfer Agent and Registrar............ 155
                 ADOPTION OF THE PLAINS 2002
                   STOCK INCENTIVE PLAN................... 156
                  2002 Stock Incentive Plan............... 156
                  Certain Federal Income Tax
                    Consequences.......................... 160
                 AMENDMENT TO PLAINS' 2002 STOCK
                   INCENTIVE PLAN......................... 162
                 ELECTION OF DIRECTORS.................... 163
                 Committees of the Board of Directors..... 163
                 Compensation............................. 167
                  Compensation of Directors............... 167
                  Executive Compensation.................. 167
                  Summary Compensation Table.............. 168
                  Option/SAR Grants in 2002............... 169
</TABLE>
<TABLE>
<CAPTION>
                                                         Page
                                                         ----
                   <S>                                   <C>
                    Aggregated SAR Exercises in 2002 and
                      Year-End SAR Values............... 169
                    2002 Stock Incentive Plan........... 170
                    Rollover Stock Incentive Plan....... 170
                    Transition Stock Incentive Plan..... 170
                    Employment Agreements and Change-
                      in-Control Arrangements........... 170
                    Indemnification of Directors and
                      Officers.......................... 175
                   PLAINS TRANSACTIONS WITH
                     RELATED PERSONS.................... 176
                   SECURITY OWNERSHIP OF PLAINS'
                     PRINCIPAL STOCKHOLDERS............. 183
                   SECTION 16(A) BENEFICIAL
                     OWNERSHIP REPORTING
                     COMPLIANCE......................... 183
                   RATIFICATION OF INDEPENDENT
                     AUDITORS........................... 184
                   EXPERTS.............................. 185
                   LEGAL MATTERS........................ 185
                   STOCKHOLDER PROPOSALS................ 186
                   INCORPORATION OF CERTAIN
                     DOCUMENTS BY REFERENCE ............ 187
                   WHERE YOU CAN FIND MORE
                     INFORMATION........................ 188
                   GLOSSARY OF OIL AND GAS
                     TERMS.............................. 189
                   INDEX TO CONSOLIDATED FINANCIAL
                     STATEMENTS......................... F-1
</TABLE>

LIST OF ANNEXES

Annex A--Agreement and Plan of Merger
Annex B--Opinion of Lehman Brothers Inc.
Annex C--Opinion of Credit Suisse First Boston LLC
Annex D--Opinion of Bear, Stearns & Co. Inc.
Annex E--Section 262 of the Delaware General Corporation Law
Annex F--Plains Exploration & Production Company Charter of the Audit Committee
Annex G--Plains Exploration & Production Company Corporate Governance
        Guidelines for Board of Directors

                                      iii

<PAGE>

                    QUESTIONS AND ANSWERS ABOUT THE MERGER

    Set forth below are commonly asked questions and answers about the merger,
including, if applicable, parenthetical page references to the more complete
discussion in this document of the questions answered in this section. For a
more complete description of the legal and other terms of the merger, please
read carefully this entire document and the other available information
referred to in "Where You Can Find More Information" on page [  ].

Q:  What will happen in the merger?

A:  The proposed merger will combine the businesses of Plains and 3TEC. At the
    effective time of the merger, 3TEC will merge with and into PXP Gulf Coast
    Inc., a newly-formed, wholly-owned subsidiary of Plains, and PXP Gulf Coast
    will be the surviving corporation. As a result of the merger, 3TEC will
    cease to exist, and Plains will continue as a public company, with the
    surviving entity in the merger as its wholly-owned subsidiary. Based on the
    closing prices of Plains and 3TEC common stock immediately prior to the
    mailing of this document, following the merger the combined company will be
    a large domestic independent oil and gas company with an enterprise value
    of over $900 million.

Q:  Why are Plains and 3TEC proposing the merger? (see page [      ])

A:  Plains and 3TEC believe that the merger will create a stronger exploration
    and production company. Plains and 3TEC believe that the merger will:

   .  Create a Larger and More Diversified Asset Base. The merger will increase
      the amount of the combined company's oil and gas reserves and diversify
      the composition and location of those reserves. The combined company's
      pro forma estimated net proved reserves of 283 MMBOE would be
      approximately 81% oil and 19% gas as of December 31, 2001. During 2001,
      on a pro forma basis, the combined company would have operated
      approximately 82% of its production.

   .  Improve Financial Flexibility. We believe that the merger will provide
      the combined company with more efficient access to capital at a lower
      cost than either Plains or 3TEC has individually. In addition, the
      combined company should be better positioned to fund future growth and
      reduce leverage through the possible sale of equity and the divestiture
      of non-core properties.

A:  Plains believes that the merger will:

   .  Diversify Reserve Commodity and Geographic Mix. The merger will reduce
      Plains' dependence on the California oil market and exposure to the
      California regulatory system. The merger will add significantly to
      Plains' reserves and production and will dramatically increase the
      percentage of Plains' reserves and production that are from gas, thereby
      reducing Plains' exposure to volatility in oil prices.

   .  Shorten Reserve Life to Production Ratio. The merger is expected to
      increase Plains' current production and its proved developed reserves as
      a percentage of its total proved reserves thereby shortening its reserve
      life to production ratio.

   .  Provide Meaningful Accretion to Earnings and Cash Flow. The merger should
      significantly increase Plains' earnings and cash flow.

                                      iv

<PAGE>

   .  Provide Plains with a Presence in East Texas and the Gulf Coast that can
      be Used for Future Growth. The merger is in accordance with Plains'
      long-term strategy of growth through corporate acquisitions, and should
      create a better platform for further consolidation of oil and gas assets
      in its core operating areas, particularly the Gulf Coast and East Texas
      regions.

   .  Balance Exploration and Development Opportunities. The merger will
      provide Plains with a more balanced portfolio of exploitation and
      exploration opportunities, thereby giving management more flexibility in
      its capital allocation decisions.

   .  Improve Access to Capital Markets. The merger will create a larger
      company that is expected to have more liquidity in its common stock and
      better access to capital markets, which should provide more financial
      flexibility.

   .  Provide Fair Merger Consideration. Lehman Brothers Inc. presented its
      review and opinion to the effect that, based upon its review and
      assumptions and subject to specific matters stated in the opinion, as of
      February 2, 2003, the consideration to be paid by Plains in the merger
      was fair to Plains from a financial point of view.

A:  3TEC believes that the merger will:

   .  Provide 3TEC stockholders immediate cash liquidity and the opportunity
      for continued investment appreciation. The merger agreement requires
      Plains to pay $8.50 in cash and issue approximately 0.85 of a share of
      Plains common stock to 3TEC common stockholders for each share of 3TEC
      common stock they hold. Accordingly, the merger consideration provides
      3TEC common stockholders immediate cash liquidity on a portion of their
      investment and provides the opportunity for longer-term gains with their
      continued investment in the combined company.

   .  Provide Premium Merger Consideration. As of January 31, 2003, the value
      of the merger consideration to 3TEC's common stockholders represented an
      18.5% premium over the last reported sale price per share of 3TEC common
      stock on that date and a 24% premium over the average last reported sale
      prices per share of 3TEC common stock for the preceding 10 trading days.
      In the view of the 3TEC board, the merger consideration appropriately
      reflects 3TEC's fair market value.

   .  Provide Downside Price Protection. Pursuant to the merger agreement, the
      3TEC common stockholders will receive $8.50 in cash and 0.85, referred to
      as the exchange ratio, of a share of Plains common stock for each share
      of 3TEC common stock owned. The exchange ratio is subject to an upward or
      downward adjustment should the market price of Plains stock fall below
      $7.65 per share or rise above $12.35 per share, respectively. This collar
      mechanism is intended to provide a minimum value of $15.00 and a maximum
      value of $19.00 for every share of 3TEC common stock.

   .  Provide Increased Liquidity. Plains common stock trades on the New York
      Stock Exchange, and 3TEC anticipates that in view of the substantially
      increased size of the combined company following the effective time of
      the merger, the Plains common stock will trade greater daily volumes than
      3TEC common stock currently trades, thereby providing increased liquidity
      for 3TEC stockholders.

   .  Qualify as a Tax-Free Reorganization. The merger is intended to qualify
      as a tax-free reorganization for U.S. federal income tax purposes, and
      the transaction should be tax free to 3TEC common stockholders, except
      for the cash portion of the merger consideration.

                                      v

<PAGE>

   .  Enhance 3TEC's Position in Louisiana as a Result of the Experience of
      Plains' Chief Executive Officer. The 3TEC board believes that James C.
      Flores, the Chief Executive Officer of Plains, has significant and
      relevant oil and gas experience in south Louisiana, an area in which 3TEC
      believes it has high quality prospects, acreage and technical
      capabilities. The 3TEC board believes that Mr. Flores' contacts and
      experience in south Louisiana should enhance 3TEC's existing position in
      south Louisiana to the benefit of the 3TEC stockholders receiving Plains
      stock in the merger.

   .  Provide Fair Merger Consideration. Credit Suisse First Boston LLC and
      Bear, Stearns & Co., Inc. each presented its review and opinion that,
      based upon its review and assumptions and subject to specific matters
      stated in the opinion, the merger consideration to be received by the
      holders of outstanding 3TEC common stock in the merger is fair, from a
      financial point of view, to the 3TEC common stockholders.

   .  Establish a Balance of Oil and Gas Properties. 3TEC's properties are
      principally gas producing properties in Texas and Louisiana and Plains'
      properties are principally oil producing properties in California and
      Illinois. The 3TEC board believes that the nature of the properties of
      the combined company provides an increased balance to the property base,
      which should inure to the long-term benefit of the combined company and
      therefore benefit the 3TEC stockholders receiving Plains common stock in
      the merger.

Q:  How will the merger affect 3TEC common stockholders? What will 3TEC common
    stockholders receive for their shares? (see page [      ])

A:  Under the terms of the merger agreement, 3TEC common stockholders will
    receive $8.50 of cash and 0.85 of a share of Plains common stock for each
    share of 3TEC common stock they own, which equates to $16.51 per 3TEC
    common share based on the February 11, 2003 closing price of $9.42 per
    Plains common share. This exchange ratio is subject to an upward or
    downward adjustment should the market price of Plains common stock fall
    below $7.65 per share or rise above $12.35 per share, respectively. This
    mechanism is intended to provide that the total value of the consideration
    received by 3TEC common stockholders at the effective time of the merger
    will be between $15.00 and $19.00 per share of 3TEC common stock. For this
    purpose, the market price of the Plains common stock is the average of the
    closing prices of Plains common stock for the 20 consecutive trading days
    immediately preceding the third trading day prior to closing.

Q:  How will the merger affect 3TEC preferred stockholders? What will 3TEC
    preferred stockholders receive for their shares? (see page [      ])

A:  Holders of 3TEC Series D preferred stock, the only outstanding preferred
    stock of 3TEC, will receive $24.00 per share, plus approximately $0.13 per
    share in accrued and unpaid dividends up to the effective time of the
    merger. 3TEC may redeem the 3TEC preferred stock between the record date
    and the effective time of the merger for the same price except that accrued
    and unpaid dividends will only be paid through the date of redemption.

Q:  What will happen to 3TEC's stock options and warrants in the merger? (see
    page [      ])

A:  Prior to the merger, 3TEC will cause all options to purchase 3TEC common
    stock issued under its employee benefit plans and non-employee director
    stock option plans to be vested and all holders of those options to
    exercise the options in a cashless exercise (based on a value of 3TEC
    common stock of $17.00) that will cause them to receive 3TEC common stock
    equal in value to the difference between $17.00 and the exercise price of
    the option. The 3TEC common stock

                                      vi

<PAGE>

    issued upon exercise of the options will be converted into merger
    consideration in the same manner as other outstanding 3TEC common stock.
    Options that are not exercised will terminate at the effective time of the
    merger.

    Also, at the effective time of the merger, each holder of a warrant to
    purchase 3TEC common stock for $3.00 per share will receive merger
    consideration of cash and Plains common stock as if such holder had
    exercised his or her warrant on a cashless basis into 3TEC common stock
    based on a value of $17.00. Additionally, at the effective time of the
    merger, each warrant to purchase 3TEC common stock for $30.00 per share
    will be exchanged for a Plains warrant having the right to purchase 0.85
    shares of Plains common stock (subject to adjustment) and $8.50 in cash for
    a purchase price of $30.00. These warrants will expire in December 2003.
    For more information, please see "Terms of the Merger Agreement - Manner
    and Basis of Converting Stock" on page [      ].

Q:  Describe the spin-off of Plains from Plains Resources Inc. and the related
    transactions.

A:  Prior to December 18, 2002 Plains was a wholly-owned subsidiary of Plains
    Resources Inc. On December 18, 2002, Plains Resources distributed 100% of
    Plains common stock to the holders of record of Plains Resources' common
    stock as of December 11, 2002. Each Plains Resources stockholder received
    one share of Plains common stock for each share of Plains Resources common
    stock held. Plains Resources received a favorable private letter ruling
    from the Internal Revenue Service stating that, for United States federal
    income tax purposes, this distribution by Plains Resources of Plains'
    capital stock qualified as a tax-free distribution to Plains Resources and
    its stockholders under Section 355 of the Internal Revenue Code. This
    spin-off was completed to, among other things, enable Plains and Plains
    Resources to obtain significant cost savings through access to capital to
    fund operations, capital expenditures, acquisitions and other business
    needs at a reduced borrowing cost. In this document we refer to this
    transaction as Plains' "spin-off."

    In contemplation of the spin-off, on July 3, 2002 Plains Resources
    contributed to Plains all of the capital stock of its subsidiaries that own
    oil and gas properties offshore California and in Illinois. In this
    document we refer to this series of transactions as the "reorganization."
    Plains Resources also contributed to Plains intercompany payables that
    Plains or its subsidiaries owed to it which totaled $257.7 million at June
    30, 2002. In addition, prior to the spin-off Plains Resources made an
    aggregate of $52.2 million in cash capital contributions to Plains.

Q:  Will Plains stockholders receive any shares in the merger? (see page
    [      ])

A:  No. Plains stockholders will continue to hold the Plains common stock they
    own prior to the effective time of the merger.

Q:  Where will my shares be traded after the merger? (see page [      ])

A:  Plains common stock will be traded on the New York Stock Exchange under the
    symbol "PXP." 3TEC common stock will no longer be quoted.

Q:  When do you expect the merger to be completed? (see page [      ])

A:  We expect to complete the merger promptly following the Plains annual
    meeting of stockholders and the 3TEC special meeting of stockholders.

                                      vii

<PAGE>

Q:  How do I vote my shares at my stockholder meeting? (see page [      ])

A:  After carefully reading this document and the information incorporated by
    reference, indicate on the enclosed proxy how you want to vote, sign it and
    mail it in the enclosed return envelope as soon as possible so that your
    shares will be represented at your stockholder meeting. To assure that we
    obtain your vote, please vote as instructed on your proxy card, even if you
    plan to attend your stockholder meeting in person. If you sign and send in
    your proxy card and do not indicate how you want to vote, your proxy will
    be counted as a vote in favor of the adoption of the merger agreement if
    you are a 3TEC stockholder, and in favor of the issuance of Plains common
    stock and the other proposals to be voted on at the Plains annual meeting
    if you are a Plains stockholder, and in favor of any other proposals that
    may be submitted at your stockholder meeting. You may revoke your proxy on
    or before the day of your stockholder meeting by following the instructions
    on page [      ]. You then may either change your vote or attend your
    stockholder meeting and vote in person.

Q:  What happens if I abstain from voting, or do not submit a proxy or vote?
    (see page [      ])

A:  If you are a 3TEC stockholder, any of these actions will have the effect of
    a vote against the adoption of the merger agreement.

A:  If you are a Plains stockholder, if you fail to vote or submit a proxy,
    your vote will have no effect on the vote regarding the share issuance but
    will not count for the purpose of determining whether a quorum exists for
    the share issuance only. An abstention will have no effect on any proposal
    brought at the annual meeting.

    In either case, if you sign your proxy card but do not indicate how you
    want to vote, your shares will be voted for each proposal.

Q:  What should I do if I want to change my vote? (see page [      ])

A:  You can change your vote at any time before your proxy card is voted at
    your stockholder meeting. You can do this in one of three ways:

   .  you can send a written notice to the company of which you are a
      stockholder stating that you would like to revoke your proxy;

   .  you can complete and submit a later dated proxy card to that company; or

   .  you can attend your stockholder meeting and vote in person.

    However, your attendance alone will not revoke your proxy. If you have
    instructed a broker to vote your shares, you must follow the procedure your
    broker provides to change those instructions.

Q:  What vote does my board of directors recommend? (see page [      ])

A:  The Plains board of directors unanimously recommends that their
    stockholders vote at the annual meeting "FOR" the proposals, including the
    issuance of the Plains common stock as a result of the transactions
    contemplated by the merger agreement. The 3TEC board of directors, with two
    interested members abstaining, unanimously recommends that their
    stockholders vote "FOR" the adoption of the merger agreement. See page
    [      ] for a discussion of why certain 3TEC directors abstained from
    voting on the proposed merger.

                                     viii

<PAGE>

Q:  If my broker holds my shares in "street name," will my broker vote them for
    me without my instructions? (see page [      ])

A:  No. Your broker will not be able to vote your shares without instructions
    from you. You should instruct your broker to vote your shares, following
    the procedure your broker provides.

Q:  Should I send in my stock certificates now? (see page [      ])

A:  No. After the merger, if you are a 3TEC stockholder, we will send written
    instructions on how to exchange your 3TEC stock certificates for cash and
    certificates representing Plains common stock. Plains stockholders should
    continue to hold their certificates after the merger and do not need to
    take any further action.

Q:  Am I entitled to appraisal rights? (see page [      ])

A:  3TEC common stockholders and 3TEC preferred stockholders are entitled to
    appraisal rights under Section 262 of the Delaware General Corporation Law,
    or DGCL. For more information regarding appraisal rights, please see "Terms
    of the Merger Agreement--Manner and Basis of Converting Stock--Appraisal
    Rights" beginning on page [  ].

Q:  Is the merger taxable? (see page [      ])

A:  3TEC and Plains each expect the merger to be tax free pursuant to Section
    368(a) of the Internal Revenue Code, to the extent 3TEC common stockholders
    receive stock in the merger. 3TEC common stockholders generally will
    recognize capital gain (but not loss) to the extent of the cash portion of
    the merger consideration they receive. The consideration, if any, received
    by the 3TEC preferred stockholders in the merger is expected to constitute
    ordinary income to the extent received for accrued and unpaid dividends. To
    the extent that cash received other than for accrued and unpaid dividends
    exceeds such stockholder's tax basis in the preferred stock, such
    stockholder will recognize gain. Such gain will be capital gain unless the
    receipt of cash has the effect of a distribution of a dividend as described
    in "Material U.S. Federal Income Tax Consequences--Tax Consequences to
    Holders of 3TEC Common Stock--Recognition of Gain or Loss" beginning on
    page [      ].

    Please review carefully the information under the caption "Material U.S.
    Federal Income Tax Consequences of the Merger" beginning on page [      ]
    for a description of the material U.S. federal income tax consequences of
    the merger. The tax consequences to you will depend on your own situation.
    Please consult your tax advisors for a full understanding of the tax
    consequences of the merger to you.

Q:  Are there any risks in the merger that I should consider? (see page
    [      ])

A:  Yes. There are risks associated with all business combinations, including
    the proposed merger. We have described this risk and the other risks in
    more detail under "Risk Factors" beginning on page [      ].

Q:  Where can I find more information about the companies? (see page [      ])

A:  Both Plains and 3TEC file periodic reports and other information with the
    Securities and Exchange Commission, or SEC. You may read and copy this
    information at the SEC's public reference facility. Please call the SEC at
    1-800-SEC-0330 for information about this facility. This information is
    also available through the Internet site maintained by the SEC at
    http://www.sec.gov and at the offices of the New York Stock Exchange. In
    addition, you may

                                      ix

<PAGE>

    obtain some of this information directly from the companies. For a more
    detailed description of the information available, please see "Where You
    Can Find More Information" on page [      ].

Q:  Who can help answer my questions? (see page [      ])

A:  If you have more questions about the merger, please call the Investor
    Relations department of Plains at (713) 739-6700 or 3TEC at (713) 821-7100.


                                      x

<PAGE>

                                    SUMMARY

    This summary primarily highlights selected information from this document
and may not contain all of the information that is important to you. To
understand the merger fully and for a more complete description of the terms of
the merger, you should read carefully this entire document and the other
available information referred to under "Where You Can Find More Information"
on page [      ]. We encourage you to read the merger agreement, the legal
document governing the merger, which is included as Annex A to this joint proxy
statement/prospectus. We have included page references parenthetically to
direct you to more complete descriptions of the topics presented in this
summary. For an explanation of certain oil and gas industry terms used in this
document, you should read "Glossary of Oil and Gas Terms" beginning on page
[      ].

    Although Plains Resources has historically owned and operated Plains'
offshore California and Illinois properties through subsidiaries, the
discussion in this document assumes Plains owned and operated these properties
since the time Plains Resources acquired them. For example, if Plains Resources
through Plains' subsidiaries drilled a well in 1999 on an Illinois property, in
this document we will state that Plains drilled the well in 1999.

The Companies

Plains Exploration & Production Company
500 Dallas Street, Suite 700
Houston, Texas 77002
(713) 739-6700

    Plains is an independent oil and gas company primarily engaged in the
upstream activities of acquiring, exploiting, developing and producing oil and
gas in the United States. Plains' core operating areas are onshore California,
primarily in the Los Angeles Basin, offshore California in the Point Arguello
unit, and the Illinois Basin in southern Illinois and Indiana. As of December
31, 2001, Plains had estimated total proved reserves of 239.3 MMBOE, of which
approximately 93% were oil and approximately 54% were proved developed. Plains
common stock is listed on the New York Stock Exchange under the symbol "PXP."

3TEC Energy Corporation
Pennzoil Plaza, North Tower
700 Milam Street, Suite 1100
Houston, Texas 77002
(713) 821-7100

    3TEC is engaged in the acquisition, development, production and exploration
of oil and gas reserves. 3TEC's properties are concentrated in East Texas and
the Gulf Coast region, both onshore and in the shallow waters of the Gulf of
Mexico. As of December 31, 2001, 3TEC had estimated total net proved reserves
of 44 MMBOE, of which approximately 88% were gas and approximately 77% were
proved developed. 3TEC common stock is quoted on the NASDAQ National Market
under the symbol "TTEN."

The Merger (see page [    ])

    Pursuant to the merger agreement, 3TEC will merge with and into a newly
formed wholly-owned subsidiary of Plains.

                                      1

<PAGE>

    Under the terms of the merger agreement, 3TEC common stockholders will
receive $8.50 of cash and 0.85 of a share of Plains common stock for each share
of 3TEC common stock they own, which equates to a total of $16.97 per 3TEC
common share based on the January 31, 2003 closing price of $9.96 per Plains
common share. This exchange ratio is subject to an upward or downward
adjustment should the market price of Plains common stock fall below $7.65 per
share or rise above $12.35 per share, respectively. This mechanism is intended
to provide that the total value of the consideration received by 3TEC common
stockholders at the effective time of the merger will be between $15.00 and
$19.00 per share of 3TEC common stock. For this purpose, the market price of
Plains common stock will be the average closing price of Plains common stock
for the 20 consecutive trading days immediately preceding the third trading day
prior to closing. In addition, if the market price of Plains common stock is
less than $6.25, Plains may either (i) terminate the merger agreement or (ii)
in lieu of issuing more Plains common stock increase the cash consideration
paid per share of 3TEC common stock by the amount the Plains common stock
market price is less than $6.25 times the exchange ratio after adjustment.

    The following table illustrates the consideration to be received by holders
of 3TEC common stock (and options and warrants to purchase common stock) in the
merger under nine different Plains common stock price scenarios:
<TABLE>
<CAPTION>
                                             Merger Consideration
                        --------------------------------------------------------------
                        $6.00  $6.25  $7.00  $8.00  $9.00  $10.00 $11.00 $12.00 $13.00
                        ------ ------ ------ ------ ------ ------ ------ ------ ------
<S>                     <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>
Assumed market price(1)
Exchange ratio(2)......   1.04   1.04   0.93   0.85   0.85   0.85   0.85   0.85   0.81
Stock value(3)......... $ 6.24 $ 6.50 $ 6.50 $ 6.80 $ 7.65 $ 8.50 $ 9.35 $10.20 $10.50
Cash................... $ 8.50 $ 8.50 $ 8.50 $ 8.50 $ 8.50 $ 8.50 $ 8.50 $ 8.50 $ 8.50
Additional cash(4)..... $ 0.26     --     --     --     --     --     --     --     --
Merger consideration... $15.00 $15.00 $15.00 $15.30 $16.15 $17.00 $17.85 $18.70 $19.00
</TABLE>
--------
(1) The market price of Plains common stock will be calculated at the effective
    time of the merger based upon the average closing prices of Plains common
    stock for the 20 consecutive trading days immediately preceding the third
    trading day prior to the closing.
(2) The number of shares of Plains common stock issued for each share of 3TEC
    common stock.
(3) The value of Plains common stock has been determined by multiplying the
    market price as determined under the merger agreement by the exchange
    ratio. The actual value, or trading price, of the Plains common stock on
    the closing date of the merger could be different.
(4) If the market price of Plains common stock as determined under the merger
    agreement is less than $6.25, Plains may terminate the merger agreement. If
    Plains does not terminate the merger agreement, then the exchange ratio
    will be determined using $6.25 as the market price and Plains will pay
    additional cash in an amount equal to the product of (i) $6.25 minus the
    market price times (ii) the exchange ratio.

    Assuming the market price of Plains common stock is between $7.65 and
$12.35, after the merger is completed, 3TEC common stockholders will own
approximately 40% of Plains, and Plains stockholders will own approximately 60%
of Plains.

    The merger is expected to qualify as a tax free reorganization under
Section 368(a) of the Internal Revenue Code. Accordingly, the merger is
expected to be tax free to Plains stockholders and tax free for the stock
portion of the consideration received by 3TEC stockholders. Plains anticipates
funding the cash portion of the merger through a new credit facility.

    3TEC preferred stockholders will receive $24.00 per share plus
approximately $0.13 per share in accrued and unpaid dividends up to the
estimated effective time of the merger. 3TEC intends to

                                      2

<PAGE>

redeem the 3TEC preferred stock between the record date of the special meeting
and the effective time of the merger for $24.00 per share plus the accrued and
unpaid dividends through the redemption date.

    Prior to the merger, 3TEC will cause all options to purchase 3TEC common
stock issued under its employee benefit plans and non-employee director stock
option plans to be vested and all holders of those options to exercise the
options, based on a value of $17.00 and in a manner that will cause them to
receive 3TEC common stock, with a value equal to the difference between $17.00
and the exercise price of the option. The 3TEC common stock issued upon
exercise of the options will be converted into merger consideration in the same
manner as other holders of 3TEC common stock. Options that are not exercised
will terminate upon the consummation of the merger.

    Also, upon the consummation of the merger, each holder of a warrant to
purchase 3TEC common stock for $3.00 per share will receive merger
consideration of cash and Plains common stock as if such holder had exercised
his or her warrant on a cashless basis into 3TEC common stock based on a value
of $17.00. Additionally, upon the consummation of the merger, each warrant to
purchase 3TEC common stock for $30.00 per share will be exchanged for Plains
warrants having the right to purchase 0.85 shares of Plains common stock
(subject to adjustment) and $8.50 in cash for a purchase price of $30.00. For
more information, please see "Terms of the Merger Agreement--Manner and Basis
of Converting Stock" on page [    ].

Recommendations of the Boards of Directors
(see page [      ])

    Plains.  The board of directors of Plains has unanimously approved and
adopted the merger agreement and the transactions contemplated by it, including
the issuance of Plains common stock to the 3TEC stockholders as a result of
such transactions, declared its advisability and unanimously recommends that
Plains stockholders vote at the annual meeting "FOR" the issuance of Plains
common stock as a result of the transactions contemplated by the merger
agreement. In addition, the Plains board of directors unanimously recommends
that Plains stockholders vote "FOR" the 2002 Stock Incentive Plan, the
adjustment to that plan, the nominees for director and the ratification of
PricewaterhouseCoopers LLP as Plains' auditors for the fiscal year ending
December 31, 2003.

    3TEC.  The board of directors of 3TEC has, with two interested members
abstaining, unanimously adopted the merger agreement, declared the merger
agreement advisable, and recommends that 3TEC stockholders vote at the special
meeting "FOR" the adoption of the merger agreement. Because certain affiliates
of EnCap Investments L.L.C. own shares and other equity interests of 3TEC and
Plains, the two 3TEC directors who are managing directors of EnCap chose to
abstain from the discussion and vote related to the merger agreement. See "The
Merger--Background of the Merger."

Opinions of Financial Advisors
(seepage [    ])

    In deciding to recommend the merger, we each considered opinions from our
respective financial advisors.

    Plains received a written opinion from its financial advisor, Lehman
Brothers Inc., to the effect that as of the date of such opinion, the merger
consideration to be paid to the holders of outstanding 3TEC common stock in the
merger is fair, from a financial point of view, to Plains.

    3TEC received written opinions from each of its financial advisors, Credit
Suisse First Boston LLC and Bear, Stearns & Co. Inc., to the effect that as of
the date of the opinions, the merger consideration

                                      3

<PAGE>

to be received by the holders of outstanding 3TEC common stock in the merger is
fair, from a financial point of view, to the 3TEC common stockholders.

    The full texts of these opinions describe the basis and assumptions on
which they were rendered and are attached as Annexes B, C and D. We urge you to
read these opinions in their entirety.

Board of Directors and Management of Plains Following the Merger
(seepage [    ])

    If the merger agreement is adopted, the share issuance is approved and the
merger becomes effective, the size of the Plains board of directors will be
increased from four to six members. The nominating committee of 3TEC's board of
directors will have the right to designate two people who are reasonably
acceptable to the Plains board of directors to fill those new board
memberships. The Plains board will appoint those designees to serve on the
Plains board immediately after the merger. As a result, following the merger,
the Plains board will consist of four individuals designated by Plains, each of
whom currently serves on the Plains board, and two individuals designated by
3TEC. Plains' senior management will not change as a result of the merger.

The Stockholder Meetings
(seepage [    ])

    Plains.  The Plains annual meeting will be held for the following purposes:

   .  to consider and vote upon a proposal to approve the issuance of Plains
      common stock to 3TEC stockholders as a result of the transactions
      contemplated by the Agreement and Plan of Merger dated February 2, 2003
      by and among Plains, the Plains merger subsidiary and 3TEC pursuant to
      which 3TEC will be merged with and into the Plains merger subsidiary;

   .  to consider and vote upon Plains' 2002 Stock Incentive Plan;

   .  to consider and vote upon a proposed adjustment to the 2002 Stock
      Incentive Plan to increase the number of shares of Plains common stock
      reserved for issuance under the plan to 1.5 million shares if the merger
      occurs;

   .  to elect four nominees to the board of directors to serve until their
      successors are duly elected and qualified or until their earlier death,
      resignation or removal; and

   .  to ratify the selection of PricewaterhouseCoopers LLP as Plains'
      independent auditors for the fiscal year ending December 31, 2003.

    3TEC.  At the 3TEC special meeting, holders of 3TEC common stock and 3TEC
preferred stock will be asked to adopt the merger agreement.

Record Dates
(seepage [      ])

    Plains.  You can vote at the annual meeting of Plains stockholders if you
owned Plains common stock at the close of business on       , 2003.

    3TEC.  You can vote at the special meeting of 3TEC stockholders if you
owned 3TEC common stock or 3TEC preferred stock at the close of business on
      , 2003.

                                      4

<PAGE>

Votes Required
(seepage [      ])

    Plains.  Each share of Plains common stock will be entitled to one vote per
share at the annual meeting.

    For the approval the proposals relating to the issuance of Plains common
stock in connection with the merger, the approval of Plains' 2002 Stock
Incentive Plan, and the adjustment to that plan (if the merger is completed),
the affirmative vote of a majority of the shares of Plains common stock present
and voting is required; except that for purposes of approving the issuance of
Plains common stock in connection with the merger, broker non-votes will not
count in determining whether a quorum is present at the meeting.

    The election of directors requires the affirmative vote of a plurality of
shares of Plains common stock present and voting, in person or by proxy, at any
meeting at which holders of a majority of common stock are present. Abstentions
and broker non-votes have no effect on determinations of plurality except to
the extent that they affect the total votes received by any particular
candidate.

    3TEC.   Each share of 3TEC common stock and 3TEC preferred stock is
entitled to one vote at the special meeting. Adoption of the merger agreement
by 3TEC stockholders requires the affirmative vote of a majority of the
outstanding shares of 3TEC common stock and 3TEC preferred stock, each voting
separately as a class.

    If you are a holder of 3TEC common stock or 3TEC preferred stock and you do
not vote your shares or abstain from voting your shares, such actions will be
the equivalent of a "no" vote because the adoption of the merger agreement
requires an affirmative vote of a majority of the outstanding shares of 3TEC
common stock and 3TEC preferred stock. In addition, broker non-votes will be
the equivalent of a "no" vote because the adoption of the merger agreement
requires the affirmative vote of a majority of the outstanding shares of 3TEC
common stock and 3TEC preferred stock, each voting as a separate class.

Voting Agreements
(seepage [      ])

    In connection with the signing of the merger agreement, certain directors,
executive officers and stockholders of Plains and 3TEC entered into voting
agreements to vote all of their shares of common stock and, if applicable, 3TEC
preferred stock in favor of the adoption of the merger agreement. The total
number of shares of Plains common stock subject to these voting agreements
represents approximately 12% of the outstanding shares of Plains common stock
and the total number of shares of 3TEC stock subject to these voting agreements
represents approximately 22% of the outstanding shares of 3TEC common stock and
74% of the outstanding shares of 3TEC preferred stock as of the record date.

Share Ownership of Management
(seepage [      ])

    Plains.  As of the record date for the Plains annual meeting, there
were             shares of Plains common stock outstanding. Directors and
executive officers of Plains beneficially owned approximately       % of the
outstanding Plains common stock on the record date.

    3TEC.  As of the record date for the 3TEC special meeting, there were
shares of 3TEC common stock and 613,919 shares of 3TEC preferred stock
outstanding. Directors and executive

                                      5

<PAGE>

officers of 3TEC beneficially owned approximately     % of the outstanding 3TEC
common stock and 10% of the outstanding 3TEC preferred stock on the record date.

Risks Associated with the Merger
(seepage [      ])

    You should be aware of and carefully consider the risks relating to the
merger described under "Risk Factors" beginning on page [      ]. These risks
include possible difficulties in combining two companies that have previously
operated independently.

Accounting Treatment
(seepage [      ])

    The merger will be accounted for as an acquisition of 3TEC by Plains using
the "purchase" method of accounting. In addition, Plains will continue to use
the full cost method of accounting for its oil and gas properties.

Conditions to the Merger
(seepage [      ])

    We will complete the merger only if the conditions to the merger are
satisfied, including the following:

   .  the adoption of the merger agreement by 3TEC common and preferred
      stockholders;

   .  the approval of the Plains common stock issuance in connection with the
      merger by the Plains stockholders;

   .  the receipt of tax opinions from counsel for each of Plains and 3TEC that
      the merger constitutes a reorganization under Section 368(a) of the
      Internal Revenue Code;

   .  the receipt of a supplemental ruling from the Internal Revenue Service or
      a tax opinion from counsel for Plains that the merger will not adversely
      affect the tax treatment of the recently completed spin-off of Plains
      from Plains Resources pursuant to Section 355 of the Internal Revenue
      Code;

   .  the absence of any material adverse effect upon either Plains or 3TEC; and

   .  the absence of any law or court order that prohibits the merger.

    Prior to the effective time of the merger, either of us may choose to
complete the merger even though a condition has not been satisfied if the law
allows us to do so, but such a waiver after the merger agreement has been
adopted by the 3TEC common or preferred stockholders may require the further
approval of the stockholders.

Termination of the Merger Agreement
(seepage [      ])

    We can agree to terminate the merger agreement at any time. In addition,
either of us can unilaterally terminate the merger agreement in various
circumstances, including the following:

   .  if the merger has not been completed by August 31, 2003, and if the
      terminating company has not materially breached its obligations under the
      merger agreement that proximately contributed to the failure to
      consummate the merger on or prior to such date; and

                                      6

<PAGE>

   .  if the stockholders of 3TEC fail to adopt the merger agreement or the
      stockholders of Plains fail to approve the issuance of Plains common
      shares as a result of the merger.

    In addition, Plains can unilaterally terminate the merger agreement if the
20-day average closing price of Plains common stock is less than $6.25 at the
time the stock portion of the merger consideration is calculated.

    The merger agreement can be terminated in other circumstances which are
described on page [    ].

Termination Fees
(seepage [      ])

    The occurrence of certain termination events in connection with an offer or
proposal regarding a business combination including 3TEC or the purchase of a
substantial amount of 3TEC's assets or stock that are not contemplated by the
merger agreement, will require 3TEC to pay Plains a termination fee of $9.0
million plus the payment of up to $1.0 million of Plains' expenses.

Interests of Certain Persons in the Merger that Differ from Your Interests
(seepage [      ])

    Some of 3TEC's directors and officers have interests in the merger that
differ from, or are in addition to, your interests as stockholders of 3TEC.
These interests include:

   .  at the effective time of the merger, the nominating committee of 3TEC's
      board of directors will have the right to designate two individuals to
      Plains' board of directors;

   .  on or before the effective time of the merger, 86,666 stock options with
      a weighted average exercise price of $9.60 per share held by Floyd C.
      Wilson, who is currently the Chairman and Chief Executive Officer of
      3TEC, will vest and will be converted into merger consideration on a
      cashless exercise basis;

   .  on or before the effective time of the merger, 104,999 stock options with
      a weighted average exercise price of $8.56 per share held by R.A. Walker,
      who is currently the President, Chief Financial Officer and a director of
      3TEC, will vest and will be converted into merger consideration on a
      cashless exercise basis;

   .  all other outstanding stock options, including those held by 3TEC's
      executive officers and independent directors, will fully vest on or
      before the effective time of the merger and will be converted into merger
      consideration on a cashless exercise basis;

   .  3TEC executive officers will be entitled to an aggregate of approximately
      $2.9 million in severance payments if they are not offered employment by
      the surviving company or its affiliate or if their benefits are reduced
      within one year of the effective time of the merger; and

   .  persons who become directors of Plains will receive 10,000 shares of
      Plains restricted stock.

    3TEC's directors and executive officers beneficially owned approximately
      % of the fully diluted shares of 3TEC common stock as of the record date
for the 3TEC special meeting. Plains' directors and executive officers did not
beneficially own any shares of 3TEC common stock as of that date.

    The 3TEC board of directors was aware of these interests and considered
them in approving the merger and the merger agreement.

                                      7

<PAGE>

Acquisition Proposals
(seepage [      ])

    3TEC has agreed not to engage in any discussions or negotiations with
anyone that has made or is considering making an offer or proposal for a
business combination involving it or the purchase of a substantial amount of
its stock or assets, other than as contemplated in the merger agreement.
However, 3TEC or its board of directors may take and disclose a position with
respect to a tender offer by a third party pursuant to applicable law and prior
to obtaining 3TEC stockholder adoption of the merger agreement, or furnish
information or enter into negotiations with any person, organization or entity
indicting a willingness to make an unsolicited bona fide proposal for a
business combination involving 3TEC or the purchase of a substantial amount of
its stock or assets if certain conditions are met. For a more detailed
discussion of such conditions, see "Terms of the Merger Agreement--Additional
Agreements--Acquisition Proposals."

Material Differences in the Rights of Stockholders
(seepage [      ])

    3TEC and Plains are both Delaware corporations. Upon completion of the
merger, your rights as stockholders of Plains will be governed by its charter
and bylaws, and Delaware law. 3TEC stockholders should consider the fact that
the surviving entity's charter and bylaws differ in some material respects from
3TEC's charter and bylaws.

Comparative Per Share Market Price Information
(seepage [      ])

    Plains common stock is listed on the New York Stock Exchange under the
symbol "PXP" and 3TEC common stock is quoted on the NASDAQ National Market
under the symbol "TTEN." On January 31, 2003, the last full trading day prior
to public announcement of the proposed merger, Plains common stock closed at
$9.96 per share and the last reported sale price of 3TEC common stock was
$14.35 per share. On     , 2003 (the last full trading day before mailing this
document), Plains common stock closed at $[    ] per share and the last
reported sale price of 3TEC common stock was $[    ] per share. We urge you to
obtain current market quotations before making any decision with respect to the
merger.

                                      8

<PAGE>

            Summary Selected Historical Consolidated Financial Data

                                    Plains

    The following table sets forth Plains' summary consolidated and combined
historical financial information that has been derived from (a) the audited
combined statements of income and cash flows for Plains' business for each of
the years ended December 31, 2001, 2000 and 1999, (b) the unaudited
consolidated statements of income and cash flows for Plains' business for the
nine months ended September 30, 2002 and 2001 and (c) Plains' unaudited
consolidated balance sheet as of September 30, 2002. Pro forma information
reflects Plains' (i) reorganization, (ii) issuance of $200.0 million aggregate
principal amount of 8.75% senior subordinated notes due 2012, (iii) entry into
a $300.0 million revolving credit facility and initial borrowings thereunder,
(iv) receipt of $47.2 million in capital contributions from Plains Resources in
December 2002 and (v) distribution of the proceeds of its notes offering and
the initial borrowings under its credit facility to Plains Resources. This
discussion does not include the effect of the merger. You should read this
financial information in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Plains" and the Plains
financial statements and notes thereto included elsewhere in this document.

<TABLE>
<CAPTION>
                                                     Nine Months Ended                     Year Ended
                                                       September 30,                      December 31,
                                               ----------------------------  --------------------------------------
                                                  Pro                           Pro
                                                 Forma                         Forma
                                                 2002      2002      2001      2001      2001      2000      1999
                                               --------  --------  --------  --------  --------  --------  --------
                                                           (Amounts in thousands, except per share data)
<S>                                            <C>       <C>       <C>       <C>       <C>       <C>       <C>
Statement of Income Data:
Revenues:
   Oil and liquids............................ $129,563  $129,563  $133,957  $174,895  $174,895  $126,434  $102,390
   Gas........................................    7,130     7,130    26,870    28,771    28,771    16,017     5,095
   Other operating revenues...................       27        27       468       473       473        --        --
                                               --------  --------  --------  --------  --------  --------  --------
                                                136,720   136,720   161,295   204,139   204,139   142,451   107,485
                                               --------  --------  --------  --------  --------  --------  --------
Costs and Expenses:
   Production expenses........................   56,826    56,826    47,995    63,795    63,795    56,228    50,527
   General and administrative(1)..............    7,362     7,362     7,074    10,210    10,210     6,308     4,367
   Depreciation, depletion and amortization...   21,723    21,262    16,999    25,010    24,105    18,859    13,329
                                               --------  --------  --------  --------  --------  --------  --------
                                                 85,911    85,450    72,068    99,015    98,110    81,395    68,223
                                               --------  --------  --------  --------  --------  --------  --------
Income from operations........................   50,809    51,270    89,227   105,124   106,029    61,056    39,262
Other income (expense)
   Expenses of terminated public equity
    offering..................................   (1,700)   (1,700)       --        --        --        --        --
   Interest expense...........................  (14,468)  (14,427)  (12,942)  (19,289)  (17,411)  (15,885)  (14,912)
   Interest and other income..................      114       114       459       463       463       343        87
                                               --------  --------  --------  --------  --------  --------  --------
Income before income taxes and cumulative
 effect of accounting change..................   34,755    35,257    76,744    86,298    89,081    45,514    24,437
Income tax expense............................  (13,562)  (13,757)  (29,623)  (33,314)  (34,388)  (16,765)   (5,332)
                                               --------  --------  --------  --------  --------  --------  --------
Income before cumulative effect of accounting
 change....................................... $ 21,193    21,500    47,121  $ 52,984    54,693    28,749    19,105
                                               ========                      ========
Cumulative effect of accounting change, net of
 tax benefit..................................                 --    (1,522)             (1,522)       --        --
                                                         --------  --------            --------  --------  --------
Net income....................................           $ 21,500  $ 45,599            $ 53,171  $ 28,749  $ 19,105
                                                         ========  ========            ========  ========  ========
Net income per common shares:
   Basic and diluted.......................... $   0.88  $   0.89  $   1.89  $   2.20  $   2.21  $   1.19  $   0.79
Weighted averaged common shares outstanding:
   Basic and diluted..........................   24,014    24,200    24,200    24,059    24,014    24,200    24,200
Other Financial Data:
Net cash provided by operating activities.....           $ 58,353  $102,071            $116,808  $ 79,464  $  4,609
Net cash used in investing activities.........             53,644   (99,453)            125,880    70,871    59,362
Net cash provided by (used in) financing
 activities...................................             (3,956)   (3,151)              8,549   (13,132)   59,690
Oil and gas capital expenditures..............             53,589    99,346             125,753    70,505    59,167
EBITDA(2).....................................   70,832    70,832   106,226   130,134   130,134    79,915    52,591
</TABLE>

                                                  (footnotes on following page)

                                      9

<PAGE>

<TABLE>
<CAPTION>
                                           As of September 30,
                                                  2002
                                               Historical
                                           -------------------
                                               (Amounts in
                                               thousands)
                 <S>                       <C>
                 Balance Sheet Data:
                 Cash and cash equivalents      $    766
                 Working capital..........       (50,500)
                 Total assets.............       541,056
                 Total debt...............       288,525
                 Stockholders' equity.....       120,127
</TABLE>
--------
(1)General and administrative expenses consist of Plains' direct expenses plus
   amounts allocated from Plains Resources for various operational, financial,
   accounting and administrative services provided to Plains. As a result of
   its reorganization and spin-off discussed in the section "Questions and
   Answers about the Merger," Plains' annual general and administrative
   expenses are expected to increase by approximately $4.6 million over the
   amount reported for the year ended December 31, 2001, reflecting the
   incremental costs of operating as a separate, publicly-held company.

   In addition, in connection with the issuance of stock appreciation rights
   (SARs) to Plains Resources' employees, officers and directors as part of and
   at the time of the spin-off, Plains was required to record a pre-tax charge
   of $3.7 million to earnings equal to the aggregate in-the-money value of the
   SARs deemed vested at that time.

   SARs are subject to variable accounting treatment. As a result, Plains'
   results of operations could be adversely or positively affected by
   fluctuations in the price of its common stock in subsequent periods.

(2)EBITDA means earnings before interest income and expenses, income taxes,
   depreciation, depletion and amortization and other income. EBITDA is not a
   measurement presented in accordance with generally accepted accounting
   principles, or GAAP, and should not be considered as an alternative to cash
   flow from operating activities as a measure of liquidity or net income as a
   measure of operating results in accordance with GAAP.

   EBITDA is presented because Plains believes it provides additional
   information with respect to Plains' ability to meet its future debt service,
   capital expenditures and working capital requirements. When evaluating
   EBITDA, investors should consider, among other factors, (i) increasing or
   decreasing trends in EBITDA, (ii) whether EBITDA has remained at positive
   levels historically and (iii) how EBITDA compares to levels of interest
   expense. However, EBITDA does not necessarily indicate whether cash flow
   will be sufficient for such items as working capital requirements, capital
   expenditures or to react to changes in Plains' industry or to the economy in
   general, as certain functional or legal requirements of Plains' business may
   require Plains to use its available funds for other purposes. EBITDA, as
   presented herein, is not necessarily comparable to other similarly titled
   captions of other companies due to potential inconsistencies in the method
   of calculation.

   EBITDA includes amortization of hedge premiums of $0.6 million and $3.1
   million for the nine months ended September 30, 2002 and 2001, respectively,
   and $3.2 million and $0.9 million for the years ended December 31, 2001 and
   2000, respectively. EBITDA is calculated as follows:

<TABLE>
<CAPTION>
                                      Nine Months Ended
                                        September 30,               Year Ended December 31,
                                 --------------------------  ------------------------------------
                                   Pro                          Pro
                                  Forma                        Forma
                                  2002      2002     2001      2001      2001      2000     1999
                                 -------  -------  --------  --------  --------  -------  -------
                                                      (Amounts in thousands)
<S>                              <C>      <C>      <C>       <C>       <C>       <C>      <C>
Income before income taxes and
 cumulative effect of accounting
 change......................... $34,755  $35,257  $ 76,744  $ 86,298  $ 89,081  $45,514  $24,437
Interest and other income.......    (114)    (114)     (459)     (463)     (463)    (343)     (87)
Interest expense................  14,468   14,427    12,942    19,289    17,411   15,885   14,912
Depreciation, depletion and
 amortization...................  21,723   21,262    16,999    25,010    24,105   18,859   13,329
                                 -------  -------  --------  --------  --------  -------  -------
EBITDA.......................... $70,832  $70,832  $106,226  $130,134  $130,134  $79,915  $52,591
                                 =======  =======  ========  ========  ========  =======  =======
</TABLE>

                                      10

<PAGE>

                                     3TEC

   The following table sets forth 3TEC's summary consolidated and combined
historical financial information that has been derived from (a) the audited
combined statements of income and cash flows for 3TEC's business for the years
ended December 31, 2001, 2000 and 1999, (b) the unaudited consolidated
statements of income and cash flows for 3TEC for the nine months ended
September 30, 2002 and 2001 and (c) 3TEC's unaudited consolidated balance sheet
as of September 30, 2002. You should read this financial information in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of 3TEC" and 3TEC's financial statements and notes
thereto included in and incorporated by reference in this document.

<TABLE>
<CAPTION>
                                                          Nine Months Ended
                                                            September 30,      Year Ended December 31,(1)
                                                         ------------------  -----------------------------
                                                           2002      2001       2001      2000      1999
                                                         --------  --------  ---------  --------  --------
                                                           (Amounts in thousands, except per share data)
                                                             (unaudited)               (audited)
<S>                                                      <C>       <C>       <C>        <C>       <C>
Statement of Income Data:
Revenues:
   Oil, gas and plant income............................ $ 70,842  $ 97,690  $ 116,080  $102,148  $ 20,088
   Gain (loss) on sale of properties....................      (74)    3,419        815       800     1,048
   Gain (loss) on derivative fair value.................   (9,314)       --      3,081        --        --
   Gain (loss) on derivative settlements................   (1,931)       --        162        --        --
   Other................................................      210       597        836       813     1,020
                                                         --------  --------  ---------  --------  --------
      Total Revenues....................................   59,733   101,706    120,974   103,761    22,156
                                                         --------  --------  ---------  --------  --------
Costs and Expenses:
   Production...........................................   18,702    21,147     26,670    23,179     7,788
   Geological and geophysical...........................    1,085       545      1,172       666       473
   Dry hole and impairments.............................    2,685     1,667     12,261        29     3,103
   Surrendered and expired acreage......................      749        --      7,875        --        --
   Stock compensation (general and administrative)......      720        --         --        --       730
   Interest.............................................    3,043     5,619      6,773     7,556     3,205
   Severance payments...................................       --        --         --        --       624
   Compensation plan payments...........................       --        --         --        --       293
   General and administrative...........................    6,928     5,159      6,991     6,141     4,122
   Depreciation, depletion and amortization.............   27,237    20,544     30,983    19,779     6,691
   Other................................................      380        --        250        --        --
                                                         --------  --------  ---------  --------  --------
      Total Expenses....................................   61,529    54,681     92,975    57,350    27,029
                                                         --------  --------  ---------  --------  --------
Income (loss) before income taxes, minority interest and
 dividends to preferred stockholders....................   (1,796)   47,025     27,999    46,411    (4,873)
Minority interest.......................................       --       448        511       305        (2)
Income tax (benefit) expense............................     (702)   18,105     10,640    14,442    (1,443)
                                                         --------  --------  ---------  --------  --------
Net income (loss)....................................... $ (1,094) $ 28,472  $  16,848  $ 31,664  $ (3,432)
                                                         ========  ========  =========  ========  ========
Dividends to preferred stockholders..................... $    551  $    562  $     710  $  1,488  $    574
Net income (loss) attributable to common shares.........   (1,645)   27,910     16,138    30,176    (4,006)
Basic net income (loss) per common share................    (0.10)     1.89       1.06      2.91     (1.14)
Diluted net income (loss) per common share..............    (0.10)     1.52       0.91      2.28     (1.14)
Weighted averaged common shares outstanding:
   Basic................................................   16,537    14,791     15,170    10,383     3,520
   Diluted..............................................   16,537    19,072     18,969    13,895     3,520
Other Financial Data:
EBITDAX(2).............................................. $ 32,044  $ 74,803  $  78,352  $ 73,628  $  7,579
Net cash provided by operating activities...............   31,460    80,496     89,780    44,468     1,401
Net cash used in investing activities...................  (34,329)  (97,724)  (122,519)  (83,771)  (80,372)
Net cash provided by (used in) financing activities.....  (10,941)   32,334     46,065    37,598    84,072
Oil and gas capital expenditures........................   36,931   136,039    167,414   105,906    94,402
</TABLE>
                                                  (footnotes on following page)


                                      11

<PAGE>

<TABLE>
<CAPTION>
                                           As of September 30,
                                                  2002
                                               Historical
                                           -------------------
                                               (Amounts in
                                               thousands)
                 <S>                       <C>
                 Balance Sheet Data:
                 Cash and cash equivalents      $  3,952
                 Working capital deficit..        (2,378)
                 Total assets.............       338,902
                 Total debt...............        97,000
                 Stockholders' equity.....       180,593
</TABLE>
--------
(1)Certain reclassifications of prior period amounts have been made to conform
   to the current presentation.

(2)EBITDAX represents earnings before interest income and expense, income
   taxes, depreciation, depletion and amortization, impairment expense, dry
   hole expense, geological and geophysical expense, and minority interest.
   3TEC believes that EBITDAX may provide additional information about its
   ability to meet its future requirements for debt service, capital
   expenditures and working capital. EBITDAX is a financial measure commonly
   used in the oil and gas industry and should not be considered in isolation
   from or as a substitute for net income, operating income, cash flows from
   operating activities or any other measure of financial performance presented
   in accordance with GAAP or as a measure of 3TEC's profitability or
   liquidity. Because EBITDAX excludes some, but not all, items that affect net
   income and this measure may vary among companies, the EBITDAX data presented
   above may not be comparable to similarly titled measures of other companies.
   EBITDAX is calculated as follows:

<TABLE>
<CAPTION>
                                                           Nine Months
                                                              Ended
                                                          September 30,    Year Ended December 31,
                                                        ----------------  -------------------------
                                                          2002     2001     2001     2000     1999
                                                        -------  -------  -------  -------  -------
                                                                   (Amounts in thousands)
<S>                                                     <C>      <C>      <C>      <C>      <C>
Income (loss) before income taxes and minority interest $(1,796) $47,025  $27,999  $46,411  $(4,873)
Interest and other income..............................    (210)    (597)    (836)    (813)  (1,020)
Interest expense.......................................   3,043    5,619    6,773    7,556    3,205
Depreciation, depletion and amortization...............  27,237   20,544   30,983   19,779    6,691
Dry hole and impairments...............................   2,685    1,667   12,261       29    3,103
Geological and geophysical.............................   1,085      545    1,172      666      473
                                                        -------  -------  -------  -------  -------
EBITDAX................................................ $32,044  $74,803  $78,352  $73,628  $ 7,579
                                                        =======  =======  =======  =======  =======
</TABLE>


                                      12

<PAGE>

            Summary Oil and Gas Reserve and Production Information
    The following tables set forth certain information with respect to Plains'
and 3TEC's oil and gas reserve and production data. The following information
should be read in connection with the information contained in the financial
statements and notes thereto included in and incorporated by reference in this
document. The information set forth below is not necessarily indicative of
future results.
<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                              ------------------------------------
                                                 2001         2000         1999
                                              --------    ----------    ----------
                                                    ($ Amounts in thousands)
<S>                                           <C>         <C>           <C>
Plains:
Estimated proved reserves (at end of period):
   Oil (MBbl)(1).............................  223,293       204,387       195,213
   Gas (MMcf)................................   96,217        93,486        90,873
     Total (MBOE)............................  239,329       219,968       210,359
Percent oil..................................      93%           93%           93%
Percent proved developed.....................      54%           52%           52%
PV-10 (at end of period)(2).................. $643,220    $1,304,182    $1,106,358
Standardized measure(2) (3)..................  384,467       789,438       727,286
Reserve additions (MBOE).....................   28,140        17,770        92,554
Reserve life (years).........................     27.3          27.0          27.6
Production:
   Oil (MBbl)................................    8,219         7,654         7,081
   Gas (MMcf)................................    3,355         3,042         3,163
     Total (MBOE)............................    8,778         8,161         7,608
Costs incurred(4):
   Exploitation and development(5)........... $123,778    $   68,186    $   54,996
   Exploration...............................      286           293           796
   Acquisition...............................    1,689         2,026         3,375
     Total costs incurred....................  125,753        70,505        59,167
Reserve replacement ratio....................     321%          218%        1,216%
Average sales price per unit:
   Oil ($/Bbl)............................... $  21.28    $    16.52    $    14.46
   Gas ($/Mcf)...............................     8.58          5.26          1.61
   BOE.......................................    23.20         17.46         14.13
Expense ($/BOE):
   Production................................ $   7.27    $     6.89    $     6.64
   General and administrative(4).............     1.16          0.77          0.57
3TEC:
Estimated proved reserves (at end of period):
   Oil (MBbl)(1).............................    5,337        10,672         9,835
   Gas (Mmcf)................................  231,266       237,693       159,699
     Total (MBOE)............................   43,881        50,288        36,452
Percent oil..................................      12%           21%           27%
Percent proved developed.....................      77%           78%           82%
PV-10 (at end of period)(2)..................  212,349     1,047,364       198,615
Standardized measure(2)(3)...................  181,599       692,674       148,741
Reserve additions (MBOE).....................    3,405        18,830        27,821
Reserve life (years).........................      9.4          12.3          27.6
Production:
   Oil (MBbl)................................      952         1,139           532
   Gas (MMcf)................................   22,352        17,764         4,738
     Total (MBOE)............................    4,678         4,100         1,322
Costs incurred(4):
   Exploitation and development(5)...........   63,358        25,346         2,154
   Exploration...............................   19,731           695           824
   Acquisition...............................   84,325(8)     79,865        91,424
     Total costs incurred....................  167,414       105,906        94,402
Reserve replacement ratio....................      73%          459%        2,103%
Average sales price per unit:
   Oil ($/Bbl)............................... $  23.95    $    24.83(7) $    16.88
   Gas ($/Mcf)...............................     4.15(6)       4.12          2.18
   BOE.......................................    24.72         25.20(7)      15.18
Expenses ($/BOE):
   Production................................ $   6.06          5.88    $     5.94
   General and administrative(4).............     1.50          1.50          3.12
</TABLE>
--------
(1)Includes oil, condensate and plant product barrels.
(2)For Plains, based on year-end spot market prices of: (a) $19.84 per Bbl of
   oil and $2.58 per Mcf of gas for 2001; (b) $26.80 per Bbl of oil and $13.70
   per Mcf of gas for 2000; and (c) $25.60 per Bbl of oil and $2.37 per Mcf of
   gas for 1999. For 3TEC, based on year-end spot market prices of (a) $19.84
   per Bbl of oil and $2.57 per Mcf of gas for 2001; (b) $25.31 per Bbl of oil
   and $9.40 per Mcf of gas for 2000; and (c) $23.64 per Bbl of oil and $2.23
   per Mcf of gas for 1999. PV-10 represents the standardized measure before
   deducting estimated future income taxes.
(3)For Plains, year-end 2001 standardized measure includes future development
   costs related to proved undeveloped reserves of $25.5 million in 2002, $58.9
   million in 2003 and $45.2 million in 2004. For 3TEC, year-end 2001
   standardized measure includes future development costs related to proved
   undeveloped reserves of $26.3 million in 2002, $15.9 million in 2003 and
   $6.2 million in 2004.
(4)Amounts for Plains and 3TEC are not comparable because Plains follows the
   full cost method of accounting for oil and gas properties while 3TEC follows
   the successful efforts method of accounting. Certain costs that are
   capitalized under the full cost method are expensed under the successful
   efforts method. These costs consist primarily of costs associated with
   unsuccessful exploration drilling geological and geophysical costs, costs of
   carrying and retaining unevaluated properties and general and administrative
   costs associated with acquisition, exploration, exploitation and development
   activities.
(5)For Plains, exploitation and development costs include expenditures of $58.5
   million in 2001, $20.6 million in 2000 and $10.7 million in 1999 related to
   the development of proved undeveloped reserves included in Plains' proved
   oil and gas reserves at the beginning of each year. For 3TEC, exploitation
   and development costs include expenditures of $8.7 million in 2001, $5.1
   million in 2000 and $2.2 million in 1999 related to the development of
   proved undeveloped reserves included in 3TEC's proved oil and gas reserves
   at the beginning of each year.
(6)Does not include the effect of 3TEC's derivatives activities, which were not
   designated as hedges pursuant to SFAS 133 and was approximately $162,000 of
   cash settlements during 2001.
(7)Includes the effect of 3TEC's hedging activities.
(8)Excludes a $29.0 million deferred tax liability.

                                      13

<PAGE>

Summary Unaudited Pro Forma Consolidated Financial Data of the Combined Company

    The following table sets forth summary unaudited pro forma consolidated
financial and operating data which are presented to give effect to the
following pro forma adjustments:

   .  the merger;

   .  Plains' reorganization;

   .  Plains' issuance of $200.0 million aggregate principal amount of 8.75%
      senior subordinated notes due 2012;

   .  Plains' entry into a $300.0 million revolving credit facility and initial
      borrowings thereunder;

   .  the receipt of $47.2 million in capital contributions from Plains
      Resources in December 2002;

   .  distribution of the proceeds of Plains' notes offering and its initial
      borrowings under its credit facility to Plains Resources; and

   .  the transfer from Plains Resources of certain assets and liabilities.

    The unaudited pro forma consolidated financial data is not necessarily
indicative of the results of operations or the financial position that would
have occurred had the merger been consummated at January 1, 2001 nor is it
necessarily indicative of future results of operations or financial position.
The unaudited pro forma combined financial data should be read together with
the historical financial statements of Plains and 3TEC included or incorporated
by reference into this document.

<TABLE>
<CAPTION>
                                                     Plains Pro Forma Adjusted
                                                  ------------------------------
                                                                      Year Ended
                                                  Nine Months Ended  December 31,
                                                  September 30, 2002     2001
                                                  ------------------ ------------
                                                      (Amounts in thousands,
                                                      except per share data)
<S>                                               <C>                <C>
Statement of Income Data:
Revenues:
   Oil, gas and plant revenues...................      $207,419        $319,556
   Other operating revenues......................            27             473
                                                       --------        --------
                                                        207,446         320,029
                                                       --------        --------
Costs and Expenses:
   Production expenses...........................        75,716          90,465
   General and administrative(1).................        14,535          16,672
   Depreciation, depletion and amortization......        40,019          49,814
                                                       --------        --------
                                                        130,270         156,951
                                                       --------        --------
Income from operations...........................        77,176         163,078
Other income (expense)
   Expenses of terminated public equity offering.        (1,700)             --
   Interest expense..............................       (22,957)        (30,608)
   Derivative fair value gain (loss).............        (9,314)          3,081
   Derivative settlement gain (loss).............        (1,931)            162
   Interest and other income.....................           183             590
                                                       --------        --------
Income before income taxes and minority interest.        41,457         136,303
Minority interest................................            --            (511)
Income tax expense...............................       (16,583)        (52,280)
                                                       --------        --------
Net income.......................................      $ 24,874        $ 83,512
                                                       ========        ========
Net income per common shares:
Basic and diluted................................      $   0.62        $   2.09
                                                       ========        ========
Weighted averaged common shares outstanding:
Basic and diluted................................        39,937          39,937
                                                       ========        ========
Other Financial Data:
EBITDA(2)........................................      $104,250        $216,135
</TABLE>
                                                  (footnotes on following page)

                                      14

<PAGE>

--------
(1)General and administrative expenses consist of Plains' direct expenses plus
   amounts allocated from Plains Resources for various operational, financial,
   accounting and administrative services provided to Plains and 3TEC's general
   and administrative expense adjusted to reflect the effect of full cost
   accounting. As a result of its reorganization and spin-off discussed in the
   section "Questions and Answers about the Merger," Plains' annual general and
   administrative expenses are expected to increase by approximately $4.6
   million over the amount reported for the year ended December 31, 2001,
   reflecting the incremental costs of operating as a separate, publicly-held
   company.

   In addition, in connection with the issuance of SARs to Plains Resources'
   employees, officers and directors as part of and at the time of the
   spin-off, Plains was required to record a pre-tax charge to earnings equal
   to the aggregate in-the-money value of the SARs deemed vested at that time.
   Plains incurred $3.7 million as an initial charge in connection with the
   spin-off.

   SARs are subject to variable accounting treatment. As a result, Plains'
   results of operations could be adversely or positively affected by
   fluctuations in the price of its common stock in subsequent periods.

(2)EBITDA means earnings before interest income and expenses, income taxes,
   depreciation, depletion and amortization and other income. EBITDA is not a
   measurement presented in accordance with generally accepted accounting
   principles, or GAAP, and should not be considered as an alternative to cash
   flow from operating activities as a measure of liquidity or net income as a
   measure of operating results in accordance with GAAP.

   EBITDA is presented because Plains believes it provides additional
   information with respect to Plains' ability to meet its future debt service,
   capital expenditures and working capital requirements. When evaluating
   EBITDA, investors should consider, among other factors, (i) increasing or
   decreasing trends in EBITDA, (ii) whether EBITDA has remained at positive
   levels historically and (iii) how EBITDA compares to levels of interest
   expense. However, EBITDA does not necessarily indicate whether cash flow
   will be sufficient for such items as working capital requirements, capital
   expenditures or to react to changes in Plains' industry or to the economy in
   general, as certain functional or legal requirements of Plains' business may
   require Plains to use its available funds for other purposes. EBITDA, as
   presented herein, is not necessarily comparable to other similarly titled
   captions of other companies due to potential inconsistencies in the method
   of calculation.

   EBITDA includes amortization of hedge premiums of $0.6 million for the nine
   months ended September 30, 2002 and $3.2 million for the year ended December
   31, 2001. EBITDA is calculated as follows:

<TABLE>
<CAPTION>
                                                           Pro Forma
                                                   -------------------------
                                                    Nine Months
                                                       Ended      Year Ended
                                                   September 30, December 31,
                                                       2002          2001
                                                   ------------- ------------
                                                     (Amounts in thousands)
  <S>                                              <C>           <C>

  Income before income taxes and minority interest   $ 41,457      $136,303
  Interest and other income.......................       (183)         (590)
  Interest expense................................     22,957        30,608
  Depreciation, depletion and amortization........     40,019        49,814
                                                     --------      --------
  EBITDA..........................................   $104,250      $216,135
                                                     ========      ========
</TABLE>


                                      15

<PAGE>

      Summary Pro Forma Oil and Gas Reserve Data of the Combined Company

    The following table sets forth summary pro forma information with respect
to Plains' and 3TEC's combined estimated net proved oil and gas reserves as of
December 31, 2001.

<TABLE>
<CAPTION>
                                                          Year Ended
                                                      December 31, 2001
                                                   ------------------------
                                                    (Dollars in thousands,
                                                   except per unit amounts)
     <S>                                           <C>
     Estimated proved reserves (at end of period):
        Oil (MBbl)(1).............................          228,630
        Gas (MMcf)................................          327,483
            Total (MBOE)..........................          283,211
     Percent oil..................................              81%
     Percent proved developed.....................              58%
     PV-10 (at end of period) (2).................         $855,569
     Standardized measure(2)......................          566,066
     Reserve additions (MBOE).....................           31,545
     Reserve life (years).........................             21.0
     Production:
        Oil (MBbl)................................            9,171
        Gas (MMcf)................................           25,707
            Total (MBOE)..........................           13,456
     Costs incurred:
        Exploitation and development..............         $187,136
        Exploration...............................           20,017
        Acquisition...............................           86,014
            Total costs incurred:.................          293,167
     Reserve replacement ratio....................             234%
     Average sales price per unit:
        Oil ($/Bbl)(3)............................         $  21.56
        Gas ($/Mcf)...............................             4.73
        BOE.......................................            23.73
     Expense ($/BOE):
        Production................................         $   6.85
        General and administrative................             1.28
</TABLE>
--------
(1)Includes oil, condensate and plant product barrels.
(2)Based on year-end spot market prices of $19.84 per Bbl of oil and $2.58 per
   Mcf of gas. PV-10 represents the standardized measure before deducting
   estimated future income taxes.
(3)Includes the effect of hedges, which was .03/Bbl.

                                      16

<PAGE>

                          Comparative Per Share Data

    The following table sets forth (a) the historical net income and book value
per share of Plains common stock in comparison with the pro forma net income
and book value per share after giving effect to the merger as a purchase of
3TEC and (b) the historical net income and book value per share of 3TEC common
stock in comparison with the equivalent pro forma net income and book value per
share attributable to 0.85 of a share of Plains common stock which will be
received for each share of 3TEC. The information presented in this table should
be read in conjunction with the pro forma consolidated financial statements and
the separate financial statements of the respective companies and the notes
thereto appearing elsewhere herein.

<TABLE>
<CAPTION>
                                             Nine Months
                                                Ended      Year Ended
                                            September 30, December 31,
                                                2002          2001
                                            ------------- ------------
         <S>                                <C>           <C>
         Historical - 3TEC
            Earnings Per Share:
                Basic......................    $ 0.13        $1.06
                Diluted....................    $ 0.12        $0.91
            Book Value Per Share - Diluted.    $10.92        $9.53
         Historical - Plains
            Earnings Per Share:
                Basic......................    $ 0.89        $2.20
                Diluted....................    $ 0.89        $2.20
            Book Value Per Share - Diluted.    $ 4.96        $7.44
         Pro Forma Combined
            Earnings Per Share:
                Basic and Diluted..........    $ 0.62        $2.09
            Book Value Per Share - Diluted.      7.97
         Equivalent Pro Forma Per Share:
            Earnings Per Share:
                Basic and Diluted..........    $ 0.53        $1.78
            Book Value Per Share - Diluted.    $ 6.77
</TABLE>

                                      17

<PAGE>

                                 RISK FACTORS

    In deciding whether to approve the merger, you should consider carefully
the following risks along with the other information in this document related
to the merger and to your investment in Plains following the merger.

Risks Relating to the Merger

We may not realize the benefits of integrating our companies.

    To be successful after the merger, Plains and 3TEC will need to combine and
integrate the operations of their separate companies into one company.
Integration will require substantial management attention and could detract
attention away from the day-to-day business of the combined company. Plains and
3TEC could encounter difficulties in the integration process, such as the loss
of key employees or suppliers. If Plains and 3TEC cannot integrate their
businesses successfully, they may fail to realize the benefits they expect to
realize from the merger.

The interests of 3TEC stockholders may not be represented in the merger because
some directors and executive officers of 3TEC have interests in the merger
different from the interests of other stockholders.

    Some of the directors and executive officers of 3TEC are parties to
agreements, or participate in other arrangements that give them interests in
the merger that are different from your interests as a stockholder of 3TEC. You
should consider these interests in voting on the merger. We have described
these different interests under "The Merger--Interests of Certain Persons in
the Merger" on page [      ].

The value of the consideration to be paid for 3TEC common stock in the merger
generally includes a fixed number of shares of Plains common stock and thus
will fluctuate with the price of Plains common stock.

    Under the terms of the merger agreement, each share of 3TEC common stock
will be converted into cash and 0.85 of a share of Plains common stock. This
exchange ratio is fixed and will not be adjusted for any increase or decrease
in the market price of Plains common stock or 3TEC common stock unless the
market price of Plains common stock at the closing is less than $7.65 or
greater than $12.35 per share. For example, if the closing price of Plains
common stock at the effective time of the merger is less than $10.00 per share,
the holders of 3TEC common stock will receive less than $17.00 per share in
merger consideration and if it is greater than $10.00 per share, the holders of
3TEC common stock will receive more than $17.00 per share in merger
consideration. If the closing price of Plains common stock at the effective
time of the merger is less than $7.65 or greater than $12.35 per share, the
exchange ratio will be modified such that the 3TEC stockholders will not
receive less than $15.00 or more than $19.00 per share in total merger
consideration per share of 3TEC common stock. For this purpose, the market
price of Plains common stock is the average of the closing prices of Plains
common stock for the 20 consecutive trading days immediately preceding the
third trading day prior to the closing of the merger.

Plains may terminate the merger agreement if its 20-day average market price
falls below $6.25 per share without penalty, even if 3TEC stockholders approve
the merger.

    If the 20-day average market price of Plains common stock is less than
$6.25, Plains may terminate the merger agreement or cause the exchange ratio
(and consequently the number of shares of Plains common stock issued per share
of 3TEC common stock) to be fixed based upon the $6.25 stock price and pay cash
equal to the value of the additional amount of shares that would have been

                                      18

<PAGE>

issued based upon the market price of Plains common stock. Except for the right
of Plains to terminate the merger agreement if the 20-day average market price
of Plains common stock is below $6.25 per share, neither Plains nor 3TEC has
the right to terminate this agreement because of fluctuations in the market
price of Plains common stock or 3TEC common stock, or on account of significant
changes in the oil and gas industry that may affect such prices.

Risks Relating to the Combined Company After the Merger

Plains' higher levels of indebtedness may limit its financial and operating
flexibility.

    After the merger, Plains will have higher levels of debt and interest
expense than either company on a stand-alone basis. Following the merger,
Plains' long-term debt, on a pro forma combined company basis as of January 31,
2003, would have been $522.0 million compared with $237.0 million for Plains
and $99.0 million for 3TEC.

    In July 2002 Plains issued $200.0 million of 8.75% senior subordinated
notes due in 2012 which are supported by guarantees of its subsidiaries. In
addition, Plains has a $300.0 million revolving credit facility, which is
collateralized by a pledge of the equity of its subsidiaries and substantially
all of its other assets and supported by guarantees of its subsidiaries. At
January 31, 2003 Plains had $39.0 million outstanding under this credit
facility.

    Plains has been assigned a Ba3 senior implied rating and its 8.75% notes
have been assigned a B2 rating by Moody's Investor Service Inc. Plains has also
been assigned a BB- corporate credit rating by Standard and Poor's Ratings
Group. All of these ratings are below investment grade. As a result, at times
Plains may have difficulty accessing capital markets or raising capital on
favorable terms as it will incur higher borrowing costs than its competitors
that have higher ratings. Therefore, Plains' financial results may be
negatively affected by its inability to raise capital or the cost of such
capital as a result of its credit ratings.

    Plains and all of its restricted subsidiaries (which will include 3TEC
after the merger) must comply with various covenants contained in its revolving
credit facility, the indenture related to its senior subordinated notes and any
of its future debt arrangements which, among other things, limit the ability of
Plains and those subsidiaries to:

   .  incur additional debt or liens;

   .  make payments in respect of or redeem or acquire any debt or equity
      issued by Plains;

   .  sell assets;

   .  make loans or investments;

   .  acquire or be acquired by other companies; and

   .  amend some of Plains' contracts.

    Plains' substantial debt could have important consequences to you. For
example, it could:

   .  increase Plains' vulnerability to general adverse economic and industry
      conditions;

   .  limit Plains' ability to fund future working capital and capital
      expenditures, to engage in future acquisitions, construction or
      development activities, or to otherwise realize the value of its assets
      and opportunities fully because of the need to dedicate a substantial
      portion of its cash flow from operations to payments on its debt or to
      comply with any restrictive terms of its debt;

   .  limit Plains' flexibility in planning for, or reacting to, changes in the
      industry in which it operates; and

   .  place Plains at a competitive disadvantage as compared to its competitors
      that have less debt.

                                      19

<PAGE>

    In addition, if Plains fails to comply with the terms of any of its debt,
its lenders will have the right to accelerate the maturity of that debt and
foreclose upon the collateral, if any, securing that debt. Realization of any
of these factors could adversely affect Plains' financial condition.

Plains will incur significant charges and expenses as a result of the merger
which will reduce the amount of capital available to fund its operations.

    Plains expects to incur approximately $12.0 million of costs related to the
merger. These expenses will include investment banking, bank commitment, legal,
accounting and reserve engineering fees, printing costs, transition costs and
other related charges. Plains may also incur unanticipated costs in the merger.
As a result, Plains will have less capital available to fund its exploitation,
exploration and development activities.

Plains' results of operations could be adversely affected as a result of
goodwill impairments.

    Goodwill represents the excess of the purchase price paid by Plains for
3TEC plus liabilities assumed, including deferred taxes recorded in connection
with the merger, over the estimated fair market value of the tangible net
assets acquired. Plains estimates that the goodwill in connection with the
merger will be approximately $113.3 million. Goodwill represents approximately
11% of pro forma total assets at September 30, 2002.

    Goodwill is not amortized, but instead must be tested at least annually for
impairment by applying a fair-value based test. Goodwill is deemed impaired to
the extent of any excess of its carrying amount over the residual fair value of
the reporting unit. Such impairment could significantly reduce earnings during
the period in which the impairment occurs, and would result in a corresponding
reduction to goodwill and stockholders' equity.

Volatile oil and gas prices could adversely affect Plains' financial condition
and results of operations.

    Plains' success is largely dependent on oil and gas prices, which are
extremely volatile. Any substantial or extended decline in the price of oil and
gas below current levels will have a material adverse effect on its business
operations and future revenues. Moreover, oil and gas prices depend on factors
Plains cannot control, such as:

   .  supply and demand for oil and gas and expectations regarding supply and
      demand;

   .  weather;

   .  actions by the Organization of Petroleum Exporting Countries, or OPEC;

   .  political conditions in other oil-producing and gas-producing countries
      including the possibility of insurgency or war in such areas;

   .  general economic conditions in the United States and worldwide; and

   .  governmental regulations.

    With respect to Plains' business, prices of oil and gas will affect:

   .  its revenues, cash flows and earnings;

   .  its ability to attract capital to finance its operations and the cost of
      such capital;

   .  the amount that it is allowed to borrow; and

   .  the value of its oil and gas properties.

                                      20

<PAGE>

Any prolonged, substantial reduction in the demand for oil and gas, or
distribution problems in meeting this demand, could adversely affect Plains'
business.

    Plains' success is materially dependent upon the demand for oil and gas.
The availability of a ready market for its oil and gas production depends on a
number of factors beyond its control, including the demand for and supply of
oil and gas, the availability of alternative energy sources, the proximity of
reserves to, and the capacity of, oil and gas gathering systems, pipelines or
trucking and terminal facilities. Plains may also have to shut-in some of its
wells temporarily due to a lack of market or adverse weather conditions
including hurricanes. If the demand for oil and gas diminishes, Plains'
financial results would be negatively impacted.

    In addition, there are limitations related to the methods of transportation
for Plains' production. Substantially all of Plains' oil and gas production is
transported by pipelines, trucks and barges owned by third parties. The
inability or unwillingness of these parties to provide transportation services
to Plains for a reasonable fee could result in Plains having to find
transportation alternatives, increased transportation costs or involuntary
curtailment of a significant portion of its oil and gas production, any of
which could have a negative impact on its results of operation and cash flows.

Recent terrorist activities and the potential for war or military and other
actions could adversely affect Plains' business.

    On September 11, 2001, the United States was the target of terrorist
attacks of unprecedented scope, and the United States and other countries
instituted military action in response. Additionally, the United States has
mobilized a sizeable military presence in anticipation of a potential war or
conflict in the Middle East. These conditions have caused instability in the
world financial markets and may generate global economic instability. The
continued threat of terrorism and the impact of military or other action have
led to and will likely lead to increased volatility in prices for oil and gas
and could affect the markets for Plains' operations. Further, the United States
government has issued public warnings that indicate that energy assets might be
specific targets of terrorist organizations. These developments have subjected
Plains' operations to increased risk and, depending on Plains' ultimate
magnitude, could have a material adverse affect on Plains' business.

Plains' oil production in California is dedicated to a single customer and, as
a result, its credit exposure to that customer is significant.

    Plains has entered into an oil marketing agreement with Plains All American
Pipeline, L.P., or PAA, under which PAA is the exclusive purchaser of all of
Plains' net oil production in California. Plains generally does not require
letters of credit or other collateral from PAA to support its trade
receivables. Accordingly, a material adverse change in PAA's financial
condition could adversely impact Plains' ability to collect its receivables
from PAA and thereby affect Plains' financial condition.

If Plains is unable to replace the reserves that it has produced, its reserves
and revenues will decline.

    Plains' future success depends on its ability to find, develop and acquire
additional oil and gas reserves that are economically recoverable which, in
itself, is dependent on oil and gas prices. Without continued successful
exploitation, acquisition or exploration activities, Plains' reserves and
revenues will decline as a result of its current reserves being depleted by
production. Plains may not be able to find or acquire additional reserves at
acceptable costs.

Plains may not be successful in acquiring, exploiting, developing or exploring
for oil and gas properties.

    The successful acquisition, exploitation or development of, or exploration
for, oil and gas properties requires an assessment of recoverable reserves,
future oil and gas prices and operating

                                      21

<PAGE>

costs, potential environmental and other liabilities, and other factors. These
assessments are necessarily inexact. As a result, Plains may not recover the
purchase price of a property from the sale of production from the property, or
may not recognize an acceptable return from properties it does acquire. In
addition, Plains' exploitation and development and exploration operations may
not result in any increases in reserves. Plains' operations may be curtailed,
delayed or canceled as a result of:

   .  inadequate capital or other factors, such as title problems;

   .  weather;

   .  compliance with governmental regulations or price controls;

   .  mechanical difficulties; or

   .  shortages or delays in the delivery of equipment.

    In addition, exploitation and development costs may greatly exceed initial
estimates. In that case, Plains would be required to make unanticipated
expenditures of additional funds to develop these projects, which could
materially adversely affect its business, financial condition and results of
operations.

    Furthermore, exploration for oil and gas, particularly offshore, has
inherent and historically higher risk than exploitation and development
activities. Future reserve increases and production may be dependent on Plains'
success in its exploration efforts, which may be unsuccessful.

Estimates of oil and gas reserves depend on many assumptions that may be
inaccurate. Any material inaccuracies could adversely affect the quantity and
value of Plains' oil and gas reserves.

    The proved oil and gas reserve information included in this document
represents only estimates. These estimates are based on reports prepared by
independent petroleum engineers. The estimates were calculated using oil and
gas prices in effect on the date indicated in the reports. Any significant
price changes will have a material effect on the quantity and present value of
Plains' reserves.

    Petroleum engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact manner.
Estimates of economically recoverable oil and gas reserves and of future net
cash flows depend upon a number of variable factors and assumptions, including:

   .  historical production from the area compared with production from other
      comparable producing areas;

   .  the assumed effects of regulations by governmental agencies;

   .  assumptions concerning future oil and gas prices; and

   .  assumptions concerning future operating costs, severance and excise
      taxes, development costs and workover and remedial costs.

    Because all reserve estimates are to some degree subjective, each of the
following items may differ materially from those assumed in estimating reserves:

   .  the quantities of oil and gas that are ultimately recovered;

   .  the timing of the recovery of oil and gas reserves;

   .  the production and operating costs incurred; and

   .  the amount and timing of future development expenditures.

                                      22

<PAGE>

    Furthermore, different reserve engineers may make different estimates of
reserves and cash flows based on the same available data. Actual production,
revenues and expenditures with respect to reserves will vary from estimates and
the variances may be material.

    The discounted future net revenues included in this document should not be
considered as the market value of the reserves attributable to our properties.
As required by the SEC, the estimated discounted future net revenues from
proved reserves are generally based on prices and costs as of the date of the
estimate, while actual future prices and costs may be materially higher or
lower. Actual future net revenues will also be affected by factors such as:

   .  the amount and timing of actual production;

   .  supply and demand for oil and gas; and

   .  changes in governmental regulations or taxation.

    In addition, the 10% discount factor, which the SEC requires to be used to
calculate discounted future net revenues for reporting purposes, is not
necessarily the most appropriate discount factor based on the cost of capital
in effect from time to time and risks associated with Plains' business and the
oil and gas industry in general.

The geographic concentration and lack of marketable characteristics of Plains'
oil reserves may have a greater effect on its ability to sell its oil compared
to other companies.

    After the merger, a substantial portion of Plains' reserves will consist of
oil reserves located in California. Because Plains' reserves are not as
diversified geographically as many of its competitors, its business is more
subject to local conditions than other, more diversified companies. Any
regional events, including price fluctuations, natural disasters, and
restrictive regulations, that increase costs, reduce availability of equipment
or supplies, reduce demand or limit Plains' production may impact Plains'
operations more than if its reserves were more geographically diversified.

    Plains' California oil reserves average 23 degrees API gravity, which is
heavier than premium grade light oil. Due to the processes required to refine
this type of oil and the transportation requirements, it is difficult to market
Plains' oil outside California.

Operating hazards, natural disasters or other interruptions of Plains'
operations could result in potential liabilities, which may not be fully
covered by its insurance.

    The oil and gas business involves certain operating hazards such as:

   .  well blowouts;

   .  cratering;

   .  explosions;

   .  uncontrollable flows of oil, gas or well fluids;

   .  fires;

   .  pollution; and

   .  releases of toxic gas.

    In addition, Plains' operations in California are especially susceptible to
damage from natural disasters such as earthquakes and fires and involve
increased risks of personal injury, property damage and marketing interruptions
because of the population density of southern California. Any of these
operating hazards could cause serious injuries, fatalities or property damage,
which could

                                      23

<PAGE>

expose Plains to liabilities. The payment of any of these liabilities could
reduce, or even eliminate, the funds available for exploration, development,
and acquisition, or could result in a loss of Plains' properties.

    Consistent with insurance coverage generally available to the industry,
Plains' insurance policies provide limited coverage for losses or liabilities
relating to pollution, with broader coverage for sudden and accidental
occurrences. Plains' insurance might be inadequate to cover its liabilities.
For example, Plains is not fully insured against earthquake risk in California
because of high premium costs. Insurance covering earthquakes or other risks
may not be available at premium levels that justify its purchase in the future,
if at all. The insurance market in general and the energy insurance market in
particular have been difficult markets over the past several years. Upon
renewal in June 2002, Plains' cost of insurance increased substantially over
the prior year's amount. In addition, Plains increased deductibles and
decreased or eliminated certain types of coverages to mitigate the cost
increase. Insurance costs are expected to continue to increase over the next
few years and Plains may decrease coverage and retain more risk to mitigate
future cost increases. If Plains incurs substantial liability and the damages
are not covered by insurance or are in excess of policy limits, or if Plains
incurs liability at a time when Plains is not able to obtain liability
insurance, then its business, results of operations and financial condition
could be materially adversely affected.

Governmental agencies and other bodies, including those in California, might
impose regulations that increase Plains' costs and may terminate or suspend its
operations.

    Plains' business is subject to federal, state and local laws and
regulations as interpreted by governmental agencies and other bodies, including
those in California, vested with much authority relating to the exploration
for, and the development, production and transportation of, oil and gas, as
well as environmental and safety matters. Existing laws and regulations could
be changed, and any changes could increase costs of compliance and costs of
operating drilling equipment or significantly limit drilling activity.

    Under certain circumstances, the United States Minerals Management Service,
or MMS, may require that Plains' operations on federal leases be suspended or
terminated. These circumstances include Plains' failure to pay royalties or its
failure to comply with safety and environmental regulations. The requirements
imposed by these laws and regulations are frequently changed and subject to new
interpretations.

Plains' offshore operations are subject to substantial regulations and risks,
which could adversely affect its ability to operate and its financial results.

    Plains conducts operations offshore California and, after the merger, will
conduct operations offshore Louisiana. Plains' offshore activities are subject
to more extensive governmental regulation than its other oil and gas
activities. In addition, Plains is vulnerable to the risks associated with
operating offshore, including risks relating to:

   .  weather;

   .  oil field service costs and availability;

   .  compliance with environmental and other laws and regulations;

   .  remediation and other costs resulting from oil spills or releases of
      hazardous materials; and

   .  failure of equipment or facilities.

    If Plains experiences any of these events, it may incur substantial
liabilities, which could adversely affect its operations and financial results.

                                      24

<PAGE>

Environmental liabilities could adversely affect Plains' financial condition.

    The oil and gas business is subject to environmental hazards, such as oil
spills, gas leaks and ruptures and discharges of petroleum products and
hazardous substances, and historic disposal activities. These environmental
hazards could expose Plains to material liabilities for property damages,
personal injuries or other environmental harm, including costs of investigating
and remediating contaminated properties. In addition, Plains also may be liable
for environmental damages caused by the previous owners or operators of
properties Plains has purchased or is currently operating. A variety of
stringent federal, state and local laws and regulations govern the
environmental aspects of Plains' business and impose strict requirements for,
among other things:

   .  well drilling or workover, operation and abandonment;

   .  waste management;

   .  land reclamation;

   .  financial assurance under the Oil Pollution Act of 1990; and

   .  controlling air, water and waste emissions.

    Any noncompliance with these laws and regulations could subject Plains to
material administrative, civil or criminal penalties or other liabilities.
Additionally, Plains' compliance with these laws may, from time to time, result
in increased costs to its operations or decreased production, and may affect
its costs of acquisitions.

    In addition, environmental laws may, in the future, cause a decrease in
Plains' production or cause an increase in its costs of production, development
or exploration. Pollution and similar environmental risks generally are not
fully insurable.

    Some fields in Plains' onshore California and Illinois Basin properties
have been in operation for more than 90 years, and current or future local,
state and federal environmental and other laws and regulations may require
substantial expenditures to remediate the properties or to otherwise comply
with these laws and regulations. In addition, approximately 183 acres of
Plains' 450 acres in the Montebello field have been designated as California
Coastal Sage Scrub, a known habitat for the gnatcatcher, which is a species of
bird designated as a federal threatened species under the Endangered Species
Act. A variety of existing laws, rules and guidelines govern activities that
can be conducted on properties that contain coastal sage scrub and gnatcatchers
and generally limit the scope of operations that Plains can conduct on this
property. The presence of coastal sage scrub and gnatcatchers in the Montebello
field and other existing or future laws, rules and guidelines could prohibit or
limit Plains' operations and its planned activities for this property.

Plains' acquisition strategy could fail or present unanticipated problems for
its business in the future, which could adversely affect its ability to make
acquisitions or realize anticipated benefits of those acquisitions.

    Plains' growth strategy may include acquiring oil and gas businesses and
properties. Plains may not be able to identify suitable acquisition
opportunities or finance and complete any particular acquisition successfully.
Furthermore, acquisitions involve a number of risks and challenges, including:

   .  diversion of management's attention;

   .  the need to integrate acquired operations;

   .  potential loss of key employees of the acquired companies;

   .  potential lack of operating experience in a geographic market of the
      acquired business; and

   .  an increase in Plains' expenses and working capital requirements.

                                      25

<PAGE>

    Any of these factors could adversely affect Plains' ability to achieve
anticipated levels of cash flows from its acquired businesses or realize other
anticipated benefits of those acquisitions.

Plains intends to continue hedging a portion of its production, which may
result in its making cash payments or prevent it from receiving the full
benefit of increases in prices for oil and gas.

    Plains reduces its exposure to the volatility of oil and gas prices by
actively hedging a portion of its production. Hedging also prevents Plains from
receiving the full advantage of increases in oil or gas prices above the fixed
amount specified in the hedge agreement. In a typical hedge transaction, Plains
has the right to receive from the hedge counterparty the excess of the fixed
price specified in the hedge agreement over a floating price based on a market
index, multiplied by the quantity hedged. If the floating price exceeds the
fixed price, Plains must pay the counterparty this difference multiplied by the
quantity hedged even if Plains had insufficient production to cover the
quantities specified in the hedge agreement. Accordingly, if Plains has less
production than it has hedged when the floating price exceeds the fixed price,
Plains must make payments against which there are no offsetting sales of
production. If these payments become too large, the remainder of Plains'
business may be adversely affected. In addition, Plains' hedging agreements
expose it to risk of financial loss if the counterparty to a hedging contract
defaults on its contract obligations.

The increase in the number of shares of Plains common stock outstanding after
the merger could cause volatility in the market price of Plains common stock
and sales of large amounts of Plains common stock following the merger could
result in a decline of the market value of Plains common stock.

    As a result of the merger, stockholders of 3TEC will receive shares of
Plains common stock representing approximately 40%, or 15.9 million shares, of
the outstanding common stock of Plains, using an exchange ratio of 0.85 of a
share of Plains common stock. Subject to certain restrictions, all of the
Plains common stock issued to 3TEC stockholders in the merger may be resold
into the public market immediately after the merger in brokers' transactions or
pursuant to one or more registration statements that Plains may file under the
terms of a registration rights agreement Plains will enter into in connection
with the merger. Trading volumes in Plains common stock have been relatively
low in the past, and the potential increase in trading activity resulting from
the issuance of Plains common stock in the merger could result in increased
volatility in the price of Plains common stock. In addition, if large amounts
of Plains common stock are sold after the merger, the price of Plains common
stock could decline.

Loss of key executives and failure to attract qualified management could limit
Plains' growth and negatively impact its operations.

    Successfully implementing Plains' strategies will depend, in part, on its
management team. The loss of members of its management team could have an
adverse effect on its business. Plains' exploration and exploitation success
and the success of other activities integral to its operations will depend, in
part, on its ability to attract and retain experienced engineers, geoscientists
and other professionals. Competition for experienced professionals is extremely
intense. If Plains cannot attract or retain experienced technical personnel,
its ability to compete could be harmed.

Plains and Plains Resources share and, therefore will compete for, the time and
effort of Plains personnel who provide services to Plains Resources, including
directors and officers.

    Because certain of Plains' officers and directors provide services to
Plains Resources, conflicts of interest could arise between Plains Resources,
on the one hand, and Plains or you, on the other. Additionally, some of these
officers and directors own and are awarded from time to time shares, or

                                      26

<PAGE>

options to purchase shares, of Plains Resources. Accordingly, their financial
interests may not always be aligned with Plains' or yours and could create, or
appear to create, potential conflicts of interest when these officers and
directors are faced with decisions that could have different implications for
Plains and Plains Resources.

Risks Relating to Plains' Reorganization and Spin-off

Plains' historical financial results as a subsidiary of Plains Resources may
not be representative of Plains' results as a separate company.

    The historical financial information included in this document does not
necessarily reflect what Plains' financial position, results of operations and
cash flows would have been had it been a separate, stand-alone entity during
the periods presented. Plains' costs and expenses reflect charges from Plains
Resources for centralized corporate services and infrastructure costs. These
allocations have been determined based on what Plains and Plains Resources
considered to be reasonable reflections of the utilization of services provided
to Plains Resources or for the benefits it received. This historical financial
information is not necessarily indicative of what Plains' results of
operations, financial position and cash flows will be in the future. Plains may
experience significant changes in its cost structure, funding and operations as
a result of its reorganization and spin-off from Plains Resources discussed in
the section "Questions and Answers" about the merger, including increased costs
associated with reduced economies of scale, and increased costs associated with
being a publicly traded, stand-alone company.

Under Plains' tax allocation agreement with its former parent Plains Resources,
if Plains takes actions that cause the distribution of its stock by Plains
Resources to its stockholders to fail to qualify as a tax-free transaction,
Plains will be required to indemnify Plains Resources for the resulting tax
liability and may not have sufficient financial resources to achieve its growth
strategy or ability to repay debt or may prevent a change in control of it.

    Plains has agreed with Plains Resources that it will not take any action
inconsistent with any information, covenant or representation provided to the
Internal Revenue Service in connection with obtaining the tax ruling stating
that the spin-off will generally be tax-free to Plains Resources and its
stockholders and has further agreed to be liable for any taxes arising from a
breach of that agreement. In addition, Plains has agreed that, for three years
following the spin-off, it will not engage in any transaction that could
adversely affect the tax treatment of the spin-off without the prior written
consent of Plains Resources, unless it obtains a supplemental tax ruling from
the Internal Revenue Service or a tax opinion acceptable to Plains Resources of
nationally recognized tax counsel to the effect that the proposed transaction
would not adversely affect the tax treatment of the spin-off. Moreover, Plains
will be liable to Plains Resources for any corporate level taxes incurred by
Plains Resources as a result of the spin-off or to specified transactions
involving Plains following the spin-off including the acquisition of 50% of
Plains common stock by any person or persons. To the extent the taxes arise as
a result of a change of control of Plains Resources, failure of Plains
Resources to continue the active conduct of its trade or business or failure of
Plains Resources to comply with the representations underlying its tax ruling
or a supplemental tax ruling relating to the spin-off, Plains Resources will be
solely responsible for the taxes resulting from the spin-off. If there are any
corporate level taxes incurred by Plains Resources as a result of the spin-off
and not due to any of the factors discussed in the two preceding sentences,
Plains would be responsible for 50% of any such liability. The amount of any
indemnification payments would be substantial and would likely result in events
of default under all of Plains' credit arrangements. As a result, Plains likely
would not have sufficient financial resources to achieve its growth strategy
or, possibly, repay its indebtedness after making these payments.

    As a result of the tax principles and agreements with Plains Resources
discussed above, Plains may be highly limited in its ability to take the
following steps in the future:

                                      27

<PAGE>

   .  issue equity in public or private offerings;

   .  issue equity as part of the consideration in acquisitions of additional
      assets; or

   .  undergo a change of control.

    As a condition to the merger, Plains must have received a supplemental
ruling from the Internal Revenue Service or a tax opinion reasonably acceptable
to Plains Resources to the effect that the merger would not adversely affect
the tax treatment of the spin-off of Plains from Plains Resources under Section
355 of the Internal Revenue Code as ruled by the Internal Revenue Service in
its private letter rulings to Plains Resources dated November 5, 2002 and May
22, 2002. Plains expects to receive a tax opinion to the effect described above
from Fulbright & Jaworski L.L.P., its special tax counsel. Plains and 3TEC are
aware of no facts that would prevent counsel from rendering the foregoing
opinion.

A significant decline or significant fluctuations in Plains' stock price or an
increase in the exchange ratio may prevent tax counsel from issuing an opinion
that the merger constitutes a reorganization under Section 368(a) of the
Internal Revenue Code, which is a condition to closing the merger.

    The completion of the merger is conditioned on, among other things, the
receipt of opinions from tax counsel for 3TEC and Plains that the merger will
qualify as a reorganization under Section 368(a) of the Internal Revenue Code.
These opinions will not be delivered unless the value of the Plains' stock
issued in the merger constitutes 40% or more of the value of the combined
merger consideration. In addition to the market value of Plains common stock on
the date of the merger, various factors affect this determination, including:

   .  whether the trading price of Plains common stock at the effective time of
      the merger equals the market price as determined under the merger
      agreement;

   .  the amount, if any, to be paid to 3TEC stockholders who perfect their
      appraisal rights;

   .  the amount of cash paid in lieu of fractional share interests; and

   .  whether 3TEC elects to redeem the 3TEC preferred stock prior to the
      merger.

    Accordingly, it is not possible to state with certainty the minimum trading
price of the Plains common stock that would cause the value of the Plains
common stock to be received in the merger to be equal to at least 40% of the
value of the combined merger consideration as of the consummation of the
merger. Assuming that there are no stockholders exercising appraisal rights, no
significant cash to be paid in lieu of fractional share interests, the trading
price of Plains common stock at the effective time of the merger equals the
market price as determined under the merger agreement, and that, as expected,
3TEC elects to redeem the 3TEC preferred stock prior to the effective time of
the merger, then the minimum trading price of the Plains common stock at which
the value of Plains common stock to be received in the merger will be equal to
at least 40% of the value of the combined merger consideration is less than
$6.00 per share. If these assumptions prove to be inaccurate, then the minimum
trading price necessary to cause the value of the Plains common stock to equal
at least 40% of the value of the combined merger consideration may be higher or
lower than $6.00 per share.

                                      28

<PAGE>

Plains' net income could be adversely affected by stock appreciation rights
charges.

    As part of the spin-off, all outstanding options to acquire Plains
Resources common stock at the time of the spin-off were "split" between Plains
Resources stock options and Plains stock appreciation rights.

    Stock appreciation rights are subject to variable accounting treatment. As
a result, at the end of each quarter, Plains compares the per share closing
price of Plains common stock to the exercise price of each stock appreciation
right that is vested or for accounting purposes is deemed vested during the
incremental period. To the extent the closing price exceeds the exercise price,
Plains will recognize the excess as an accounting charge to the extent Plains
did not previously recognize such excess. If, at the end of the quarter, the
per share closing price of Plains common stock decreased, the Plains stock
appreciation right accounting charge would decrease, resulting in increased net
income for Plains.

                                      29

<PAGE>

          CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS

    This document includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act, Section 21E of the Exchange Act and the
Private Securities Litigation Reform Act of 1995 about Plains and 3TEC that are
subject to risks and uncertainties. All statements other than statements of
historical fact included in this document are forward-looking statements.
Forward-looking statements may be found under "Summary," "The Merger,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Plains," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of 3TEC," "Information about Plains,"
"Information about 3TEC," "The Combined Company," "Unaudited Pro Forma
Condensed Combined Financial Statements of Plains," and the risk factors in the
periodic reports filed under the Exchange Act by Plains and 3TEC and elsewhere
in this document regarding the financial position, business strategy,
production and reserve growth, possible or assumed future results of
operations, and other plans and objectives for the future operations of Plains
and 3TEC, and statements regarding integration of the businesses of Plains and
3TEC and general economic conditions.

    Forward-looking statements are subject to risks and uncertainties and
include information concerning cost savings from the merger. Although we
believe that in making such statements our expectations are based on reasonable
assumptions, such statements may be influenced by factors that could cause
actual outcomes and results to be materially different from those projected.

   Statements that are predictive in nature, that depend upon or refer to
future events or conditions, or that include words such as "will," "would,"
"should," "plans," "likely," "expects," "anticipates," "intends," "believes,"
"estimates," "thinks," "may," and similar expressions, are forward-looking
statements. The following important factors, in addition to those discussed
under "Risk Factors" and elsewhere in this document, could affect the future
results of the energy industry in general, and Plains and 3TEC after the merger
in particular, and could cause those results to differ materially from those
expressed in such forward-looking statements:

   .  uncertainties inherent in the development and production of and
      exploration for oil and gas and in estimating reserves;

   .  unexpected difficulties in integrating the operations of Plains and 3TEC;

   .  the consequences of Plains' officers and employees providing services to
      both it and Plains Resources and not being required to spend any
      specified percentage or amount of time on Plains' business;

   .  unexpected future capital expenditures (including the amount and nature
      thereof);

   .  impact of oil and gas price fluctuations;

   .  the effects of competition;

   .  the success of our risk management activities;

   .  the availability (or lack thereof) of acquisition or combination
      opportunities;

   .  the impact of current and future laws and governmental regulations;

   .  environmental liabilities that are not covered by an effective indemnity
      or insurance; and

   .  general economic, market or business conditions.

    All written and oral forward-looking statements attributable to Plains or
3TEC or persons acting on behalf of Plains or 3TEC are expressly qualified in
their entirety by such factors. For additional information with respect to
these factors, see "Where You Can Find More Information" on page [  ].

                                      30

<PAGE>

                     MARKET PRICE AND DIVIDEND INFORMATION

Historical Market Prices of Plains and 3TEC

    Plains common stock is listed on the New York Stock Exchange under the
symbol "PXP." 3TEC common stock is quoted on The NASDAQ National Market under
the symbol "TTEN." The following table sets forth the high and low trading
prices per share of the Plains common stock and the high and low bid prices per
share of the 3TEC common stock on The New York Stock Exchange and The NASDAQ
National Market, respectively.

<TABLE>
<CAPTION>
                                             Plains Common  3TEC Common
                                               Stock(1)        Stock
                                             ------------  -------------
                                              High    Low   High   Low
                                             ------  ----- ------ ------
         <S>                                 <C>     <C>   <C>    <C>
         2001
         First Quarter......................               $19.00 $15.38
         Second Quarter.....................                21.05  13.79
         Third Quarter......................                17.60  11.95
         Fourth Quarter.....................                15.20  13.00
         2002
         First Quarter......................                19.69  13.52
         Second Quarter.....................                18.20  13.40
         Third Quarter......................                17.75  12.69
         Fourth Quarter..................... $10.00  $9.75  15.50  12.00
         2003
         First Quarter (through February 11) $10.36  $8.88 $16.75 $12.80
</TABLE>
--------
(1) Plains was spun-off from Plains Resources on December 18, 2002. As a
    result, trading prices for the Plains common stock are provided from
    December 19, 2002.

    On January 31, 2003, the last full trading day before the public
announcement of the proposed merger, the closing price per share of Plains
common stock on the New York Stock Exchange was $9.96 and the last reported
sale price per share of 3TEC common stock on The NASDAQ National Market was
$14.35.

    As of February 12, 2003, there were approximately 1,083 record holders of
Plains common stock, and there were approximately 864 record holders of 3TEC
common stock.

    There is currently no public trading market for the shares of 3TEC
preferred stock.

No History of Dividends and No Dividends Expected in the Foreseeable Future

    Neither Plains nor 3TEC is currently paying dividends on its common stock.
After the merger, Plains intends to retain its earnings to finance the
expansion of its business and for general corporate purposes. Therefore, Plains
does not anticipate paying cash dividends on its common stock in the
foreseeable future.

    Following the merger, Plains' board of directors will have the authority to
declare and pay dividends on its common stock in its discretion, as long as
Plains has funds legally available to do so. Plains' credit facility and the
indenture relating to its 8.75% senior subordinated notes restrict its ability
to pay cash dividends. Plains expects that the credit facility into which
Plains will enter in connection with the merger will also restrict its ability
to pay dividends.

                                      31

<PAGE>

    3TEC's credit facility prohibits it from paying cash dividends on its
common stock. Any future dividends are also restricted by the terms of 3TEC's
outstanding preferred stock and may be restricted by any debt agreements which
3TEC may enter into from time to time. 3TEC's credit facility allows, and, 3TEC
will, contemporaneous with the merger, if approved, terminate the credit
facility without premium or penalty, except for certain breakage fees
associated with some of the loans made under the credit facility, upon its
prepayment of the principal amount borrowed under the credit facility, plus
accrued interest to the prepayment date.

                                      32

<PAGE>

                           THE STOCKHOLDER MEETINGS

    The Plains board is using this document to solicit proxies from Plains
stockholders for use at Plains' annual meeting of stockholders. The 3TEC board
is using this document to solicit proxies from 3TEC stockholders for use at
3TEC's special meeting of stockholders. In addition, this document constitutes
a prospectus covering the issuance of Plains common stock as a result of the
transactions contemplated by the merger agreement.

Times and Places

    The stockholder meetings will be held as follows:

                For Plains stockholders:        For 3TEC stockholders:
                          , local time                    , local time
                          , 2003                          , 2003
                Houston, Texas                  Houston, Texas

Purposes of the Stockholder Meetings

Plains

    The purpose of the Plains annual meeting is as follows:

   .  to consider and vote upon the issuance of Plains common stock to the
      stockholders of 3TEC as a result of the transactions contemplated by the
      merger agreement;

   .  to consider and vote upon Plains' 2002 Stock Incentive Plan;

   .  to consider and vote upon a proposed adjustment to Plains' 2002 Stock
      Incentive Plan to increase the number of shares of Plains common stock
      reserved for issuance under the plan to 1.5 million shares if the merger
      occurs;

   .  to elect four nominees to the board of directors to serve until their
      successors are duly elected and qualified or until their earlier death,
      resignation or removal;

   .  to ratify the selection of PricewaterhouseCoopers LLP as Plains'
      independent auditors for the fiscal year ending December 31, 2003; and

   .  to transact such other business incident to the conduct of the meeting as
      may properly come before the meeting or any adjournments or postponements
      thereof.

    Plains knows of no other matters to come before the annual meeting.

    The Plains board of directors has unanimously approved and adopted the
merger agreement and the transactions contemplated by it, including the
issuance of Plains common stock to the 3TEC stockholders as a result of such
transactions, declared its advisability, and unanimously recommends that Plains
stockholders vote at the annual meeting "FOR" the issuance of Plains common
stock as a result of the transactions contemplated by the merger agreement and
"FOR" the other proposals described above.

3TEC

    The purpose of the 3TEC special meeting is to consider and vote upon the
adoption of the merger agreement. The 3TEC board of directors, with two
interested members abstaining, unanimously adopted the merger agreement,
declared the merger agreement advisable, and recommends that 3TEC stockholders
vote at the special meeting "FOR" adoption of the merger agreement.

                                      33

<PAGE>

Because certain affiliates of EnCap Investments L.L.C. own shares of Plains
common stock, the two 3TEC directors who are managing directors of EnCap chose
to abstain from both the discussion and vote related to the merger agreement.
See "The Merger--Background of the Merger."

Record Date and Outstanding Shares

Plains

    Only holders of record of Plains common stock at the close of business on
            , 2003 are entitled to notice of, and to vote at, the Plains annual
meeting. On the record date, there were        shares of Plains common stock
issued and outstanding held by approximately        holders of record. Each
share of Plains common stock entitles the holder of that share to one vote on
each matter submitted for stockholder approval.

3TEC

    Only holders of record of 3TEC common stock or 3TEC preferred stock at the
close of business on             , 2003 are entitled to notice of, and to vote
at, the 3TEC special meeting. On the record date, there were        shares of
3TEC common stock issued and outstanding held by approximately        holders
of record and 613,919 shares of 3TEC preferred stock issued and outstanding
held by approximately 43 holders of record. Each share of 3TEC common stock
entitles the holder of that share to one vote on each matter submitted for
stockholder approval. The holders of 3TEC preferred stock are entitled to a
separate class vote on the approval and adoption of the merger agreement and
are entitled to one vote per share of 3TEC preferred stock they hold.

Quorum and Vote Necessary to Approve Proposals

Plains

    The presence, in person or by proxy, of the holders of a majority of the
shares of Plains common stock outstanding is necessary to constitute a quorum
at the Plains annual meeting. Approval of the issuance of the Plains common
stock as a result of the transactions contemplated by the merger agreement,
Plains' 2002 Stock Incentive Plan, the adjustment to the 2002 Stock Incentive
Plan (if the merger is completed) and the ratification of the selection of
PricewaterhouseCoopers LLP requires the affirmative vote of a majority of the
shares of Plains common stock present and voting in person or by proxy; except
that for purposes of approving the issuance of Plains common stock in
connection with the merger, broker non-votes will not count in determining
whether a quorum exists. The election of directors requires the affirmative
vote of the holders of a plurality of shares of Plains common stock present and
voting, in person or by proxy, at the annual meeting. Each share of Plains
common stock is entitled to one vote per share.

3TEC

    The presence, in person or by proxy, of the holders of a majority of the
shares of 3TEC common stock outstanding is necessary to constitute a quorum at
the 3TEC special meeting. Adoption of the merger agreement requires the
affirmative vote of a majority of the outstanding shares of 3TEC common stock
and 3TEC preferred stock, each voting as a separate class, in person or by
proxy, at the special meeting. Each share of 3TEC common stock and 3TEC
preferred stock is entitled to one vote per share.

                                      34

<PAGE>

Proxies

    The applicable proxy card will be sent to each Plains and 3TEC stockholder
on or promptly after their respective record dates. If you receive a proxy
card, you may grant a proxy vote on the proposals by marking and signing your
proxy card and returning it to Plains or 3TEC, as applicable. If you hold your
stock in the name of a bank, broker or other nominee, you should follow the
instructions of the bank, broker or nominee when voting your shares. All shares
of stock represented by properly executed proxies received prior to or at the
Plains annual meeting and the 3TEC special meeting will be voted in accordance
with the instructions indicated on such proxies. Proxies that have been revoked
properly and on time will not be counted. If no instructions are indicated on a
properly executed returned proxy, that proxy will be voted "FOR" adoption of
the merger agreement with respect to 3TEC, "FOR" the issuance of Plains common
stock as a result of the transactions contemplated by the merger agreement, and
"FOR" the other matters indicated on the proxy card.

3TEC

    In accordance with The NASDAQ National Market rules, brokers and nominees
who hold shares in street name for customers may not exercise their voting
discretion with respect to the adoption of the merger agreement. Thus, absent
specific instructions from the beneficial owner of such shares, brokers and
nominees may not vote such shares with respect to the adoption of such
proposals. 3TEC common stock represented by these "broker non-votes" will not
be counted for purposes of determining whether there is a quorum at the 3TEC
special meeting and will have the effect of a vote against the adoption of the
merger agreement.

    A properly executed proxy marked "ABSTAIN," although counted for purposes
of determining whether there is a quorum, will not be voted. Accordingly, if
you mark your proxy "ABSTAIN," that will have the effect of a vote against the
adoption of the merger agreement.

Plains

    In accordance with the New York Stock Exchange rules, brokers and nominees
who hold shares in street name for customers may not exercise their voting
discretion with respect to the approval of the issuance of Plains common stock
as a result of the transactions contemplated by the merger agreement, the
approval of the Plains' Stock Incentive Plan and the adjustment to that plan.
Thus, absent specific instructions from the beneficial owner of such shares,
brokers and nominees may not vote such shares with respect to the approval of
those proposals. Shares represented by these "broker non-votes" will be
considered present at the Plains annual meeting for these matters but will not
vote, effectively reducing the number of affirmative votes required to achieve
a majority vote and reducing the total number of shares from which the majority
is calculated for these matters; except that for purposes of approving the
issuance of Plains common stock in connection with the merger, broker non-votes
will not count in determining whether a quorum exists.

    Except as noted above, a properly executed proxy marked "ABSTAIN," although
counted for purposes of determining whether there is a quorum, will not be
voted on any matters brought before the stockholder meeting.

    Voting on the Election of Directors and Ratification of
PricewaterhouseCoopers LLP.  Unless they receive instructions from you, banks,
brokers and other nominees who hold shares in street name, upon meeting the
requirements of the New York Stock Exchange rules, may vote your shares of
Plains common stock in connection with the election of directors and the
ratification of PricewaterhouseCoopers LLP as auditors. With respect to the
election of directors, abstentions and broker non-votes have no effect on
determinations of a plurality except to the extent that they affect the total
votes received by any particular nominee.

                                      35

<PAGE>

    Other Business.  The Plains and 3TEC boards are not currently aware of any
business to be acted upon at the stockholders meetings other than the matters
described herein. If, however, other matters are properly brought before a
stockholders meeting, or any adjournments or postponements thereof, the persons
appointed as proxies will have discretion to vote or act on those matters
according to their judgment. Adjournments or postponements of a stockholders
meeting may be made for the purpose of, among other things, soliciting
additional proxies. Any adjournment may be made from time to time by approval
of the holders of common stock representing a majority of the votes present in
person or by proxy at a stockholders meeting, whether or not a quorum exists,
without further notice other than by an announcement made at the stockholders
meetings. Proxies from 3TEC stockholders voted against the adoption of the
merger agreement will not be voted in favor of an adjournment or postponement
of the special meeting for the purpose of soliciting additional proxies.

Revocation of Proxies

    You may revoke your proxy before it is voted by:

   .  submitting a new proxy with a later date;

   .  notifying the corporate secretary of Plains or 3TEC, as appropriate, in
      writing before the stockholders meeting that you have revoked your proxy;
      or

   .  voting in person, or notifying the corporate secretary of Plains or 3TEC,
      as appropriate, orally at the stockholders meeting of your wish to revoke
      your proxy.

Solicitation of Proxies

    In addition to solicitation by mail, we will make arrangements with
brokerage houses and other custodians, nominees and fiduciaries to send proxy
material to beneficial owners. We will reimburse them for their reasonable
expenses in doing so. Plains has engaged [        ] and 3TEC has engaged
[        ], both proxy solicitation firms, to solicit proxies. In addition, the
directors, officers and employees of Plains and 3TEC may solicit proxies by
telephone, telecopy, fax, telegram or in person. These directors, officers and
employees will receive no additional compensation for doing so. Plains and 3TEC
estimate that the total fees paid to [        ] and [        ] will each be
less than $[    ].

    To ensure sufficient representation at the stockholder meetings, we may
request the return of proxy cards by telephone, telegram, or in person. The
extent to which this will be necessary depends entirely upon how promptly proxy
cards are returned. You are urged to send in your proxies without delay.

    The cost of soliciting proxies, including the cost of preparing and mailing
this document and the expenses incurred by brokerage houses, nominees and
fiduciaries in forwarding proxy materials to beneficial owners, will be paid by
Plains if the merger is consummated. In the merger agreement, we have agreed to
split most of the costs of preparing and distributing this document, other than
legal and investment banking fees, if the merger agreement is terminated.

Voting Agreements

    In connection with the execution of the merger agreement, each of EnCap
Energy Capital Fund III-B, L.P., EnCap Energy Capital Fund III, L.P., BOCP
Energy Partners, L.P., Energy Capital Investment Company PLC, Sable Management,
L.P. and James C. Flores entered into a voting agreement with 3TEC and Plains
to vote all of the shares of Plains common stock owned or controlled by them in
favor of the issuance of Plains common stock as a result of the merger and the
other

                                      36

<PAGE>

transactions related to the merger. The entities other than Sable Management
described above are affiliates and control greater than 5% of Plains common
stock. Mr. Flores is an officer and director of Plains and controls Sable
Management. In addition, they have each agreed not to transfer their shares of
Plains common stock (except they may transfer their shares to an affiliate who
agrees to be bound by the terms of the voting agreement), not to grant a proxy
with respect to such shares, and not to solicit in favor of any competing
transaction to the merger. The aggregate amount of shares of Plains common
stock subject to these voting agreements represents approximately 12% of the
outstanding Plains common stock.

    In connection with the execution of the merger agreement, each of EnCap
Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc., BOCP
Energy Partners, L.P., ECIC Corporation, Floyd C. Wilson, Stephen W. Herod and
R.A. Walker entered into voting agreements with Plains and 3TEC to vote all of
the shares of 3TEC common stock and 3TEC preferred stock they own in favor of
the adoption of the merger agreement. Mr. Wilson and Mr. Walker are officers
and directors of 3TEC. Mr. Herod is an officer of 3TEC. The entities described
above in the aggregate and Mr. Wilson own more than 5% of 3TEC common stock
and, in the case of the entities, a majority of the 3TEC preferred stock. In
addition, each has agreed not to transfer their shares of 3TEC common stock or
3TEC preferred stock (except they may transfer their shares to an affiliate or
other stockholder of 3TEC who agrees to be bound by the terms of the voting
agreement), not to grant a proxy with respect to such shares, and not to
solicit or vote in favor of any competing transaction to the merger. Finally,
each has agreed to not exercise their employee stock options or warrants to
purchase 3TEC common stock for $3.00, except as contemplated by the merger
agreement. The aggregate amount of shares of 3TEC common stock and 3TEC
preferred stock subject to these voting agreements represents approximately 22%
of the outstanding 3TEC common stock and approximately 74% of the outstanding
3TEC preferred stock.

    Each voting agreement will terminate upon the first to occur of (i) the
effective time of the merger or (ii) the date upon which the merger agreement
is terminated.

Option Exercise Forbearance Agreement

    In connection with the execution of the merger agreement, Plains, 3TEC and
certain holders of options to purchase 3TEC common stock have entered into an
Option Exercise Forbearance Agreement, or forbearance agreement. Under the
terms of the forbearance agreement, certain holders of 3TEC options have agreed
not to exercise (except as contemplated under the merger agreement) or sell,
transfer, pledge, assign or otherwise dispose of, their options. This
forbearance agreement covers options to purchase 515,000 shares of 3TEC common
stock, and will terminate upon the first to occur of (i) the effective time of
the merger or (ii) the date upon which the merger agreement is terminated.

                                      37

<PAGE>

                         PLAINS--THE COMBINED COMPANY

    The combination of Plains and 3TEC will create an independent oil and gas
company with an aggregate of 283 MMBOE of pro forma proved reserves at December
31, 2001 and pro forma production of 37 MBOE per day. We expect the combined
company to have the following advantages after the merger:

    Larger and More Diversified, Long Lived Asset Base.  The merger will
increase and diversify the combined company's oil and gas production and
reserves. Pro forma for the acquisition of 3TEC, Plains' pro forma 2001
production would increase by over 50% and would be comprised of approximately
32% natural gas and 68% oil. In addition, the combined company's asset base
will be more geographically diversified. After the merger the combined company
will have a proved reserve life of over 21.0 years and a proved developed
reserve life of over 12.0 years. Plains believes the combined company's
long-lived reserve base in East Texas and onshore California combined with the
continuation of its active hedging strategy should provide the combined company
with relatively stable and recurring cash flow. Such cash flows and operations
will support its higher impact operations in the Gulf Coast via exploitation
and exploratory drilling activities. The combined company's pro forma 2001
reserves and production were concentrated in the following core areas:

<TABLE>
<CAPTION>
                                         Percentage
                                     ------------------
                       Region        Reserves Production
                       ------        -------- ----------
                       <S>           <C>      <C>
                       California...    77%       58%
                       East Texas...     9%       16%
                       Gulf Coast...     2%       10%
                       Other........    12%       16%
                                       ---       ---
                       Total Company   100%      100%
                                       ===       ===
</TABLE>

    Large Exploration, Exploitation and Development Project Inventory with High
Operatorship Levels.  The combined company will have a large inventory of
projects in its core areas that it believes will support at least 3 years of
exploration, and three years of exploitation and development activity. On a pro
forma basis, the combined company operated approximately 82% of its 2001
production. In particular, the combined company will continue to have a 100%
operating interest in its onshore properties in California and in Illinois.
Plains believes its high operatorship levels provide it with more flexibility
than many of its peers to pursue exploitation and development projects relating
to its properties opportunistically.

    Experienced and Proven Management and Technical Team.  The combined
company's executive management team will have an average of over 20 years of
experience in the oil and gas industry. Its Chief Executive Officer is James
Flores, who founded Flores & Rucks Incorporated, a predecessor of Ocean Energy,
Inc., and was President and Chief Executive Officer of Ocean Energy from July
1995 until March 1999. Mr. Flores served as Chairman of the Board of Ocean
Energy from March 1999 until January 2000, and as Vice Chairman from January
2000 until January 2001. The combined company's executive management will be
supported by a core team of technical and operating managers who have many
years of experience in the oil and gas industry.

    Greater Human and Technological Resources.  The combined company will have
significant expertise with regard to various energy technologies, including 3-D
seismic interpretation capabilities, enhanced oil recovery, shallow offshore
drilling, deep onshore drilling, and other exploration, production and
processing technologies. The addition of 3TEC employees, who have significant
expertise in the oil and gas industry in regions outside the specific expertise
of Plains' employees, will complement Plains' existing operations team. As a
result, the combined company is expected to have

                                      38

<PAGE>

an enhanced ability to acquire, explore for, develop and exploit oil and gas
reserves domestically, both onshore and offshore.

    Improved Capital Efficiencies.  The combined company will have a more
balanced profile of lower risk, exploitation properties in California and East
Texas and properties with higher potential returns in South Louisiana. This
merger should enhance the combined company's ability to finance its exploration
opportunities internally through the significant free cash flow generation from
its exploitation assets. This should give the combined company greater
flexibility to fund its internal growth initiatives across varying commodity
price and capital markets cycles.

    Improved Financial Profile and Flexibility.  Greater geographic and
commodity diversity and an overall increase in size should enhance the combined
company's investment and risk profile. These risk mitigators should provide the
combined company with lower financing costs thus better positioning the
combined company to fund future growth opportunities that cannot be funded with
internal cash flow. Finally, the increased capital efficiency of the combined
company both from an internal cash flow and external capital raising standpoint
should allow the combined company to focus on those opportunities and projects
that have the potential for greater returns on capital employed than either
company could achieve on an individual basis.

    Enhanced Platform for Industry Consolidation.  Plains' management believes
that independent exploration and production companies will likely continue to
merge and consolidate in the future and attractive property acquisition
opportunities should become available in the combined company's core areas of
the Gulf Coast, California and East Texas. The merger is expected to enhance
the combined company's ability to pursue these future consolidation
opportunities by creating a larger, more efficient and scaleable growth
platform with investment characteristics more attractive to growth capital
providers. In addition, the merger should provide Plains' with increased
opportunities for operational efficiencies and development opportunities when
evaluating acquisitions in the East Texas and Gulf Coast regions. Management
believes that the combined company's enhanced scale and scope, in addition to
its stronger financial profile, should allow it to pursue consolidation
opportunities on a more effective basis than either company could have on an
individual basis.

    Expanded Capital Base and Trading Liquidity.  After the merger, the number
of outstanding shares of the combined company's common stock will be
approximately 40.0 million with a total market capitalization of $376 million
based a closing price of Plains common stock of $9.42 on February 11, 2003. The
combined company's public float will be approximately 340 million shares which
represents an 72% and 57% increase in Plains' and 3TEC's existing public float,
respectively. Additionally, Plains' and 3TEC's existing stockholder bases are
diverse. This diversity should result in greater institutional investor
awareness of the combined company than either Plains or 3TEC has individually.
The increase in trading liquidity resulting from an increased public float and
stockholder diversity should make the combined company's investment profile
more attractive to equity capital providers. These enhancements should provide
the combined company with greater access to the equity capital markets than
either Plains or 3TEC would have individually, and should thus enhance the
combined company's ability to finance its future growth opportunities.

    Demonstrated Operational Track Record.  Over the last five years, Plains
has achieved a high success rate on development and exploitation projects,
drilling a total of 561 development wells with a 99.5% success rate. In
addition, Plains has completed numerous other production enhancement projects,
such as recompletions, workovers and upgrades. The results of these activities
over the last five years have been additions to proved reserves, excluding
reserves added through acquisition activities, totaling 120.6 MMBOE, or
approximately 332% of cumulative net production for this period. Reserve
replacement costs, excluding acquisitions, have averaged approximately $3.17
per BOE for the same period.

                                      39

<PAGE>

Strategy

    Continue Exploitation and Development of Current Asset Base.  Plains
believes the combined company can continue its strong reserve and production
growth through the exploitation and development of its existing inventory of
projects relating to its properties. The combined company will focus on
implementing improved production practices and recovery techniques and
relatively low-risk development drilling in its onshore California and East
Texas properties and, higher impact exploratory drilling in the Gulf Coast
region.

    An example of its previous success in this area in exploiting
underdeveloped properties can be found in Plains' Montebello field located in
the LA Basin. Since Plains' acquisition of this field in March 1997, its
exploitation and development activities have resulted in an increase in its net
average production from approximately 930 BOE per day at the time of
acquisition to approximately 2,500 BOE per day during the first nine months of
2002, representing a compound annual growth rate of over 20%.

    Engage in a Higher Impact Exploration Progam. Plains believes there are
many opportunities for the combined company to continue to expand on 3TEC's
success in exploratory drilling primarily in the Gulf Coast region by taking
advantage of 3TEC's existing inventory of exploratory projects and by carefully
evaluating and prudently allocating capital to additional exploratory projects.

    Maintain Long-Term Hedging Program.  Plains plans to continue managing its
exposure to commodity price fluctuations by actively hedging significant
portions of its oil and gas production through the use of swaps, collars and
purchased puts and calls. The level of hedging activity depends on the combined
company's view of market conditions, available hedge prices and its operating
strategy. Under its hedging program, Plains typically hedges approximately
70-75% of its production for the current year, 40-50% of its production for the
next year and up to 25% of its production for the following year. For example,
on a pro forma basis for the merger, and assuming a constant production level
of 37 MBOE per day, as of February 6, 2003, the combined company's hedge
positions result in it having hedged approximately 75% of production for 2003,
approximately 65% of production for 2004 and approximately 14% for 2005.

                                      40

<PAGE>

                                  THE MERGER

Background of the Merger

    From August 1999 through the first quarter of 2001, 3TEC's principal means
of growth was through the acquisition and subsequent development and
exploitation of producing properties and related assets. 3TEC made a series of
acquisitions beginning with a large acquisition of primarily producing
properties in the fall of 1999, followed by an acquisition of mostly proved
undeveloped reserves and exploration prospects in February 2000. Two other
significant acquisitions of producing properties with associated proved
undeveloped reserves followed in the spring of 2000 and in January of 2001.
These acquisitions, along with 3TEC's development and exploitation activity,
resulted in rapidly growing reserves and gas production volumes during this
period.

    After January 2001, 3TEC did not make any material acquisitions because the
highly competitive market for oil and gas properties combined with a shortage
of quality energy assets available for purchase created a price environment
that 3TEC's management and board believed was not conducive to completing
acquisitions with attractive rates of return. Consequently, in 2001 3TEC
increased its focus on a drilling strategy to replace reserves and create
stockholder value, while continuing to look for asset acquisitions and
corporate transactions.

    In December 2001, the 3TEC board decided that the continuing lack of
attractive asset acquisitions called for increased focus on corporate
transactions with other energy companies. From January through July 2002, 3TEC
had discussions with several independent oil and gas companies to evaluate
their interest in pursuing a business combination with 3TEC. In some instances
proposals were exchanged but no agreements resulted from these discussions.

    In late summer of 2002, the 3TEC board upon the recommendation of 3TEC's
chief executive officer, Floyd Wilson, directed 3TEC's management to consider
various nationally recognized investment banking firms to assist 3TEC in its
examination of possible corporate transactions. At a 3TEC board meeting on
August 5, 2002, the investment banking firms of Credit Suisse First Boston LLC
("CSFB") and Bear Stearns & Co. Inc. ("Bear Stearns") made a joint presentation
regarding their experience and capabilities in advising energy companies in
business combinations and provided the board with information relating to the
process of identifying, contacting and positioning 3TEC for discussions with
potential merger or other business combination prospects. After the
presentation, the 3TEC board authorized senior management to negotiate an
agreement providing for the engagement of the two investment banking firms to
explore strategic alternatives. 3TEC engaged CSFB and Bear Stearns in August
2002. CSFB and Bear Stearns made another presentation to 3TEC's board of
directors on September 4, 2002 in which they presented a list of 45 companies,
categorized by anticipated interest level, that they believed represented
prospects for a business combination with 3TEC

    During September, October and November 2002, CSFB and Bear Stearns, on
behalf of 3TEC, made contact on a confidential basis with approximately 50
companies, of which one was Plains.

    On November 18, 2002, James Flores, Plains' chief executive officer, and
R.A. Walker met to discuss Plains' interest in 3TEC. At that time, Plains was a
subsidiary of Plains Resources Inc. Plains Resources had attempted an initial
public offering of Plains stock, but the offering was withdrawn prior to being
completed. Mr. Flores explained to Mr. Walker that Plains Resources had
publicly announced a tax-free spin-off of Plains to the Plains Resources
stockholders that would result in Plains becoming a separate public company. He
explained that until this process was completed, Plains was not in a position
to enter into negotiations with 3TEC.

    In November 2002, 3TEC conducted a data room process for interested and
qualified candidates to review technical, financial and other information
concerning 3TEC. In November and December

                                      41

<PAGE>

2002, eight companies signed confidentiality agreements with 3TEC and made
visits to the data room. Plains did not conduct due diligence or enter into a
confidentiality agreement at this time.

    Five of the companies that visited the data room indicated a continued
interest in a transaction with 3TEC. After conversations with 3TEC's financial
advisors, three of these companies submitted written, non-binding, expressions
of interest in late December 2002. At this time the 3TEC board rejected one
proposal as unsatisfactory.

    On December 18, 2002, Plains Resources completed its spin-off of Plains as
a separate publicly traded company. On January 10, 2003, Mr. Wilson met with
Mr. Flores to discuss Plains' interest in a transaction, after which Plains
executed a confidentiality agreement and began due diligence on 3TEC.

    On January 17, 2003, one of the remaining companies (other than Plains)
submitted a written letter of intent to the 3TEC board expressing interest in a
transaction at a specified price, of which the cash component was 50%, and
subject to a number of terms and conditions.

    Also on January 17, 2003, Plains sent 3TEC an indication of interest that
would result in 3TEC merging with Plains for a total consideration to 3TEC
common stockholders, warrantholders and optionholders of $95.3 million in cash
and 21.1 million shares of Plains common stock. Based on a trading value of $10
per share for the Plains common stock, this indication of interest would result
in consideration of which approximately 31% would be in cash and 69% would be
in Plains common stock. This indication of interest valued the 3TEC stock at
approximately $16.50 per common share. On January 20, 2003, Mr. Wilson and Mr.
Walker met with John Raymond, the President and Chief Operating Officer of
Plains, at Plains' offices. Mr. Raymond gave Mr. Wilson and Mr. Walker a brief
overview of Plains and generally explained Plains' reasons for investigating an
acquisition of 3TEC. On the same day, a confidentiality agreement was executed
that allowed 3TEC to conduct a due diligence review of Plains and a visit by
Plains to the 3TEC data room was schedule for the next day.

    The 3TEC board met during the morning of January 21, 2003 with its
investment bankers to obtain a status report and to provide management
direction on how to proceed. The 3TEC board considered the two indications of
interest 3TEC had received on January 17, 2003, one from Plains and one from
another company. During the meeting, D. Martin Phillips and David Miller, both
managing directors of EnCap Investments, L.L.C. ("EnCap"), reminded the board
that affiliates of EnCap held a significant equity position in Plains. The
board concluded that Messrs. Phillips and Miller would be considered
"interested directors" with regard to any transaction between 3TEC and Plains
and therefore they would not participate in any discussion or voting with
respect to Plains or any decision that might ultimately be reached between the
competing proposals. They were, however, permitted to ask questions of the
investment bankers and other board members.

    In the meeting there was an extended discussion of the merits of the two
competing proposals, the result of which was the 3TEC board directed management
and the advisors to continue negotiating with, and doing due diligence on, both
companies. As discussed above, Mr. Phillips and Mr. Miller abstained from any
discussion and voting relating to the decision on how to proceed.

    From January 22, 2003 until the merger agreement was signed on February 2,
2003, Plains and 3TEC continued with due diligence on each other. This process
included diligence being done by each company's internal personnel, financial
advisors, legal advisors and other consultants.

    On January 22, 2003, Mr. Flores had various conversations with each member
of the Plains board in which he brought them up to date on the status of the
conversations with 3TEC. In addition, Plains sent information packages to its
board members that day containing information about 3TEC and management's
evaluation of 3TEC.

                                     41.1

<PAGE>

    On January 24, 2003, Plains had a telephonic meeting of its board of
directors at which Plains' management discussed the results of its
investigation of, and conversations with, 3TEC to date. At that meeting the
Plains board authorized its management to negotiate terms of the potential
transaction with 3TEC and continue its diligence investigation of 3TEC. Also on
January 24, 2003, Plains entered into conversations with one of its regularly
retained financial advisors, Lehman Brothers Inc regarding the potential
transaction.

    On January 23 and 24, 2003, 3TEC personnel also made a visit to the
headquarters of the other company, which consisted of a dinner meeting on the
evening of January 23, 2003, followed by a full day of due diligence on January
24, 2003. During this time, Mr. Wilson held telephonic meetings with Mr. Flores
on several occasions about Plains' proposal and received a verbal commitment
from Mr. Flores that Plains would raise the cash component of its proposal to
50% of the total consideration. Mr. Wilson also had a number of conversations
with the chief executive officer of the other company relating to that
company's proposal and received a verbal assurance that his company would
increase the price it was willing to pay for 3TEC.

    Over the weekend of January 25 and 26, 2003, Mr. Wilson had telephone
conversations with each 3TEC board member in which he reported the results of
the due diligence meetings and the substance of the discussions that he had
with Mr. Flores and the other company's chief executive officer. The consensus
of the 3TEC board was that Mr. Wilson should issue an invitation to Mr. Flores
and the chief executive officer of the other company to make presentations to
the 3TEC board on Monday, January 27, 2003. Both Plains and the other company
agreed to do so.

    On January 27, 2003 Plains formally retained Lehman Brothers Inc. to advise
it in connection with the proposed transaction.

    The 3TEC board along with several 3TEC officers, 3TEC's counsel and
representatives from CSFB and Bear Stearns, assembled at the 3TEC offices on
Monday, January 27, 2003. Mr. Flores and other members of the Plains management
team along with representatives of Plains financial advisor, Lehman Brothers
Inc., presented first to the 3TEC group. At the beginning of the presentation
Mr. Flores detailed the revised Plains offer. After a lengthy question and
answer session, Mr. Flores and the Plains group left and the other company made
a presentation.

    After the second presentation, all non-board members except for David
Elkouri, 3TEC's outside counsel, and the representatives from the 3TEC
investment banking advisors, were dismissed and a special meeting of the 3TEC
board was convened. Mr. Miller and Mr. Phillips abstained from all discussion
and voting. After reviewing the two presentations and hearing from the 3TEC
advisors, the board determined that the last Plains offer was more favorable
financially to 3TEC and its stockholders than the other company's offer. The
factors weighing in favor and the risks associated with the Plains offer are
discussed under "Reasons for the Merger - 3TEC on pages        and        of
this document. The 3TEC board then directed Mr. Wilson to telephone Mr. Flores
and ask the Plains group to come back to 3TEC's offices to answer additional
questions and to clarify the Plains offer. Mr. Flores and the Plains group
arrived in the early morning hours of January 28, 2003 and discussion ensued.

    The discussion centered around clarifying a few key points of the Plains'
offer. The 3TEC board asked Mr. Flores to comment on certain features of a
proposed merger agreement that the 3TEC board considered important. Agreement
was reached on the key points and the 3TEC board informed Mr. Flores that it
was willing to proceed toward the negotiation of a definitive merger agreement
and the completion of mutual due diligence. Mr. Flores responded that he would
like this work completed as soon as possible with the goal of executing a
merger agreement between Plains and 3TEC by Sunday, February 2, 2003. He then
presented the 3TEC board with a draft merger agreement. The 3TEC board agreed
to proceed towards that objective and instructed 3TEC management and its
counsel, Hinkle Elkouri Law Firm L.L.C. and Thompson & Knight LLP, to begin
comprehensive document review and negotiations.

                                     41.2

<PAGE>

    On January 28 and 29, Mr. Flores had conversations with each member of the
Plains board to discuss the status of the negotiations with, and diligence on,
3TEC.

    Between January 28 and February 2, 2003, meetings were held between Plains
and its legal counsel, financial advisors and representatives and 3TEC and its
legal counsel, financial advisors and representatives. During this period, the
parties completed their due diligence review and negotiated the merger
agreement. All substantive issues with respect to the merger agreement were
addressed by January 30, and thereafter the specific wording of the agreement
was finalized.

    On Friday January 31, all members of the Plains board met in person to
review the merger with 3TEC. At that meeting Plains management made a
presentation concerning the transaction and the status of due diligence. In
addition, Lehman Brothers reviewed with the board preliminary materials about
3TEC and the possible merger. Lehman Brothers did not submit an opinion with
respect to the transaction at this time. The board also received a report of
Akin Gump, its outside counsel as to the material terms of the merger
agreement, the results of its legal diligence with respect to 3TEC and the
board's fiduciary duties in connection with considering the transaction. At
this meeting, the Plains board of directors authorized the Plains' management
to continue their discussions with 3TEC regarding the merger.

    During the afternoon and evening of Saturday, February 1, 2003, 3TEC's
board of directors met at 3TEC's offices in Houston with 3TEC personnel and
representatives of CSFB, Bear Stearns, Hinkle Elkouri and Thompson & Knight to
discuss the proposed transaction and the status of due diligence. After a
management presentation on the status of due diligence and other matters
related to the transaction, Hinkle Elkouri presented to the 3TEC board an
overview of the terms and conditions of the proposed merger agreement and
advised the board as to its fiduciary duties. A member of Thompson & Knight
presented to the board a summary of the legal due diligence that had taken
place by 3TEC. At this meeting, the 3TEC board of directors authorized 3TEC's
management to continue their discussions with Plains regarding the merger.

    During the afternoon of Sunday, February 2, 2003, Mr. Wilson met with Mr.
Flores and Mr. Raymond to discuss several final issues on the merger agreement.
Representatives from Akin Gump and Hinkle Elkouri were also present. Mr. Wilson
and Mr. Flores reached agreement on all open issues.

    The 3TEC board of directors met again during the afternoon and evening of
Sunday, February 2, 2003. All members of the 3TEC board attended in person. Mr.
Phillips and Mr. Miller attended the meeting but did not participate in
discussion or voting. A member of Hinkle Elkouri again reviewed the terms and
conditions of the proposed merger agreement. The 3TEC board was once again
advised on its fiduciary duties. Representatives of CSFB and Bear Stearns then
provided their financial analyses with regard to the proposed merger. Each of
CSFB and Bear Stearns then delivered its separate opinions to the 3TEC board of
directors to the effect that, as of that date and subject to the assumptions
and other matters set forth in the opinions, the consideration to be received
by the holders of 3TEC common stock pursuant to the merger agreement was fair
from a financial point of view to the holders. For a discussion of the opinion
of CSFB and Bear Stearns, see"--Opinions of Financial Advisors---Opinions of
Credit Suisse First Boston Corporation and Bear Stearns & Co. Inc.--Financial
Advisors to 3TEC." Following a discussion, 3TEC's board of directors, with its
two interested members, Messrs. Phillips and Miller, abstaining, approved the
merger, the merger agreement and the related transactions.

    In the evening of February 2, 2003, the Plains board met. At the meeting,
the Plains management updated the board as to the status of the negotiations
and other aspect of the proposed merger. In addition, Lehman Brothers delivered
its opinion that as of that date and subject to the assumptions and

                                     41.3

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other matters set forth in its opinion, the consideration Plains was to pay in
the merger was fair to Plains from a financial point of view. For a discussion
of the opinion of Lehman Brothers, see "--Opinions of Financial
Advisors--Opinion of Lehman Brothers Inc.--Financial Advisor to Plains."
Finally, Akin Gump confirmed that no additional matters had come to its
attention in connection with its legal due diligence and reviewed the
additional changes to the merger agreement. Following a discussion, Plains'
board of directors approved the merger, the merger agreement and the related
transactions.

    Signing of the Voting Agreements. Concurrently with the execution of the
merger agreement, EnCap Energy Acquisition III-B, Inc., EnCap Energy Capital
Fund III, L.P., BOCP Energy Partners, L.P., ECIC Corporation, Floyd C. Wilson,
R.A. Walker and Stephen W. Herod and 3TEC executed a voting agreement with
Plains under which they agreed to vote in favor of the merger. Plains requested
that 3TEC's stockholders execute a voting agreement to provide greater
assurances that the merger would be consummated.

    In addition, at that time, EnCap Energy Capital Fund III-B, L.P., EnCap
Energy Capital Fund III, L.P., BOCP Energy Partners, L.P., Energy Capital
Investment Company PLC, Sable Management, L.P., James C. Flores and Plains
executed a voting agreement with 3TEC under which they agreed to vote in favor
of the share issuance by Plains in connection with the merger. 3TEC requested
that Plains' stockholders execute a voting agreement to provide greater
assurances that the merger would be consummated.

Reasons for the Merger -- 3TEC

    The board of directors of 3TEC, with two interested members, Messrs.
Phillips and Miller, abstaining, unanimously adopted the merger agreement,
declared the merger agreement advisable, and recommends that 3TEC stockholders
vote at the special meeting "FOR" the adoption of the merger agreement.

    The board of directors considered various factors, including the following,
in unanimously approving the merger agreement and the merger (the order does
not reflect the relative significance of the factors considered):

   .  Provide 3TEC stockholders immediate cash liquidity and the opportunity
      for continued investment appreciation. The merger agreement requires
      Plains to pay 8.50 in cash and issue approximately 0.85 of a share of
      Plains common stock to 3TEC common stockholders for each share of 3TEC
      common stock they hold. Accordingly, the merger consideration provides
      3TEC common stockholders immediate cash liquidity on a portion of their
      investment and provides the opportunity for longer-term gains with their
      continued investment in the combined company.

   .  Provide Premium Merger Consideration. As of January 31, 2003, the value
      of the merger consideration to 3TEC's common stockholders represented an
      18.5% premium over the last reported sale price per share of 3TEC common
      stock on that date and a 24% premium over the average last reported sale
      prices per share of 3TEC common stock for the preceding 10 trading days.
      In the view of the 3TEC board, the merger consideration appropriately
      reflects 3TEC's fair market value.

   .  Provide Downside Price Protection. Pursuant to the merger agreement, the
      3TEC common stockholders will receive $8.50 in cash and 0.85, referred to
      as the exchange ratio, of a share of Plains common stock for each share
      of 3TEC common stock owned. The exchange ratio is subject to an upward or
      downward adjustment should the market price of Plains stock fall below
      $7.65 per share or rise above $12.35 per share, respectively. This collar
      mechanism is

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      intended to provide a minimum value of $15.00 and a maximum value of
      $19.00 for every share of 3TEC common stock.

   .  Provide Increased Liquidity. Plains common stock trades on the New York
      Stock Exchange, and 3TEC anticipates that in view of the substantially
      increased size of the combined company following the effective time of
      the merger, the Plains common stock will trade greater daily volumes than
      3TEC currently trades, thereby providing increased liquidity for 3TEC
      stockholders.

   .  Qualify as a Tax-Free Reorganization. The merger is intended to qualify
      as a tax-free reorganization for U.S. federal income tax purposes, and
      the transaction should be tax free to 3TEC common stockholders, except
      for the cash portion of the merger consideration.

   .  Enhance 3TEC's Position in Louisiana as a Result of the Experience of
      Plains' Chief Executive Officer. The 3TEC board believes that James C.
      Flores, the Chief Executive Officer of Plains, has significant and
      relevant oil and gas experience in south Louisiana, an area in which 3TEC
      believes it has high quality prospects, acreage and technical
      capabilities. The 3TEC board believes that Mr. Flores' contacts and
      experience in south Louisiana should enhance 3TEC's existing position in
      south Louisiana to the benefit of the 3TEC stockholders receiving Plains
      stock in the merger.

   .  Provide Fair Merger Consideration. Credit Suisse First Boston LLC and
      Bear, Stearns & Co., Inc. each presented its review and opinion that,
      based upon its review and assumptions and subject to specific matters
      stated in the opinion, the merger consideration to be received by the
      holders of outstanding 3TEC common stock in the merger is fair, from a
      financial point of view, to the 3TEC common stockholders.

   .  Establish a Balance of Oil and Gas Properties. 3TEC's properties are
      principally gas producing properties in Texas and Louisiana and Plains'
      properties are principally oil producing properties in California and
      Illinois. The 3TEC board believes that the nature of the properties of
      the combined company provides an increased balance to the property base,
      which should inure to the long-term benefit of the combined company and
      therefore benefit the 3TEC stockholders receiving Plains common stock in
      the merger.

    The preceding discussion of the information and factors considered and
given weight by the board of directors is not intended to be exhaustive.
However, the board of directors believes that the discussion encompasses all of
the material factors considered. In reaching their decision to approve and to
recommend approval of the merger agreement to 3TEC stockholders, the board of
directors did not assign any relative or specific weights to factors they
considered. Individual directors may have given different weights to different
factors.

    The board of directors realizes that there are risks associated with the
merger, many of which are explained in more detail in this document under the
heading "Risk Factors." These risks include the following:

   .  The operations of the two companies may not be successfully integrated.

   .  The merger might not be completed as a result of a failure to satisfy the
      conditions contained in the merger agreement.

   .  The market price of Plains common stock could fall below $6.25 per share,
      giving Plains the unilateral right to terminate the merger agreement
      without any liability to 3TEC or its stockholders.

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   .  Either before or after closing, the price of oil could fall significantly
      having an adverse impact on the value of Plains stock. The risk of this
      loss of value may be affected by domestic and international events,
      including if the United States goes to war with Iraq, enters into a
      military conflict with North Korea or other countries or suffers a
      terrorist attack. Plains has relatively high lifting costs related to its
      onshore oil production. Consequently, its cash flow from these properties
      is more price sensitive than the cash flow from 3TEC's gas properties.

   .  The combined company will be significantly more leveraged than 3TEC,
      putting it at greater risk in the event of a downturn in its business.

   .  Plains has significant assets located near large population centers in
      southern California, which locations make it particularly sensitive to
      regulatory or environmental issues relating to these large population
      centers.

    Having considered these factors and the risks discussed more fully under
"Risk Factors," as well as the potential rewards of the merger, the board of
directors of 3TEC believes that the positive factors should outweigh any
negative factors.


    In considering the recommendation of 3TEC board with respect to the merger,
the merger agreement and the transactions contemplated thereby, 3TEC
stockholders should be aware that certain officers and directors of 3TEC have
certain interests in the proposed merger that are different from and in
addition to the interests of 3TEC stockholders generally. The 3TEC board was
aware of these interests and considered them in approving the merger and merger
agreement. Please refer to "The Merger -- Interests of Certain Persons in the
Merger" for more information about these interests.

Reasons for the Merger - Plains

    At its February 2, 2003 meeting the members of the Plains board unanimously
approved and adopted the merger agreement and the transactions contemplated by
it, and recommended that the Plains stockholders approve the issuance of Plains
common stock to 3TEC stockholders as a result of the merger. The Plains board
believes that the merger agreement and the terms of the merger are fair to, and
in the best interests of, Plains and the Plains stockholders. Therefore, the
Plains board recommends that Plains' stockholders vote "FOR" approval of the
above described share issuance.

    In reaching its recommendation, the Plains board consulted with Plains'
management, as well as its financial and legal advisors, and considered the
following material factors:

   .  Create a Larger and More Diversified Asset Base. The merger will increase
      the amount of the combined company's oil and gas reserves and diversify
      the composition and location of those reserves. The combined company's
      pro forma estimated net proved reserves of 283 MMBOE would be
      approximately 81% oil and 19% gas as of December 31, 2001. During 2001,
      on a pro forma basis, the combined company would have operated
      approximately 82% of its production.

   .  Improve Financial Flexibility. We believe that the merger will provide
      the combined company with more efficient access to capital at a lower
      cost than either Plains or 3TEC has individually. In addition, the
      combined company should be better positioned to fund future growth and
      reduce leverage through the possible sale of equity and the divestiture
      of non-core properties.

   .  Diversify Reserve Commodity and Geographic Mix. The merger will reduce
      Plains' dependence on the California oil market and exposure to the
      California regulatory system. The merger will add significantly to
      Plains' reserves and production and will dramatically increase the
      percentage of Plains' reserves and production that are from gas, thereby
      reducing Plains' exposure to volatility in oil prices.

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   .  Shorten Reserve Life to Production Ratio. The merger is expected to
      increase Plains' current production and its proved developed reserves as
      a percentage of its total proved reserves thereby shortening its reserve
      life to production ratio.

   .  Provide Meaningful Accretion to Earnings and Cash Flow. The merger should
      significantly increase Plains earnings and cash flow.

   .  Provide Plains with a Presence in East Texas and the Gulf Coast that can
      be Used for Future Growth. The merger is in accordance with Plains'
      long-term strategy of growth through corporate acquisitions, and should
      create a better platform for further consolidation of oil and gas assets
      in its core operating areas, particularly the Gulf Coast and East Texas
      regions.

   .  Balance Exploration and Development Opportunities. The merger will
      provide Plains with a more balanced portfolio of exploitation and
      exploratory opportunities, thereby giving management more flexibility in
      its capital allocation decisions.

   .  Improved Access to Capital Markets. The merger will create a larger
      company that is expected to have more liquidity in its common stock and
      better access to capital markets, which should provide more financial
      flexibility.

   .  Fair Merger Consideration. Lehman Brothers Inc. presented its review and
      opinion to the effect that, based upon its review and assumptions and
      subject to specific matters stated in the opinion, as of February 2,
      2003, the consideration Plains paid in the merger was fair to Plains from
      a financial point of view.

    In reaching its decision to recommend the merger to its stockholders, the
Plains board also considered a number of additional factors, including:

   .  its discussions with Plains' management concerning the results of Plains'
      investigation of 3TEC; and

   .  the strategic, operational and financial opportunities available to
      Plains in the normal course of its business compared to those that might
      be available following the merger.

    The Plains board also considered certain risks and potential disadvantages
associated with the merger, including:

   .  the increased amount of debt that the combined company would have
      compared to Plains on a stand-alone basis and the effect of that debt on
      Plains' future operations. Long-term debt of the combined company on a
      pro forma basis as of January 31, 2003 would have been $522.0 million
      compared with $237.0 million of long-term debt of Plains on that date;

   .  the cash expenses payable in connection with the merger;

   .  the risk that the operations of the two companies may not be successfully
      integrated;

   .  the risk that expected cost savings may not be realized to the degree
      anticipated;

   .  the time and resources required to complete the merger and the risk that
      the merger might not be completed as a result of a failure to satisfy the
      conditions to the merger agreement; and

   .  other matters described under "Risk Factors."

    In the judgment of the Plains board, the potential benefits of the merger
outweigh these considerations. The foregoing discussion of the information and
factors that were given weight by the Plains board is not intended to be
exhaustive, but it is believed to include all material factors considered by
the Plains board.

    In view of the variety of factors considered in connection with its
evaluation of the proposed merger and the terms of the merger agreement, the
Plains board did not deem it practicable to quantify

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or assign relative weights to the factors considered in reaching its
conclusion. In addition, individual Plains directors may have given different
weights to different factors.

Opinions of 3TEC's Financial Advisors

    Bear, Stearns & Co. Inc. and Credit Suisse First Boston LLC were 3TEC's
financial advisors in connection with the merger.

    Opinion of Bear Stearns.  On February 2, 2003, in connection with 3TEC's
evaluation of the merger agreement and the contemplated transaction with
Plains, Bear Stearns delivered to the 3TEC board of directors its written
opinion dated February 2, 2003, that, as of such date and subject to certain
assumptions, factors and limitations stated in the opinion and as described
below, the consideration to be received by the 3TEC common stockholders in the
merger is fair, from a financial point of view, to such stockholders.

    The full text of the Bear Stearns opinion, which sets forth the assumptions
made, matters considered and qualifications and limitations on the review
undertaken by Bear Stearns, is included in Annex D to this document and is
incorporated herein by reference. The summary of the Bear Stearns opinion set
forth in this document is qualified in its entirety by reference to the full
text of the opinion. The common stockholders of 3TEC are urged to read
carefully the Bear Stearns opinion in its entirety. The Bear Stearns opinion
was provided to the 3TEC board of directors for its information and is directed
only to the fairness, from a financial point of view, of the consideration to
be received by the common stockholders of 3TEC in the merger as contemplated by
the merger agreement and does not address the merits of the underlying decision
by 3TEC to engage in the merger, the relative merits of the merger with Plains
as compared to any alternative business strategies that might exist for 3TEC,
the effects of any other transaction in which 3TEC might engage and the price
or range of prices at which the shares of common stock of 3TEC or Plains may
trade subsequent to the announcement of the merger. The Bear Stearns opinion
does not constitute a recommendation to any 3TEC stockholder or to the 3TEC
board of directors as to how to vote on the proposed merger or any matter
related to the merger.

    Although Bear Stearns evaluated the fairness, from a financial point of
view, of the consideration to be received by the common stockholders of 3TEC in
the merger as contemplated by the merger agreement, the form of the merger
consideration was determined by 3TEC and Plains through arm's-length
negotiations and was not based on any recommendation by Bear Stearns. During
the course of its engagements, Bear Stearns was asked by the 3TEC board of
directors to solicit indications of interest from various third parties
regarding a transaction with 3TEC and has considered the result of such
solicitation in rendering its opinion. 3TEC did not otherwise provide specific
instructions to, or place any limitations upon, Bear Stearns with respect to
the procedures to be followed or factors to be considered by Bear Stearns in
performing its analyses or rendering its opinion.

    In the course of performing its review and analyses for rendering its
opinion, Bear Stearns:

   .  reviewed the merger agreement;

   .  reviewed 3TEC's Annual Reports to Shareholders and Annual Reports on Form
      10-KSB for the years ended December 31, 1999 through 2001, its Quarterly
      Reports on Form 10-Q for the periods ended March 31, 2002, June 30, 2002
      and September 30, 2002 and its Current Reports on Form 8-K for the three
      years ended on the date of its opinion;

   .  reviewed 3TEC's Registration Statement on Form S-3 filed with the
      Securities and Exchange Commission on December 15, 2000;

   .  reviewed certain operating and financial information, including
      projections through the years ended December 31, 2004 relating to 3TEC's
      business and prospects that were provided to Bear Stearns by 3TEC's
      management;

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<PAGE>

   .  met with certain members of 3TEC's senior management to discuss 3TEC's
      business, operations, historical and projected financial results and
      future prospects;

   .  reviewed Plains' (and Plains Resources Inc., which distributed shares of
      Plains to its stockholders on December 18, 2002, where applicable) Annual
      Reports on Form 10-K for the years ended December 31, 1999 through 2001,
      its Quarterly Reports on Form 10-Q for the periods ended March 31, 2002,
      June 30, 2002 and September 30, 2002 and its Current Reports on Form 8-K
      for the three years ended on the date of its opinion;

   .  reviewed the Registration Statements on Form S-3 of Plains Resources Inc.
      filed with the Securities and Exchange Commission during the three years
      ended on the date of its opinion;

   .  reviewed certain operating and financial information, including
      projections through the year ended December 31, 2003 relating to Plains'
      business and prospects that were provided to Bear Stearns by Plains'
      management;

   .  met with certain members of Plains' senior management to discuss Plains'
      business, operations, historical and projected financial results and
      future prospects;

   .  reviewed third party oil and gas reserve reports, including estimates and
      assumptions regarding the proved reserves of 3TEC and Plains prepared as
      of December 31, 2002, as supplied to Bear Stearns by 3TEC and Plains,
      respectively;

   .  reviewed the historical prices, trading multiples and trading volumes of
      the shares of common stock of 3TEC and Plains;

   .  reviewed publicly available financial data, stock market performance data
      and trading multiples of companies which Bear Stearns deemed generally
      comparable to 3TEC and Plains, as appropriate;

   .  reviewed the terms of recent transactions involving companies and assets
      which Bear Stearns deemed generally comparable to 3TEC and the merger;

   .  performed discounted cash flow analyses based on 3TEC's projections and
      third party oil and gas reserve reports for 3TEC furnished to Bear
      Stearns by 3TEC;

   .  reviewed the pro forma financial results, financial condition and
      capitalization of Plains giving effect to the merger; and

   .  conducted such other studies, analyses, inquiries and investigations as
      Bear Stearns deemed appropriate.

    In the course of its review, Bear Stearns relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information (including the projections and oil and gas reserve reports)
provided to it by 3TEC and Plains. With respect to 3TEC's and Plains' projected
financial results and estimates and assumptions underlying the oil and gas
reserve reports, Bear Stearns relied on representations of the management of
3TEC and Plains, as applicable, that such projections and reports have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the senior management teams of 3TEC and Plains as to the
expected future performance of 3TEC and Plains, respectively. Bear Stearns did
not assume any responsibility for the independent verification of any
information (including the projections and oil and gas reserve reports)
provided to it and relied upon the assurances of the senior management teams of
3TEC and Plains that they are unaware of any facts that would make the
information (including projections and oil and gas reserve reports) provided to
Bear Stearns incomplete or misleading. In arriving at its opinion, Bear Stearns
did not perform or obtain any independent appraisal of the assets or
liabilities (contingent or otherwise) of 3TEC or Plains nor was it furnished
with any such appraisals. The Bear Stearns opinion is necessarily based on
economic, market and other conditions, and the information made available to
it, as of February 2, 2003, the date of its opinion. Bear Stearns does not have
any obligation to update or revise its opinion based on circumstances or events
occurring after that date.

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    For purposes of rendering its opinion, Bear Stearns assumed that the merger
will be consummated in a timely manner and in accordance with the terms of the
merger agreement without any limitations, restrictions, conditions, amendments
or modifications, regulatory or otherwise, that would collectively have a
material effect on Plains.

    In connection with preparing and rendering its opinion, Bear Stearns
performed a variety of valuation and financial analyses. The summary of these
analyses, as set forth below under "--Joint Presentation of 3TEC's Financial
Advisors", does not purport to be a complete description of the analyses
underlying the Bear Stearns opinion and is qualified in its entirety by
reference to the full text of the Bear Stearns opinion which is included in
Annex D to this document. The preparation of a fairness opinion is a complex
process and does not lend itself to summary description. Bear Stearns believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and the factors considered by it without considering all such
factors and analyses could create an incomplete and misleading view of the
processes underlying its opinion. In addition, Bear Stearns may have deemed
various assumptions more or less probable than other assumptions, so that the
range of valuations resulting from any particular analysis described below
should not be taken to be Bear Stearns' view of the actual value of 3TEC or
Plains. Bear Stearns did not make any attempt to assign specific weights to
particular analyses in preparing its opinion. Moreover, the estimates contained
in Bear Stearns' analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by Bear Stearns' analyses. Such analyses were
prepared solely as part of Bear Stearns' preparation of its fairness opinion
and were provided to the 3TEC board of directors in connection with the
delivery of such opinion. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or necessarily reflect
the prices at which businesses or securities actually may be sold. Accordingly,
such estimates are inherently subject to substantial uncertainties.

    In performing its analyses, Bear Stearns did not express any opinion as to
the range of prices at which Plains common stock may trade subsequent to the
consummation of the merger. The prices at which Plains common stock ultimately
trades in the stock market will be driven by a variety of quantitative and
qualitative factors.

    Bear Stearns' opinion and financial analyses were only one of many factors
considered by the 3TEC board of directors in its evaluation of the proposed
merger and should not be viewed as determinative of the views of the 3TEC board
of directors or management with respect to the merger or the merger
consideration.

    3TEC engaged Bear Stearns as its financial advisor based on Bear Stearns'
experience and expertise. Bear Stearns is an internationally recognized
investment banking firm that has substantial experience in the energy industry
and in transactions similar to the merger. Bear Stearns, as part of its
investment banking business, is continuously engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes.

    Pursuant to an engagement letter dated as of August 5, 2002, between 3TEC
and Bear Stearns, 3TEC retained Bear Stearns as financial advisor in connection
with a possible sale of all or a specified portion of 3TEC. Pursuant to the
terms of the engagement letter, 3TEC agreed to pay Bear Stearns a customary
transaction fee, a substantial portion of which is contingent, and payable,
upon successful consummation of the merger. In addition, 3TEC has agreed to
reimburse Bear Stearns for its out-of-pocket expenses, including the reasonable
fees and expenses of its counsel and any other advisor retained by Bear Stearns
with 3TEC's prior approval, and to indemnify Bear Stearns and related persons
against certain liabilities, including liabilities under the federal securities
laws, related to or arising out of Bear Stearns' engagement under the
engagement letter.

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    Bear Stearns has previously rendered certain investment banking and
financial advisory services to 3TEC for which it received customary fees. In
the ordinary course of its business, Bear Stearns may actively trade the equity
and securities and/or bank debt of 3TEC and/or Plains for its own account and
for the accounts of customers. Accordingly, Bear Stearns may at any time hold a
long or short position in such securities or bank debt.

  Opinion of Credit Suisse First Boston

    Credit Suisse First Boston has acted as 3TEC's financial advisor in
connection with the merger. Credit Suisse First Boston is an internationally
recognized investment banking firm and is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. 3TEC selected Credit Suisse First
Boston based on Credit Suisse First Boston's experience, expertise and
reputation, and its familiarity with 3TEC's industry.

    In connection with Credit Suisse First Boston's engagement, 3TEC requested
that Credit Suisse First Boston evaluate the fairness, from a financial point
of view, to the common stockholders of 3TEC, of the merger consideration
payable to such stockholders in the merger. On February 2, 2003, at a meeting
of the 3TEC board of directors held to evaluate the merger, Credit Suisse First
Boston delivered to the 3TEC board of directors a written opinion dated
February 2, 2003, to the effect that, as of that date and based on and subject
to the matters described in its opinion, the merger consideration was fair,
from a financial point of view, to the common stockholders of 3TEC.

    The full text of Credit Suisse First Boston's written opinion, dated
February 2, 2003, to the 3TEC board of directors, which sets forth the
procedures followed, assumptions made, matters considered and limitations on
the review undertaken, is included in Annex C to, and is incorporated by
reference into, this document. 3TEC common stockholders are encouraged to read
this opinion carefully and in its entirety. Credit Suisse First Boston's
opinion is addressed to the 3TEC board of directors and relates only to the
fairness, from a financial point of view, of the merger consideration to the
common stockholders of 3TEC, does not address any other aspect of the proposed
merger or any related transaction and does not constitute a recommendation to
any stockholder as to any matter relating to the merger. The summary of Credit
Suisse First Boston's opinion in this document is qualified in its entirety by
reference to the full text of the opinion.

    In arriving at its opinion, Credit Suisse First Boston reviewed the merger
agreement and certain related agreements, as well as publicly available
business and financial information relating to 3TEC and Plains. Credit Suisse
First Boston also reviewed certain other information relating to 3TEC and
Plains, including financial forecasts, provided to or discussed with Credit
Suisse First Boston by 3TEC and Plains and certain oil and gas reserve reports
prepared for 3TEC by Ryder Scott Company and for Plains by Ryder Scott Company
and Netherland, Sewell & Associates, Inc. and met with the management teams of
3TEC and Plains to discuss the business and prospects of 3TEC and Plains.
Credit Suisse First Boston also considered financial and stock market data for
3TEC and Plains, compared those data with similar data for other publicly held
companies in businesses Credit Suisse First Boston deemed similar to 3TEC and
Plains, and considered, to the extent publicly available, the financial terms
of certain other business combinations and other transactions recently
announced or effected. Credit Suisse First Boston also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria that Credit Suisse First Boston deemed relevant.

    In connection with its review, Credit Suisse First Boston did not assume
any responsibility for independent verification of any of the information that
it reviewed or considered and relied on that information being complete and
accurate in all material respects. With respect to the financial forecasts

                                      48

<PAGE>

and the oil and gas reserve reports, Credit Suisse First Boston was advised,
and assumed, that the forecasts and oil and gas reserve reports were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management teams of 3TEC and Plains and the consultants who
prepared those reports as to the future financial performance and oil and gas
reserves of 3TEC and Plains, respectively. Credit Suisse First Boston also
assumed, with 3TEC's consent, that the merger would be consummated in
accordance with the terms of the merger agreement, without amendment,
modification or waiver of any material term, condition or agreement and that in
the course of obtaining any necessary regulatory and third party approvals and
consents for the merger, no modification, condition, restriction, limitation or
delay would be imposed that would have an adverse effect on 3TEC or Plains or
the contemplated benefits of the merger. Credit Suisse First Boston was not
requested to, and did not, make an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of 3TEC or Plains, and Credit
Suisse First Boston was not furnished with any such evaluations or appraisals,
other than the oil and gas reports mentioned above.

    Credit Suisse First Boston's opinion was necessarily based on information
available to it, and financial, economic, market and other conditions as they
existed and could be evaluated, on the date of Credit Suisse First Boston's
opinion. Credit Suisse First Boston did not express any opinion as to what the
value of Plains common stock actually would be when issued in the merger or the
prices at which Plains common stock would trade at any time. Although Credit
Suisse First Boston evaluated the merger consideration payable to the 3TEC
common stockholders from a financial point of view, Credit Suisse First Boston
was not requested to, and did not, recommend the specific consideration payable
in the merger, which consideration was determined between 3TEC and Plains. In
connection with its engagement, Credit Suisse First Boston approached third
parties to solicit indications of interest in a possible acquisition of 3TEC
and held preliminary discussions with certain of these parties prior to
February 2, 2003. Credit Suisse First Boston's opinion did not address the
relative merits of the merger as compared to other business strategies that
might have been available to 3TEC, and also did not address the underlying
business decision of 3TEC to proceed with the merger. Except as described
above, 3TEC imposed no other limitations on Credit Suisse First Boston with
respect to the investigations made or procedures followed in rendering its
opinion.

    In preparing its opinion to the 3TEC board of directors, Credit Suisse
First Boston performed a variety of financial and comparative analyses,
including those described below. The summary of Credit Suisse First Boston's
analyses described below under "--Joint Presentation of 3TEC's Financial
Advisors" is not a complete description of the analyses underlying its opinion.
The preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, a fairness opinion is not readily susceptible to partial
analysis or summary description. In arriving at its opinion, Credit Suisse
First Boston made qualitative judgments as to the significance and relevance of
each analysis and factor that it considered. Accordingly, Credit Suisse First
Boston believes that its analyses must be considered as a whole and that
selecting portions of its analyses and factors or focusing on information
presented in tabular format, without considering all analyses and factors or
the narrative description of the analyses, could create a misleading or
incomplete view of the processes underlying its analyses and opinion.

    In its analyses, Credit Suisse First Boston considered industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of 3TEC or Plains. No
company, transaction or business used in Credit Suisse First Boston's analyses
as a comparison is identical to 3TEC, Plains or the proposed merger, and an
evaluation of the results of those analyses is not entirely mathematical.
Rather, the analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business segments
or transactions analyzed. The estimates contained in Credit Suisse First
Boston's analyses and the ranges of

                                      49

<PAGE>

valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than those suggested by the
analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, Credit Suisse First
Boston's analyses and estimates are inherently subject to substantial
uncertainty.

    Credit Suisse First Boston's opinion and financial analyses were only one
of many factors considered by the 3TEC board of directors in its evaluation of
the proposed merger and should not be viewed as determinative of the views of
the 3TEC board of directors or management with respect to the merger or the
merger consideration.

    Pursuant to an engagement letter dated as of August 5, 2002, between 3TEC
and Credit Suisse First Boston, 3TEC has engaged Credit Suisse First Boston to
act as its financial advisor in connection with the proposed sale of all or a
specified portion of 3TEC and has agreed to pay Credit Suisse First Boston a
customary transaction fee, a significant portion of which is contingent, and
payable, upon the consummation of the merger. 3TEC also has agreed to reimburse
Credit Suisse First Boston for its out-of-pocket expenses, including reasonable
fees and expenses of legal counsel and any other advisor retained by Credit
Suisse First Boston with 3TEC's prior approval, and to indemnify Credit Suisse
First Boston and related parties against liabilities, including liabilities
under the federal securities laws, related to or arising out of its engagement.

    Credit Suisse First Boston and its affiliates have in the past provided,
and may in the future provide, investment banking and financial services to
3TEC and EnCap Investments, L.L.C., an affiliate of 3TEC, and certain
affiliates of EnCap, unrelated to the merger, for which services Credit Suisse
First Boston and its affiliates have received, and expect to receive,
compensation. In addition, certain funds affiliated or associated with Credit
Suisse First Boston have a direct or indirect interest in EnCap and certain of
its affiliates. In the ordinary course of business, Credit Suisse First Boston
and its affiliates may actively trade the debt and equity securities of 3TEC,
Plains and certain affiliates of EnCap for their own accounts and for the
accounts of customers and, accordingly, may at any time hold long or short
positions in those securities.

  Joint Presentation of 3TEC's Financial Advisors

    On February 2, 2003, Bear Stearns and Credit Suisse First Boston made a
joint presentation to the 3TEC board of directors. A description of the
analyses of Bear Stearns and Credit Suisse First Boston presented to the 3TEC
board of directors is set forth below. Some of the summaries of the financial
analyses include information presented in tabular format. In order to more
fully understand the financial analyses used by Bear Stearns and Credit Suisse
First Boston, the tables must be read together with the full text of each
summary. The tables are not a complete description of the financial analyses of
Bear Stearns and Credit Suisse First Boston.

3TEC

  Selected Company Analysis

    Bear Stearns and Credit Suisse First Boston compared financial, operating
and stock market data of 3TEC to corresponding data of the following publicly
traded companies in the oil and gas exploration and production industry:

    Company

   .  Cabot Oil & Gas Corporation

   .  Cimarex Energy Co.

                                      50

<PAGE>

   .  The Houston Exploration Company

   .  Patina Oil & Gas Corporation

   .  St. Mary Land & Exploration Company

   .  Tom Brown, Inc.

    Bear Stearns and Credit Suisse First Boston reviewed enterprise values,
calculated as equity value, plus debt, preferred stock at liquidation value and
minority interest, less cash, as multiples of estimated calendar years 2002 and
2003 earnings before interest, taxes, depreciation, amortization and
exploration expense ("EBITDAX"). Bear Stearns and Credit Suisse First Boston
also reviewed enterprise values as multiples of year-end 2001 proved reserves,
proved developed reserves and the standardized measure of discounted future net
cash flows after taxes relating to proved reserves ("After-Tax SEC PV-10%") and
the value of the estimated calendar year 2003 average daily production of oil
and gas. Bear Stearns and Credit Suisse First Boston also reviewed common stock
prices as multiples of estimated calendar years 2002 and 2003 after-tax cash
flow per share of common stock. Estimated calendar years 2002 and 2003 EBITDAX
and calendar year 2003 average daily production of oil and gas for the selected
companies were based on publicly available research analysts' estimates.
Year-end 2001 reserve data for the selected companies were adjusted to take
into account subsequently announced transactions. Estimated calendar years 2002
and 2003 after-tax cash flow per share of common stock for the selected
companies was based on First Call mean estimates. Estimated 3TEC financial and
operating data for calendar years 2002 and 2003 were based on 3TEC's unaudited
financial statements and estimated financial data based on public disclosures
made by 3TEC, respectively. 3TEC's reserve data were based on estimated
reserves as of July 31, 2002. All multiples were based on closing stock prices
on January 31, 2003. Bear Stearns and Credit Suisse First Boston then applied
ranges of selected multiples of estimated calendar years 2002 and 2003 EBITDAX
and after-tax cash flow per share of common stock, year-end 2001 proved
reserves, proved developed reserves and After-Tax SEC PV-10% and estimated
calendar year 2003 average daily production of oil and gas derived from the
selected transactions to corresponding data of 3TEC.

    The table set forth below includes the mean and median multiples of the
selected companies reviewed for 3TEC as well as the multiple ranges selected by
Bear Stearns and Credit Suisse First Boston based on a review of the multiples
of the selected companies.

<TABLE>
<CAPTION>
                                                          Selected Company Multiples
                                                         ----------------------------
                                                          Mean  Median Selected Range
                                                         ------ ------ --------------
<S>                                                      <C>    <C>    <C>
Enterprise Value/2002E EBITDAX..........................   5.9x   6.4x     5.5x-6.5x
Enterprise Value/2003E EBITDAX..........................   4.7x   5.2x     4.0x-5.0x
Share Price/2002E Cash Flow Per Share...................   4.2x   4.4x     4.0x-5.0x
Share Price/2003E Cash Flow Per Share...................   4.2x   4.4x     3.5x-4.5x
Enterprise Value/2001 Proved Reserves ($/Mcfe).......... $ 1.56 $ 1.66   $1.20-$1.50
Enterprise Value/2001 Proved Developed Reserves ($/Mcfe) $ 2.02 $ 2.06   $1.60-$1.90
Enterprise Value/2001 After-Tax SEC PV-10%..............   208%   212%     175%-225%
Enterprise Value/2003E Average Daily Production ($/Mcfe) $4,542 $4,577 $4,250-$4,750
</TABLE>

    This analysis indicated the following implied per share equity reference
range for 3TEC, as compared to the implied merger consideration in the merger
based on the closing price of Plains common stock on January 31, 2003 of $9.96
per share:

<TABLE>
<CAPTION>
                                     Implied Merger Consideration
                Implied per Share       Based on Plains Common
              Equity Reference Range  Stock Price as of 01/31/03
              ---------------------- ----------------------------
              <S>                    <C>
                  $14.00--$18.00                $16.97
</TABLE>

                                      51

<PAGE>

  Selected Corporate Transaction Analysis

    Bear Stearns and Credit Suisse First Boston reviewed the transaction values
and certain implied transaction multiples in the following selected corporate
transactions in the oil and gas exploration and production industry:

<TABLE>
<CAPTION>
Announcement
    Date                 Acquiror                           Target/Seller
    ----                 --------                           -------------
<C>          <S>                               <C>
  11/06/02   Patina Oil & Gas Corporation      Bravo Natural Resources (Private)
  09/18/02   Nuevo Energy Company              Athanor Resources, Inc. (Private)
  08/20/02   Unocal Corporation                Pure Resources, Inc.
  08/07/02   Douglas H. Miller                 EXCO Resources, Inc.
  05/29/02   Newfield Exploration Company      EEX Corporation
  04/22/02   Chesapeake Energy Corporation     Canaan Energy Corp. (Private)
  01/11/02   Progress Energy, Inc.             Westchester Production Company (Private)
  10/22/01   Comstock Resources, Inc.          DevX Energy, Inc.
  09/10/01   Dominion Resources, Inc.          Louis Dreyfus Natural Gas Corp.
  08/14/01   Devon Energy Corporation          Mitchell Energy & Development Corp.
  07/10/01   Calpine Corporation               Michael Petroleum Corp.(Private)
  06/21/01   Cabot Oil & Gas Corporation       Cody Company (Private)
  06/21/01   Penn Virginia Corporation         Synergy Oil & Gas, Inc. (Private)
  06/19/01   Hunt Oil Co.                      Chieftain International, Inc.
  06/05/01   Denbury Resources Inc.            Matrix Oil & Gas, Inc. (Private)
  05/14/01   Kerr-McGee Corporation            HS Resources, Inc.
  03/30/01   Pure Resources, Inc.              Hallwood Energy Corporation
  01/19/01   Ocean Energy, Inc.                Texoil, Inc.
  12/29/01   Newfield Exploration Company      Lariat Petroleum, Inc. (Private)
  12/22/00   Marathon Oil Corporation          Pennaco Energy, Inc.
  11/20/00   Pogo Producing Company            North Central Oil Corp. (Private)
  10/30/00   Stone Energy Corporation          Basin Exploration, Inc.
  07/18/00   The Meridian Resource Corporation Shell Oil Company
  06/30/00   Chesapeake Energy Corporation     Gothic Energy Corporation
  04/24/00   Louis Dreyfus Natural Gas Corp.   Costilla Energy, Inc.
</TABLE>

    Bear Stearns and Credit Suisse First Boston reviewed total transaction
values, calculated as equity value plus debt, preferred stock at liquidation
value and minority interest, less cash, of the selected corporate transactions
as multiples of latest 12 months EBITDAX, proved reserves and daily production.
All multiples for the selected transactions were based on publicly available
information at the time of announcement of the relevant transaction. Bear
Stearns and Credit Suisse First Boston then applied ranges of selected
multiples of latest 12 months EBITDAX, proved reserves and daily production
derived from the selected corporate transactions to 3TEC's estimated calendar
year 2002 EBITDAX, estimated proved reserves as of July 31, 2002 and third
quarter 2002 average daily production.

    The table set forth below includes the mean and median multiples in the
selected corporate transactions reviewed for 3TEC as well as the multiple
ranges selected by Bear Stearns and Credit Suisse First Boston based on a
review of the multiples implied in the selected corporate transactions.

<TABLE>
<CAPTION>
                                                Implied Multiples in Selected
                                                        Transactions
                                                ----------------------------
                                                 Mean   Median Selected Range
                                                ------  ------ --------------
    <S>                                         <C>     <C>    <C>
    Transaction Value/LTM EBITDAX..............   6.1x    5.6x     5.5x-6.5x
    Transaction Value/Proved Reserves ($/Mcfe). $ 1.32  $ 1.23   $1.30-$1.50
    Transaction Value/Daily Production ($/Mcfe) $5,042  $4,935 $4,500-$5,500
</TABLE>

                                      52

<PAGE>

    This analysis indicated the following implied per share equity reference
range for 3TEC, as compared to the implied merger consideration in the merger
based on the closing price of Plains common stock on January 31, 2003 of $9.96
per share:
                                     Implied Merger Consideration
              Implied Per Share           Based on the Plains
            Equity Reference Range Common Stock Price as of 01/31/03
            ---------------------- ---------------------------------
                $13.50-$17.00.....              $16.97

  Selected Asset Transaction Analysis

    Bear Stearns and Credit Suisse First Boston reviewed the transaction values
and certain implied transaction multiples in the following selected asset
transactions in the oil and gas exploration and production industry:

<TABLE>
<CAPTION>
Announcement
    Date                Acquiror                                 Seller
    ----                --------                                 ------
<C>          <S>                             <C>
  12/17/02.. Apache Corporation              Undisclosed
  11/25/02.. Chesapeake Energy Corporation   ONEOK Inc.
  09/30/02.. Westport Resources Corporation  Smith Production Inc.
  08/01/02.. Burlington Resources Inc.       Undisclosed
  07/25/02.. Chesapeake Energy Corporation   Four separate parties
  04/22/02.. The Houston Exploration Company Burlington Resources Inc.
  03/29/02.. United Energy Corporation       El Paso Corporation
  10/11/01.. Mirant Corporation              Castex Energy
  10/01/01.. Samson Investment Co.           Clayton Williams Acquisition Partnership, Ltd.
  04/27/01.. Peoples Energy Corporation      EnCap Investments LLC
  03/26/01.. Ocean Energy Inc.               EnSight Resources LLC
  02/20/01.. Amerada Hess Corporation        LLOG Exploration Co.
  02/07/00.. Newfield Exploration Company    Headington Oil Co.
  02/01/00.. Apache Corporation              Repsol-YPF SA
</TABLE>

    Bear Stearns and Credit Suisse First Boston reviewed transaction values of
the selected asset transactions as multiples of proved reserves and daily
production. All multiples for the selected asset transactions were based on
publicly available information at the time of announcement of the relevant
transaction. Bear Stearns and Credit Suisse First Boston then applied ranges of
selected multiples of proved reserves and daily production derived from the
selected asset transactions to 3TEC's estimated proved reserves as of July 31,
2002 and third quarter 2002 average daily production.

    The table set forth below includes the mean and median implied multiples in
the selected asset transactions reviewed for 3TEC as well as the multiple
ranges selected by Bear Stearns and Credit Suisse First Boston based on a
review of the multiples implied in the selected asset transactions.

<TABLE>
<CAPTION>
                                                Implied Multiples in Selected
                                                        Transactions
                                                ----------------------------
                                                 Mean   Median Selected Range
                                                ------  ------ --------------
    <S>                                         <C>     <C>    <C>
    Transaction Value/Proved Reserves ($/Mcfe). $ 1.33  $ 1.26   $1.30-$1.50
    Transaction Value/Daily Production ($/Mcfe) $4,237  $4,040 $4,500-$5,500
</TABLE>

    This analysis indicated the following implied per share equity reference
range for 3TEC, as compared to the implied merger consideration based on the
closing price of Plains common stock on January 31, 2003 of $9.96:


                                      53

<PAGE>

<TABLE>
<CAPTION>
                                     Implied Merger Consideration
              Implied per Share           Based on the Plains
            Equity Reference Range Common Stock Price as of 01/31/03
            ---------------------- ---------------------------------
            <S>                    <C>
                $14.00--$18.00                  $16.97
</TABLE>

  Discounted Cash Flow Analysis

    Bear Stearns and Credit Suisse First Boston performed a discounted cash
flow analysis of 3TEC to calculate the estimated present value of the
stand-alone, unlevered, after-tax free cash flows that 3TEC could generate for
the calendar years 2003 through 2013. Bear Stearns and Credit Suisse First
Boston performed their analyses based on 3TEC's historical financial results,
consultation with 3TEC management and the December 31, 2002 audited reserve
report for 3TEC prepared by Ryder Scott Company. Bear Stearns and Credit Suisse
First Boston performed their analyses using different combinations of factors
such as implied forward prices of oil and gas, liquidation and reinvestment
alternatives, reserve layer risk cases and finding and development cost
sensitivities.

    The following cases were considered by Bear Stearns and Credit Suisse First
Boston:

<TABLE>
<CAPTION>
         Cases 1 to 3                               Case 4                            Cases 5 to 7
         ------------                               ------                            ------------
<S>                                    <C>                                   <C>
..    Liquidation alternative           .    Liquidation alternative          .    Reinvestment alternative
..    Base reserve layer risk           .    High reserve layer risk          .    Base reserve layer risk
..    Forward prices per barrel         .    Forward prices per               .    Forward prices per barrel
      of oil and per million                 barrel of oil and per Mcf             of oil and per Mcf of
      cubic feet ("Mcf") of                  of natural gas equal to               natural gas equal to the
      natural gas equal to:                  the Forward Strip                     Forward Strip
..      the Forward Strip/1 /in                                               .    Finding and development
        case 1                                                                     costs
..      $22.00 and $3.50 in                                                   .      Base in case 5
        case 2                                                               .      High in case 6
..      $21.00 and $3.00 in                                                   .      Low in case 7
        case 3
</TABLE>
--------
/1/ New York Mercantile Exchange forward strip in the oil and natural gas
    futures market as of January 30, 2003 (as reported on Bloomberg) through
    2007, after which prices are assumed to remain constant.

    Bear Stearns and Credit Suisse First Boston calculated a range of estimated
terminal values for 3TEC by multiplying projected 2013 EBITDAX by multiples
ranging from 5.5x to 6.5x. The estimated after-tax free cash flows and terminal
values of 3TEC were then discounted to present value using selected discount
rates ranging from 9.0% to 10.0%.

    This analysis indicated the following implied per share equity reference
ranges for 3TEC, as compared to the implied merger consolidation based on the
closing price of Plains common stock on January 31, 2003 of $9.96:

<TABLE>
<CAPTION>
                                       Implied Merger Consideration
              Implied per Share             Based on the Plains
            Equity Reference Range   Common Stock Price as of 01/31/03
            ----------------------   ---------------------------------
          <S>                        <C>
          Cases 1-3  $ 8.07 - $15.42              $16.97
          Case 4     $11.51 - $12.63
          Cases 5-7  $16.98 - $23.70
</TABLE>

    For illustrative purposes only, Bear Stearns and Credit Suisse First Boston
performed additional discounted cash flow analyses of 3TEC using additional
assumptions with respect to the factors

                                      54

<PAGE>

mentioned above. Those analyses were not taken into account by Bear Stearns and
Credit Suisse First Boston in reaching their opinion as to the fairness, from a
financial point of view, of the merger consideration payable to the 3TEC common
stockholders in the merger and therefore are not discussed in this summary.

PLAINS

  Selected Company Analysis

    Bear Stearns and Credit Suisse First Boston compared financial, operating
and stock market data of Plains to corresponding data of the following publicly
traded companies:

    Company

   .  Berry Petroleum Company

   .  Denbury Resources Inc.

   .  Encore Acquisition Company

   .  Nuevo Energy Company

   .  Vintage Petroleum, Inc.

    Bear Stearns and Credit Suisse First Boston reviewed enterprise values as
multiples of estimated calendar years 2002 and 2003 EBITDAX. Bear Stearns and
Credit Suisse First Boston also reviewed enterprise values as multiples of
year-end 2001 proved reserves, proved developed reserves and After-Tax SEC
PV-10% and the value of the estimated calendar year 2003 average daily
production of oil and gas. Bear Sterns and Credit Suisse First Boston also
reviewed common stock prices as multiples of estimated calendar years 2002 and
2003 after-tax cash flow per share of common stock. Estimated calendar years
2002 and 2003 EBITDAX and 2003 average daily production of oil and gas for the
selected companies were based on publicly available research analysts'
estimates. Year-end 2001 reserve data for the selected companies were adjusted
to take into account subsequently announced transactions. Estimated calendar
years 2002 and 2003 after-tax cash flow per share of common stock for the
selected companies was based on First Call mean estimates. Financial and
operating data for Plains for calendar years 2002 and 2003 were based on
information provided by Plains management. Plains' reserve data were based on
the information included in the Prospectus of Plains filed with the Securities
and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of
1933 on December 3, 2002. All multiples were based on closing stock prices on
January 31, 2003. Bear Stearns and Credit Suisse First Boston then applied
ranges of selected multiples of estimated calendar years 2002 and 2003 EBITDAX
and after-tax cash flow per share of common stock, year-end 2001 proved
reserves, proved developed reserves and After-Tax SEC PV-10% and estimated
calendar 2003 average daily production of oil and gas derived from the selected
transactions to corresponding data of Plains.

                                      55

<PAGE>

    The table set forth below includes the mean and median multiples of the
selected companies reviewed for Plains as well as the multiple ranges selected
by Bear Stearns and Credit Suisse First Boston based on a review of the
multiples of the selected companies.

<TABLE>
<CAPTION>
                                                          Selected Company Multiples
                                                         ----------------------------
                                                          Mean  Median Selected Range
                                                         ------ ------ --------------
<S>                                                      <C>    <C>    <C>
Enterprise Value/2002E EBITDAX..........................   5.5x   5.2x     5.0x-5.5x
Enterprise Value/2003E EBITDAX..........................   5.4x   5.1x     6.0x-6.5x
Share Price/2002E Cash Flow Per Share...................   3.4x   3.7x     3.0x-4.0x
Share Price/2003E Cash Flow Per Share...................   3.7x   3.6x     3.5x-4.5x
Enterprise Value/2001 Proved Reserves ($/Mcfe).......... $ 0.80 $ 0.58   $0.40-$0.50
Enterprise Value/2001 Proved Developed Reserves ($/Mcfe) $ 1.04 $ 0.79   $0.60-$0.70
Enterprise Value/2001 After-Tax SEC PV-10%..............   147%   128%     110%-130%
Enterprise Value/2003E Average Daily Production ($/Mcfe) $3,934 $4,089 $3,000-$3,500
</TABLE>

    This analysis indicated the following implied per share equity reference
range for Plains, as compared to the closing price of Plains common stock on
January 31, 2003:

                 Implied per Share     Per Share Price of Plains
               Equity Reference Range Common Stock as of 01/31/03
               ---------------------- ---------------------------
                   $10.00-$13.00                 $9.96

  Selected Corporate Transaction Analysis

    Bear Stearns and Credit Suisse First Boston reviewed the transaction values
and certain implied transaction multiples in the following selected corporate
transactions in the oil and gas exploration and production industry:

<TABLE>
<CAPTION>
   Announcement
       Date                  Acquiror                    Target/Seller
       ----                  --------                    -------------
   <C>          <S>                                <C>
     09/30/02.. Anadarko Petroleum Corporation     Howell Corporation
     01/25/01.. Bellwether Exploration Company     Bargo Energy Company
     03/01/00.. Canadian Occidental Petroleum Ltd. Occidental Petroleum Corp.
     12/02/98.. Texas Pacific Group                Denbury Resources, Inc.
     08/18/97.. Texaco Inc.                        Monterey Resources, Inc.
     06/17/97.. Monterey Resources, Inc.           McFarland Energy, Inc.
     06/01/97.. Aera Energy LLC                    Mobil Corp./Shell Oil Co.
     08/24/95.. Enron Capital & Trade Resources    Coda Energy, Inc.
</TABLE>

    Bear Stearns and Credit Suisse First Boston reviewed total transaction
values of the selected corporate transactions as multiples of latest 12 months
EBITDAX, proved reserves and daily production. All multiples for the selected
corporate transactions were based on publicly available information at the time
of announcement of the relevant transaction. Bear Stearns and Credit Suisse
First Boston then applied ranges of selected multiples of the latest 12 months
EBITDAX, proved reserves and daily production derived from the selected
corporate transactions to Plains' estimated calendar year 2002 EBITDAX,
year-end 2001 proved reserves and third quarter 2002 average daily production.

                                      56

<PAGE>

    The table set forth below includes the mean and median implied multiples in
the selected corporate transactions reviewed for Plains as well as the multiple
ranges selected by Bear Stearns and Credit Suisse First Boston based on a
review of the multiples implied in the selected corporate transactions.

<TABLE>
<CAPTION>
                                                Implied Multiples in Selected
                                                        Transactions
                                                ----------------------------
                                                 Mean   Median Selected Range
                                                ------  ------ --------------
    <S>                                         <C>     <C>    <C>
    Transaction Value/LTM EBITDAX..............   6.5x    7.0x     5.5x-6.5x
    Transaction Value/Proved Reserves ($/Mcfe). $ 0.89  $ 0.87   $0.35-$0.45
    Transaction Value/Daily Production ($/Mcfe) $3,350  $3,367 $3,500-$4,000
</TABLE>

    This analysis indicated the following implied per share equity range for
Plains, as compared to the closing price of Plains common stock on January 31,
2003:

                 Implied per Share     Per Share Price of Plains
               Equity Reference Range Common Stock as of 01/31/03
               ---------------------- ---------------------------
                   $12.00-$16.50                 $9.96

  Selected Asset Transaction Analysis

    Bear Stearns and Credit Suisse First Boston reviewed the transaction values
and certain implied transaction multiples in the following selected asset
transactions in the oil and gas exploration and production industry:

<TABLE>
<CAPTION>
      Announcement
          Date              Acquiror                     Seller
          ----              --------                     ------
      <C>          <S>                         <C>
        01/05/00.. Vintage Petroleum, Inc      Nuevo Energy Company
        06/29/99.. Nuevo Energy Company        Texaco Inc.
        12/23/98.. Berry Petroleum Company     Aera Energy LLC
        08/04/98.. Mobil Corporation           Atlantic Richfield Company
        03/31/98.. National Fuel Gas Company   Whittier Trust Company
        11/12/97.. Plains Resources Inc        Shell Oil Company
        02/27/97.. Plains Resources Inc        Chevron Corporation
        12/16/96.. Berry Petroleum Company     Exxon Corporation
        08/30/96.. Nuevo Energy Company        Unocal Corporation
        08/17/96.. Berry Petroleum Company     Tannehill Oil
        08/30/95.. Torch Energy Advisors, Inc. Unocal Corporation
        05/01/95.. Vintage Petroleum, Inc.     Texaco Inc.
</TABLE>

    Bear Stearns and Credit Suisse First Boston reviewed transaction values of
the selected asset transactions as multiples of proved reserves and daily
production. All multiples for the selected asset transactions were based on
publicly available information at the time of announcement of the relevant
transaction. Bear Stearns and Credit Suisse First Boston then applied ranges of
selected multiples of proved reserves and daily production derived from the
selected transactions to Plains' year-end 2001 proved reserves and third
quarter 2002 average daily production.

                                      57

<PAGE>

    The table set forth below includes the mean and median implied multiples in
the selected asset transactions reviewed for Plains as well as the multiple
ranges selected by Bear Stearns and Credit Suisse First Boston based on a
review of the multiples implied in the selected asset transactions.

<TABLE>
<CAPTION>
                                                Implied Multiples in Selected
                                                        Transactions
                                                ----------------------------
                                                 Mean   Median Selected Range
                                                ------  ------ --------------
    <S>                                         <C>     <C>    <C>
    Transaction Value/Proved Reserves ($/Mcfe). $ 0.41  $ 0.46   $0.35-$0.45
    Transaction Value/Daily Production ($/Mcfe) $3,055  $2,273 $3,500-$4,000
</TABLE>


    This analysis indicated the following implied per share equity reference
range for Plains, as compared to the closing price of Plains common stock on
January 31, 2003:

<TABLE>
<CAPTION>
                 Implied per Share     Per Share Price of Plains
               Equity Reference Range Common Stock as of 01/31/03
               ---------------------- ---------------------------
               <S>                    <C>
                   $12.50-$17.00                 $9.96
</TABLE>

  Discounted Cash Flow Analysis

    Bear Stearns and Credit Suisse First Boston performed a discounted cash
flow analysis of Plains to calculate the estimated present value of the
stand-alone, unlevered, after-tax free cash flows that Plains could generate
for the calendar years 2003 through 2013. Bear Stearns and Credit Suisse First
Boston performed their analyses based on Plains' historical financial results,
consultation with Plains management and the December 31, 2002 reserve reports
for Plains prepared by Ryder Scott Company and Netherland, Sewell & Associates.
Bear Stearns and Credit Suisse First Boston performed their analyses using the
same factors as the ones mentioned under "--3TEC--Discounted Cash Flow
Analysis" appropriately adjusted to reflect the differences between the
businesses of 3TEC and Plains and considered the same combinations of those
factors as the ones described under "--3TEC--Discounted Cash Flow Analysis"
under cases 1 to 7.

    Bear Stearns and Credit Suisse First Boston calculated a range of estimated
terminal values for Plains by multiplying projected 2013 EBITDAX by multiples
ranging from 5.5x to 6.5x. The estimated after-tax free cash flows and terminal
values of Plains were then discounted to present value using selected discount
rates ranging from 8.5% to 9.5%.

    This analysis indicated the following implied per share equity reference
range for Plains, as compared to the closing price of Plains common stock on
January 31, 2003 of $9.96:

<TABLE>
<CAPTION>
              Implied per Share          Per Share Price of Plains
            Equity Reference Range   Common Stock Price as of 01/31/03
            ----------------------   ---------------------------------
          <S>                        <C>
          Cases 1-3  $4.62 - $14.22                $9.96
          Case 4      $8.55 - $11.64
          Cases 5-7  $7.20 - $16.88
</TABLE>

    For illustrative purposes only, Bear Stearns and Credit Suisse First Boston
performed additional discounted cash flow analyses of Plains using additional
assumptions with respect to the factors mentioned above. Those analyses were
not taken into account by Bear Stearns and Credit Suisse First Boston in
reaching their opinion as to the fairness, from a financial point of view, of
the merger consideration payable to the 3TEC common stockholders in the merger
and therefore are not discussed in this summary.

                                      58

<PAGE>

ADDITIONAL ANALYSES

  Relative Implied Value Analysis

    Bear Stearns and Credit Suisse First Boston compared the implied per share
equity reference price for 3TEC derived from the analyses described under
"--3TEC--Discounted Cash Flow Analysis", "--3TEC--Selected Companies Analysis",
"--3TEC--Selected Corporate Transaction Analysis" and "--3TEC--Selected Asset
Transaction Analysis" to the implied merger consideration consisting of the sum
of (A) the product of (x) the implied per share equity reference range for
Plains derived from the analyses described under "--Plains--Discounted Cash
Flow Analysis", "--Plains--Selected Companies Analysis", "--Plains--Selected
Corporate Transactions Analysis" and "--Plains--Selected Asset Transactions
Analysis" and (y) 0.85 (the exchange ratio for the stock component of the
merger consideration) and (B) $8.50 (the cash component of the merger
consideration):

<TABLE>
<CAPTION>
                                                             Implied Merger
                                               Aggregate     Consideration
                                              Implied per   Based on Implied
                                             Share Equity   per Share Equity
                                            Reference Range Reference Range
                                               for 3TEC        for Plains
                                            --------------- ----------------
    <S>                                     <C>             <C>
    Discounted Cash Flow Analysis..........
    Cases 1-3..............................   $8.07-$15.42   $12.43-$20.58
    Case 4.................................  $11.51-$12.63   $15.77-$18.39
    Case 5-7...............................  $16.98-$23.70   $14.62-$22.84
    Selected Companies Analysis............  $14.00-$18.00   $17.00-$19.55
    Selected Corporate Transaction Analysis  $13.50-$17.00   $18.70-$22.53
    Selected Asset Transaction Analysis....  $14.00-$18.00   $19.13-$22.95
</TABLE>

  Other Factors

    In rendering their opinions, Bear Stearns and Credit Suisse First Boston
also reviewed and considered other factors, including:

   .  historical trading prices for 3TEC common stock, including the trading
      price ranges for 3TEC common stock for the period beginning on the
      inception date of 3TEC and ending on January 31, 2003;

   .  the relationship between movements in 3TEC common stock, movements in the
      S&P 500 index and movements in the common stock of other selected
      companies in the oil and gas exploration and production industry;

   .  the relative contributions of 3TEC and Plains to the combined company's
      enterprise value, proved reserves, proved developed reserves and
      estimated calendar year 2003 average daily production, EBITDAX, after-tax
      cash flow and net income;

   .  the premiums over the target company's stock price one day, 30 days and
      60 days prior to the announcement of the transaction paid in selected
      transactions in the oil and gas exploration industry;

   .  the ratio of the closing price of 3TEC common stock to the closing price
      of Plains common stock on January 31, 2003 and the ratios implied by the
      average closing prices of 3TEC common stock to Plains common stock over
      the 10-day, 20-day and one-month periods ending on January 31, 2003 and
      over the period commencing on December 18, 2002 (the date of the Plains
      spin-off) and ending on January 31, 2003; and

   .  the potential pro forma effect of the merger on Plains' proved reserves
      per share, estimated calendar year 2003 after-tax earnings per share,
      after-tax cash flow per share and production per share as well as on
      Plains' overall leverage.

                                      59

<PAGE>

Opinion of Plains' Financial Advisor

    Lehman Brothers Inc. has acted as financial advisor to Plains in connection
with the proposed merger. On February 2, 2003, Lehman Brothers rendered its
opinion to the Plains board that as of such date and, based upon and subject to
certain matters stated therein, from a financial point of view, the
consideration to be paid by Plains in the transaction was fair to Plains.

    THE FULL TEXT OF LEHMAN BROTHERS' OPINION DATED FEBRUARY 2, 2003 IS
INCLUDED AS ANNEX B TO THIS DOCUMENT AND IS INCORPORATED HEREIN BY REFERENCE.
HOLDERS OF PLAINS COMMON STOCK MAY READ LEHMAN BROTHERS' OPINION FOR A
DISCUSSION OF THE PROCEDURES FOLLOWED, FACTORS CONSIDERED, ASSUMPTIONS MADE AND
QUALIFICATIONS AND LIMITATIONS OF THE REVIEW UNDERTAKEN BY LEHMAN BROTHERS IN
CONNECTION WITH ITS OPINION.

    LEHMAN BROTHERS' ADVISORY SERVICES AND OPINION WERE PROVIDED FOR THE
INFORMATION AND ASSISTANCE OF THE BOARD OF DIRECTORS IN CONNECTION WITH ITS
CONSIDERATION OF THE PROPOSED MERGER. LEHMAN BROTHERS' OPINION IS NOT A
RECOMMENDATION TO ANY STOCKHOLDER OF PLAINS AS TO WHETHER TO VOTE FOR OR
AGAINST THE PROPOSED MERGER. LEHMAN BROTHERS WAS NOT REQUESTED TO OPINE AS TO,
AND ITS OPINION DOES NOT ADDRESS, PLAINS' UNDERLYING BUSINESS DECISION TO
PROCEED WITH OR EFFECT THE PROPOSED MERGER.

    In arriving at its opinion, Lehman Brothers reviewed, among other things:

   .  the merger agreement and the specific terms of the proposed merger;

   .  publicly available information concerning 3TEC that it believed to be
      relevant to its analysis, including 3TEC's Annual Report on Form 10-K for
      the year ended December 31, 2001 and 3TEC's Quarterly Report on Form 10-Q
      for the period ended September 30, 2002;

   .  financial and operating information with respect to the business,
      operations and prospects of 3TEC furnished to it by Plains and 3TEC,
      including preliminary unaudited 2002 financial statements;

   .  financial and operating information with respect to the business,
      operations and prospects of Plains furnished to us by Plains;

   .  certain estimates of proved and non-proved reserves and future
      production, revenue, operating costs and capital investment for 3TEC
      prepared by 3TEC ("3TEC Estimates");

   .  certain estimates of proved reserves for 3TEC prepared by Ryder Scott
      Company, L.P., 3TEC's third party reserve engineer ("Ryder Scott
      Estimates");

   .  trading histories of the common stock of 3TEC and Plains from January 30,
      2002 to February 2, 2003 and a comparison of those trading histories with
      each other and with those of other companies that Lehman Brothers deemed
      relevant;

   .  a comparison of the historical financial results and present financial
      condition of 3TEC with those of other companies that Lehman Brothers
      deemed relevant;

   .  a comparison of the financial terms of the proposed merger with the
      financial terms of certain other transactions that Lehman Brothers deemed
      relevant; and

   .  an analysis of 3TEC's contributions to Plains on a pro forma basis,
      including its impact on pro forma earnings and cash flow per share.

    In addition, Lehman Brothers had discussions with the management of 3TEC
concerning its business, operations, assets, financial condition, prospects,
reserves, production profile and

                                      60

<PAGE>

exploration programs and undertook such other studies, analyses and
investigations as Lehman Brothers deemed appropriate.

    In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and relied upon the assurances of management of 3TEC that they are
not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial projections of 3TEC and
the 3TEC estimates, upon advice of Plains and 3TEC, Lehman assumed that such
projections and estimates were reasonably prepared on a basis reflecting the
best currently available estimates and judgments of the management of 3TEC as
to the future financial performance of 3TEC and that 3TEC would perform
substantially in accordance with such projections and estimates. With respect
to the financial projections of Plains, upon advice of Plains, Lehman assumed
that such projections were reasonably prepared on a basis reflecting the best
currently available estimates and judgments of Plains' management as to the
future financial performance of Plains and that Plains would perform
substantially in accordance with such projections. In arriving at its opinion,
Lehman Brothers did not conduct a physical inspection of the properties and
facilities of 3TEC and did not make or obtain any evaluations or appraisals of
the assets or liabilities of 3TEC, other than the Ryder Scott Estimates. Lehman
Brothers' opinion necessarily was based upon market, economic and other
conditions as they existed on, and could be evaluated as of February 2, 2003.

    No limitations were imposed by Plains on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion. In connection with rendering its opinion, Lehman Brothers
performed certain financial, comparative and other analyses as described below.
In arriving at its opinion, Lehman Brothers did not ascribe a specific range of
value to 3TEC or Plains, but rather made its determination as to the fairness,
from a financial point of view, of the consideration to be paid by Plains in
the proposed merger on the basis of the analysis described below. The
preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant methods of financial and comparative analysis and
the application of those methods to the particular circumstances, and,
therefore, such an opinion is not readily susceptible to summary description.
Furthermore, in arriving at its fairness opinion, Lehman Brothers did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Lehman Brothers believes that its analyses
must be considered as a whole and that considering any portion of such analyses
and the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the opinion.
In its analyses, Lehman Brothers made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of 3TEC. Any estimates contained
in the analyses are not necessarily indicative of actual values or predictive
of future results or values, which may be significantly more or less favorable
than as set forth in the analyses. In addition, analyses relating to the value
of businesses do not purport to be appraisals or to reflect the prices at which
businesses could actually be sold.

    Valuation Analysis.  Lehman Brothers performed a valuation of 3TEC using
the following methodologies: net asset valuation analysis, "going concern"
discounted cash flow analysis, comparable companies analysis and comparable
transactions analysis. Each of these methodologies was used to generate a
reference enterprise value range for 3TEC. The enterprise value range was
adjusted for appropriate on and off balance sheet assets and liabilities to
arrive at an equity value range (in aggregate dollars). The equity value range
was divided by fully diluted shares outstanding which is comprised of primary
shares and outstanding options and warrants. The per share equity value ranges
were then compared to the consideration to be paid to 3TEC in the merger. The
implied per share equity values derived using the various valuation
methodologies described above supported

                                      61

<PAGE>

the conclusion that the consideration to be paid by Plains was fair, from a
financial point of view, to the company.

    The various valuation methodologies noted above and the implied per share
equity values derived from these methodologies are included in the following
table. This table should be read together with the more detailed descriptions
set forth below. The table alone does not constitute a complete description of
the financial and comparative analyses. Considering the implied per share
equity values without considering the narrative description of the financial
analyses, including the assumptions underlying these analyses, could create a
misleading or incomplete view of the process underlying, and conclusions
represented by, Lehman Brothers' opinion.

<TABLE>
<CAPTION>
                                         Summary Description of           Implied Equity
     Valuation Methodology               Valuation Methodology            Value Per Share
     ---------------------      ----------------------------------------- ---------------
<S>                             <C>                                       <C>
NET ASSET VALUATION ANALYSIS    Net present value of after-tax cash flows
                                generated by producing to exhaustion
                                3TEC's existing proved, probable and
                                possible reserves using selected
                                hydrocarbon pricing scenarios and
                                discount rates plus the evaluation of
                                certain other assets and liabilities

                                .Case I Commodity Prices                   $15.86-$18.50

                                .Case II Commodity Prices                  $15.04-$17.68

                                .Case III Commodity Prices                 $13.36-$15.78

"GOING CONCERN" DISCOUNTED      Net present value of after-tax cash flows
  CASH FLOW ANALYSIS            generated by management projections of
                                future financial performance using
                                selected discount rates and terminal
                                value multiples                            $17.97-$24.66

COMPARABLE COMPANIES ANALYSIS   Market valuation benchmark based on
                                an examination of trading multiples of
                                selected comparable public companies
                                against relevant financial and asset-
                                based metrics                              $17.79-$22.44

                                Comparable companies valuation
                                analysis incorporating a 20% control
                                premium                                    $21.34-$26.93

COMPARABLE TRANSACTIONS         Market valuation benchmark based on
  ANALYSIS                      consideration paid in selected
                                comparable asset and corporate
                                transactions                               $16.62-$20.11
CONSIDERATION IN THE MERGER (AS
  OF JANUARY 31, 2003)                                                     $       16.97
</TABLE>

    Net Asset Valuation Analysis.  Lehman Brothers estimated the net present
value of the future after-tax cash flows expected to be generated from 3TEC's
proved reserves as of December 31, 2002 based on estimated reserves, production
cost estimates and a range of discount rates as described below and assuming a
tax rate of 39%, all as provided by 3TEC's management and discussed with 3TEC's
management. Lehman Brothers added to such estimated values for proved reserves
assessments of the value of certain other assets and liabilities of 3TEC,
including risked probable and

                                      62

<PAGE>

possible reserves, potential reserve upsides, the company's commodity hedging
portfolio, and certain other adjustments. The net asset valuation analysis was
performed under three commodity price scenarios (Case I, Case II and Case III),
which are described below.

    The natural gas and oil price forecasts employed by Lehman Brothers were
based on New York Mercantile Exchange ("NYMEX") price forecasts (Henry Hub,
Louisiana delivery for natural gas and West Texas Intermediate, Cushing,
Oklahoma delivery for oil). From these benchmark prices, adjustments were made
to reflect location and quality differentials attributable to 3TEC's reserves.
NYMEX gas price quotations are stated in heating value equivalents per million
British Thermal Units ("MMBtu"), which are adjusted to reflect the value per
thousand cubic feet ("MCF") of gas. NYMEX oil price quotations are stated in
dollars per barrel of crude oil. The table below presents a summary of the
benchmark natural gas and oil price forecasts employed by Lehman Brothers for
each pricing case.

<TABLE>
<CAPTION>
                                                               Escalation Price
Henry Hub ($/MMBTU)  2003E  2004E  2005E  2006E  2007E  2008E  Thereafter  Cap
-------------------  ------ ------ ------ ------ ------ ------ ---------- ------
<S>                  <C>    <C>    <C>    <C>    <C>    <C>    <C>        <C>
      Case I........ $ 4.50 $ 4.50 $ 4.50 $ 4.50 $ 4.50 $ 4.50    0.0%    $ 7.50
      Case II....... $ 5.09 $ 4.43 $ 4.02 $ 3.89 $ 3.91 $ 3.99    2.0%    $ 7.50
      Case III...... $ 4.50 $ 3.75 $ 3.75 $ 3.75 $ 3.75 $ 3.75    2.0%    $ 7.50

West Texas                                                     Escalation Price
Intermediate ($/BBL) 2003E  2004E  2005E  2006E  2007E  2008E  Thereafter  Cap
-------------------- ------ ------ ------ ------ ------ ------ ---------- ------
      Case I........ $26.00 $23.00 $23.00 $23.00 $23.00 $23.00    0.0%    $40.00
      Case II....... $30.08 $25.11 $23.79 $23.47 $23.32 $23.79    2.0%    $40.00
      Case III...... $26.00 $21.00 $21.00 $21.00 $21.00 $21.00    2.0%    $40.00
</TABLE>

    The following table summarized the discount rate ranges Lehman Brothers
employed to estimate the present value of the future after-tax cash flows for
each of the different reserve categories.

<TABLE>
<CAPTION>
                                                   Low  High
                           Reserve Category        Case Case
                           ----------------        ---- ----
                    <S>                            <C>  <C>
                    Proved Developed Producing....   9%   7%
                    Proved Developed Non-producing  11%   9%
                    Proved Undeveloped............  13%  11%
                    Probable / Possible...........  15%  13%
</TABLE>

    The net asset valuation analysis resulted in implied per share equity
values of $15.86 to $18.50 for Case I; $15.04 to $17.68 for Case II; and $13.36
to $15.78 for Case III. Based on January 31, 2003 closing prices, the implied
consideration of $16.97 per share offered to 3TEC stockholders in the merger is
in the middle of the overall valuation range.

    "Going Concern" Discounted Cash Flow Analysis.  Lehman Brothers estimated
the present value of the future after-tax cash flows expected to be generated
from 3TEC's operations based on Case III commodity prices and certain
production projections provided by Plains for 3TEC for the years 2003 and 2004
and then assumed 2% growth thereafter through 2007. In 2007, terminal value
EBITDAX multiples of 4.0x to 5.0x were applied to 3TEC projected EBITDAX and
discounted at rates of 10% to 12% which were used to generate a range of
enterprise values, equity values and equity values per share for 3TEC. Unlike
the net asset valuation analysis performed, which was an analysis of the value
of the after-tax cash flows generated by 3TEC's depleting asset base over a
finite period of time, the "going concern" discounted cash flow analysis
performed assumes that 3TEC's operations continue as a going concern in
perpetuity.

    The aggregate "going concern" discounted cash flow analysis resulted in
implied per share equity values of $17.97 to $24.66. Based on January 31, 2003
closing prices, the implied consideration of $16.97 per share offered to 3TEC
stockholders in the merger falls below this range.

                                      63

<PAGE>

    Comparable Companies Analysis.  Lehman Brothers reviewed the public stock
market trading multiples for selected exploration and production companies
including:

   .  Comstock Resources, Inc.

   .  Magnum Hunter Resources, Inc.

   .  Pogo Producing Company

   .  Stone Energy Corporation

   .  Swift Energy Company

   .  Tom Brown, Inc.

    Using publicly available information including certain published equity
research estimates from Lehman Brothers, Lehman Brothers calculated and
analyzed equity and adjusted capitalization multiples of certain projected
financial and operating criteria such as EBITDAX, proved reserves and
discretionary cash flow. The adjusted capitalization of each company was
obtained by adding its long-term debt to the sum of the market value of the
common equity, the value of its preferred stock and the book value of any
minority interest, minus cash balance. The projected 2003 and 2004 EBITDAX
multiple ranges applied to 3TEC projections were each determined to be 3.5x to
4.5x as compared to a peer group range of 3.8x to 6.8x. Proved reserve multiple
ranges were determined to be $1.20 to $1.50 per thousand cubic feet of gas
equivalent as compared to a peer group range of $0.82 to $1.86; the multiples
were applied to 3TEC's internal proved reserve estimates as of December 31,
2002. The appropriate projected 2003 and 2004 discretionary cash flow multiple
ranges were each determined to be 3.0x to 4.0x as compared to a peer group
range of 2.5x to 5.0x.

    This methodology yielded valuations for 3TEC that implied a per share
equity value range of $17.79 to $22.44. Additionally, a control premium was
applied to reflect potential additional per share value of owning a majority
interest in the equity of 3TEC. This control premium was estimated to be 20%.
This methodology yielded valuations for 3TEC that implied a per share equity
value range of $21.34 to $26.93. Based on January 31, 2003 closing prices, the
implied consideration of $16.97 per share offered to 3TEC stockholders in the
merger falls below this range.

    Because of the inherent differences between the corporate structure,
businesses, operations and prospects of 3TEC and the corporate structure,
businesses, operations and prospects of the companies included in the
comparable company groups, Lehman Brothers believed that it was inappropriate
to, and therefore did not, rely solely on the quantitative results of the
analysis and, accordingly, also made qualitative judgments concerning
differences between the financial and operating-characteristics of 3TEC and the
companies in the comparable company group that would affect the public trading
values of 3TEC and such comparable companies.

    Comparable Transactions Analysis.  Lehman Brothers reviewed certain
publicly available information on selected corporate level and asset
acquisition transactions which were announced or took place from December 2000
to September 2002, including, but not limited to:

   .  Westport Resources Corporation / Smith Production Inc.

   .  Unocal Corporation / Pure Resources, Inc.

   .  Douglas H. Miller & ER Acquisition, Inc. / EXCO Resources, Inc.

   .  Newfield Exploration Company / EEX Corporation

   .  Magnum Hunter Resources, Inc. / Prize Energy Corp.

   .  Apache Corporation / Certain Louisiana properties from an undisclosed
      seller

                                      64

<PAGE>

   .  Dominion Resources, Inc. / Louis Dreyfus Natural Gas Corp.

   .  Devon Energy Corporation / Mitchell Energy & Development Corp.

   .  Westport Resources Corporation / Belco Oil & Gas Corp.

   .  Kerr-McGee Corporation / HS Resources, Inc.

   .  The Williams Companies, Inc. / Barrett Resources Corporation

   .  Newfield Exploration Company / Lariat Petroleum, Inc.

   .  USX Marathon Group / Pennaco Energy, Inc.

    For each transaction, relevant transaction multiples were analyzed
including: total purchase price (equity purchase price plus assumed
obligations) divided by latest twelve month ("LTM") and projected EBITDAX; and
total purchase price divided by proved oil and natural gas reserves on an Mcfe
basis. The appropriate LTM EBITDAX multiple range was determined to be 4.5x to
5.5x as compared to a range of 4.4x to 12.3x in precedent transactions. The
appropriate projected 2003 EBITDAX multiple range was determined to be 4.0x to
5.0x. The appropriate proved reserve multiple range for corporate transactions
was determined to be $1.20 to $1.50 per Mcfe as compared to a range of $0.90 to
$2.11 in precedent transactions.

    This methodology yielded valuations for 3TEC that implied per share equity
values ranging from $16.62 to $20.11. Based on January 31, 2003 closing prices,
the implied consideration of $16.97 per share offered to 3TEC stockholders in
the merger falls within this range.

    Because the market conditions, rationale and circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of
3TEC and the acquired businesses analyzed, Lehman Brothers believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative
results of the analysis and, accordingly, also made qualitative judgments
concerning differences between the characteristics of each of these
transactions and the proposed merger.

Other Analyses

    E&P Transaction Premia Analysis. Lehman Brothers reviewed certain publicly
available information related to selected exploration and production corporate
transactions to calculate the amount of the premiums paid by the acquirers to
the acquired company's stockholders. Transactions analyzed included, but were
not limited to:

   .  Unocal Corporation / Pure Resources, Inc.

   .  Douglas H. Miller & ER Acquisition, Inc. / EXCO Resources, Inc.

   .  Newfield Exploration Company / EEX Corporation

   .  Magnum Hunter Resources, Inc. / Prize Energy Corp.

   .  Dominion Resources, Inc. / Louis Dreyfus Natural Gas Corp.

   .  Devon Energy Corporation / Mitchell Energy & Development Corp.

   .  Westport Resources Corporation / Belco Oil & Gas Corp.

   .  Kerr-McGee Corporation / HS Resources, Inc.

   .  The Williams Companies, Inc. / Barrett Resources Corporation

   .  USX Marathon Group / Pennaco Energy, Inc.

                                      65

<PAGE>

    Lehman Brothers calculated the premiums paid by the acquirer by comparing
the per share purchase price in each transaction to the historical stock price
of the acquired company as of one day, five days and twenty trading days prior
to the announcement date. Lehman Brothers compared the premiums paid in the
precedent transactions to the premium levels implied by $17.00 of assumed
consideration offered to 3TEC's stockholders in the offer and the merger. The
table below sets forth the summary results of the analysis:

<TABLE>
<CAPTION>
                                                         Percentage Premium to
                                                         the Price as of Trading
                                                          Day(s) Prior to
                                                            Transaction
                                                            Announcement
                                                         ----------------------
    Selected Transactions                                1-Day   5-Day   20-Day
    ---------------------                                -----   -----   ------
    <S>                                                  <C>     <C>     <C>
    Mean................................................ 27.7%   32.7%    31.7%
    Median.............................................. 24.5%   31.4%    35.6%
    PREMIUM OFFERED TO 3TEC'S STOCKHOLDERS IN THE MERGER
      (BASED ON $17.00 PER 3TEC SHARE).................. 18.5%   30.0%    14.0%
</TABLE>

    Pro Forma Merger Consequences Analysis.  Lehman Brothers analyzed the pro
forma impact of the merger on Plains' projected earnings per share and cash
flow from operations per share. Projected net income and cash flow from
operations for fiscal years 2003 and 2004 was based on the financial and
operating projections provided by Plains. The pro forma results reflected the
following adjustments: (a) the change in DD&A and exploration expense due to
converting 3TEC's accounting treatment of its properties from successful
efforts to full cost; (b) the additional depreciation and depletion expense
associated with the purchase accounting write-up of 3TEC's assets to the
consideration offered in the transaction; and (c) the additional interest
expense of Plains associated with the financing of the cash portion of the
consideration to be offered to 3TEC and the refinancing of 3TEC's existing
debt. Based on these assumptions, Lehman Brothers' analysis indicated that the
merger would be accretive to Plains' 2003 earnings per share by approximately
$1.03 and would be accretive to Plains' 2003 cash flow from operations per
share by approximately $1.54.

    Exchange Ratio Analysis.  Lehman Brothers also analyzed the premium of the
proposed exchange ratio in the merger in relation to the historical average
exchange ratio derived from previous trading histories of the common stock of
3TEC and Plains. The proposed exchange ratio in the merger represents a premium
of 18.0% to 22.9% over the average exchange ratios derived from prior trading
history.

    Contribution Analysis.  Lehman Brothers compared the relative contributions
of the two companies to the combined company's earnings, cash flow, book value
and reserves. Lehman then compared the proposed exchange ratio in the merger to
the exchange ratio which would be implied by the respective contributions of
the companies. The proposed exchange ratio was lower than the exchange ratio
implied by relative earnings and cash flow contributions, but was higher than
that which would have been implied by relative book value contributions.

    Lehman Brothers is an internationally recognized investment banking firm
engaged in, among other things, the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed. and
unlisted securities, private placements and valuations for corporate and other
purposes. Plains selected Lehman Brothers because of its expertise, reputation
and familiarity with Plains and because its investment banking professionals
have substantial experience in transactions comparable to those which are
contemplated by the proposed merger.

    Lehman Brothers has acted as financial advisor to Plains in connection with
the proposed merger and will receive a fee for its services which is contingent
upon the consummation of the proposed

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<PAGE>

merger. In addition, Plains has agreed to indemnify Lehman Brothers for certain
liabilities that may arise out of the rendering of this opinion.

    Lehman Brothers has also performed various investment banking services for
Plains and its affiliates in the past and has received customary fees for such
services. In the ordinary course of business, Lehman Brothers actively trades
in the securities of Plains for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.

Accounting Treatment

    The merger will be accounted for as an acquisition of 3TEC by Plains using
the "purchase" method of accounting. In addition, Plains will continue to use
the full cost method of accounting for oil and gas properties.

Opinion as to Material U.S. Federal Income Tax Consequences of the Merger

    As a condition to the merger, 3TEC must receive an opinion of its tax
counsel, Thompson & Knight LLP, that the merger constitutes a reorganization
under Section 368(a) of the Internal Revenue Code. In addition, such opinion
will provide that 3TEC and Plains shall each be a party to the reorganization,
and that no gain or loss shall be recognized by the 3TEC stockholders upon the
receipt of Plains common stock in exchange for 3TEC common stock pursuant to
the merger, except with respect to the cash consideration, any cash received in
lieu of fractional share interests and cash paid to dissenting stockholders. As
a condition to the merger, Plains must receive an opinion of its tax counsel,
Akin Gump Strauss Hauer & Feld LLP, that the merger constitutes a
reorganization under Section 368(a) of the Internal Revenue Code, that Plains
and 3TEC shall each be a party to the reorganization, and that neither Plains
nor 3TEC will recognize any gain or loss because of the merger.

    In addition, as a condition to the merger, Plains must have received a
supplemental ruling from the Internal Revenue Service or a tax opinion
reasonably acceptable to Plains Resources from special tax counsel to Plains,
Fulbright and Jaworski L.L.P., to the effect that the merger would not
adversely affect the tax treatment of the spin-off of Plains from Plains
Resources under Section 355 of the Internal Revenue Code as ruled by the
Internal Revenue Service in its private letter rulings to Plains Resources Inc.
dated November 5, 2002 and May 22, 2002.

    Each opinion will be based on certain factual representations and
certifications contained in certificates signed by duly authorized officers of
3TEC, Plains, Plains merger subsidiary, and Plains Resources. An opinion of
counsel represents counsel's best legal judgment and is not binding on the
Internal Revenue Service, and there can be no assurance that following the
merger the Internal Revenue Service will not challenge the legal conclusions
expressed in the opinions. Please review carefully the information under the
caption "Material U.S. Federal Income Tax Consequences of the Merger" beginning
on page [      ] for a description of the material U.S. federal income tax
consequences of the merger.

                                      67

<PAGE>

Board of Directors and Management of Plains Following the Merger

    Immediately after the merger, the Plains board will have six members.
Pursuant to the terms of the merger agreement, after the effective time of the
merger, the Plains board will appoint as directors two individuals designated
by the nominating committee of the 3TEC board. After the merger, the Plains
board will consist of four Plains designated directors and two 3TEC designated
directors, as follows:

<TABLE>
<CAPTION>
Name                  Age                             Title
----                  ---                             -----
<C>                   <C> <S>
Plains designees:
   James C. Flores... 43  Chairman of the Board, Chief Executive Officer and a Director
   Jerry L. Dees..... 62  Director
   Tom H. Delimitros. 62  Director
   John H. Lollar.... 64  Director
3TEC designees:
</TABLE>

    The following are biographies of the 3TEC designees to the Plains board of
directors. Please see page [      ] for biographies of the current members of
Plains' board of directors.

    Each of the Plains designees currently serves on the Plains board.

    Following the merger, Plains' board of directors will have three
committees, nominating, audit and compensation, as discussed on pages [      ]
to [      ] of this document.

    The senior management of Plains will not be affected as a result of the
merger. For a discussion of Plains management, please see pages [      ] to
[      ] of this document.

    If at any time prior to the effective time of the merger any 3TEC director
nominee is unable to serve as a director at the effective time of the merger,
the nominating committee of the 3TEC board of directors will designate another
qualified individual reasonably acceptable to Plains to serve in his place.

Interests of Certain Persons in the Merger

    In considering the recommendation of the boards with respect to the merger,
stockholders of Plains and 3TEC should be aware that certain officers and
directors of Plains and 3TEC have the following interests in the merger that
are separate from and in addition to the interests of stockholders of Plains
and stockholders of 3TEC generally. The boards were aware of these interests
and took them into account in adopting the merger agreement and the
transactions contemplated thereby.

    Stock ownership.  In connection with the merger, 613,919 shares of 3TEC
preferred stock will either be redeemed or converted into the right to receive
$24.00 per share plus accrued and unpaid dividends estimated to be $0.13 per
share. Two members of 3TEC's board, D. Martin Phillips and David B. Miller, are
managing directors of EnCap Investments L.L.C., which beneficially owns 453,980
shares of 3TEC preferred stock and 2,980,635 shares of 3TEC common stock, as
well as 1,848,728 shares of Plains common stock.

    Composition of Plains' Board.  The merger agreement provides that after the
merger the Plains board will consist of six members--four individuals
designated by Plains and two individuals designated by the nominating committee
of the 3TEC board of directors. Members of Plains' board of directors who are
not also employees of Plains, will each receive 10,000 shares of Plains
restricted

                                      68

<PAGE>

stock on the closing date of the merger, and will receive director's fees and
annual option grants in the future as described on page [    ] of this document.

    Stock Option and Change of Control Agreements.  The merger constitutes a
change in control for purposes of 3TEC's stock option plans and other benefit
plans. The merger agreement provides that prior to the effective time of the
merger, 3TEC will cause all stock options under 3TEC's plans to become fully
vested and will cause holders of such options to exercise them prior to the
effective time of the merger. In addition, executive officers of 3TEC are party
to severance arrangements which will be triggered by the merger. Pursuant to
these arrangements, the following directors and executive officers of 3TEC are
entitled to receive the following:

   .  at the effective time of the merger, 37,500 shares of restricted stock
      held by Floyd C. Wilson, who is currently the Chairman and Chief
      Executive Officer of 3TEC, will be terminated, and on or prior to the
      effective time, [86,666] stock options with a weighted average exercise
      price of $9.60 per share held by Mr. Wilson will vest and will be
      converted into merger consideration on a cashless exercise basis;

   .  at the effective time of the merger, 25,000 shares of restricted stock
      held by R.A. Walker, who is currently the President, Chief Financial
      Officer and a director of 3TEC, will be terminated, and on or prior to
      the effective time, 104,999 stock options with a weighted average
      exercise price of $8.56 per share held by Mr. Walker will vest and will
      be converted into merger consideration on a cashless exercise basis;

   .  all other outstanding stock options, including those held by 3TEC's
      executive officers and independent directors, will fully vest on or
      before effective time of the merger and will be converted into merger
      consideration on a cashless basis;

   .  3TEC executive officers will be entitled to severance payments if they
      are not offered employment by the surviving company or its affiliate or
      if their benefits are reduced within one year of the effective time of
      the merger;

   .  persons who become directors of Plains will receive 10,000 shares of
      Plains restricted stock.

    Directors' and Officers' Indemnification and Insurance.  The merger
agreement provides that for six years after the effective time of the merger,
Plains merger subsidiary will indemnify the present and former officers and
directors of 3TEC from liabilities arising out of actions or omissions in their
capacity as such at or prior to the effective time of the merger, to the full
extent permitted under Delaware law or Plains merger subsidiary's certificate
of incorporation and bylaws. Accordingly, Plains merger subsidiary will
maintain 3TEC's directors' and officers' insurance coverage for six years after
the effective time of the merger but only to the extent related to actions or
omissions prior to the effective time of the merger, provided that Plains
merger subsidiary may substitute insurance policies with substantially similar
coverage and amounts containing no less advantageous terms than those
maintained by 3TEC as of the effective time of the merger.

    Registration Rights.  In connection with the merger, EnCap Energy Capital
Fund III, L.P., EnCap Energy Acquisition III-B, Inc., BOCP Energy Partners,
L.P., ECIC Corporation and EnCap Investments L.L.C., or the EnCap entities,
entered into a registration rights agreement with Plains that gives the EnCap
entities the right on two occasions to require Plains to initiate a registered
public offering for the shares of Plains common stock requested to be sold by
the EnCap entities provided that those shares represent at least 4% of the
outstanding Plains common stock. The EnCap entities are the largest
stockholders of 3TEC and, after the merger, will own approximately 13% of
Plains common stock. The EnCap entities may collectively exercise their rights
to request a registration once during each 270 day period. Additionally, the
EnCap entities have the right, collectively, to participate in

                                      69

<PAGE>

and sell shares of stock held by them during any public offering of Plains
common stock whether offered by Plains or any other stockholder.

Financing for the Merger

    To finance the merger, Plains will be required to enter into a new credit
facility or obtain additional funds by accessing the debt or equity markets.

Appraisal or Dissenters' Rights

    Plains and 3TEC are Delaware corporations. Under Delaware law, 3TEC common
stockholders and 3TEC preferred stockholders who do not vote in favor of
adoption of the merger agreement are entitled to appraisal rights.

    If you are a 3TEC common stockholder and do not wish to accept the
estimated $15.00 to $19.00 per share of 3TEC common stock merger consideration,
or if you are a 3TEC preferred stockholder and do not wish to receive $24.00
plus funds equal to accrued and unpaid dividends per share of 3TEC preferred
stock, then, if you do not vote in favor of the adoption of the merger
agreement, make a written demand for appraisal of your shares prior to the vote
at the special meeting, continuously hold your shares of record through the
effective time of the merger, and otherwise comply with the procedures
described in "The Merger--Appraisal Rights," you will have the right under
Delaware law to seek a judicial appraisal of your shares to determine their
"fair value."

Termination of Trading of 3TEC Common Stock

    If the merger is completed, the shares of 3TEC common stock will cease
quotation on The NASDAQ National Market and will be deregistered under the
Securities Exchange Act of 1934.

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<PAGE>

                         TERMS OF THE MERGER AGREEMENT

    The following describes the material terms of the merger agreement. The
full text of the merger agreement is attached as Annex A and is incorporated
herein by reference. We encourage you to read the entire merger agreement.

Merger

    By virtue of the merger agreement, 3TEC will merge with a wholly-owned
subsidiary of Plains, with the Plains merger subsidiary being the surviving
entity in the merger. In the merger, 3TEC common stockholders and certain
warrantholders will receive cash and common stock of Plains and 3TEC preferred
stockholders will receive cash, as described below under "Manner and Basis of
Converting Stock." The merger is expected to constitute a tax-free
reorganization under Section 368(a) of the Internal Revenue Code.

    The merger agreement provides that the closing of the merger will take
place on the business day on which all of the conditions to closing of the
merger are satisfied or waived, or on such other date agreed to by Plains and
3TEC. Plains and 3TEC anticipate that the closing date will be on the business
day immediately following the Plains and 3TEC stockholders meetings. The filing
of a certificate of merger with the Secretary of State of Delaware will be made
as soon as practicable after such closing. The merger will become effective on
the later of (i) the date of filing of such certificate of merger or (ii) on a
date agreed to by the parties to the merger as stated in the certificate of
merger.

Manner and Basis of Converting Stock

    Conversion of 3TEC Common Stock.  Subject to the rights of dissenting
stockholders discussed in the subsection "Dissenter's Rights" below, once the
merger becomes effective, each outstanding share of 3TEC common stock will be
converted into the right to receive:

   .  $8.50 in cash; plus, if the average of the closing prices of Plains
      common stock on the New York Stock Exchange, or NYSE, for the 20
      consecutive trading days immediately preceding the third trading day
      before the closing of the merger, or the "market price," of the Plains
      common stock is less than $6.25 and Plains does not terminate the merger
      agreement, an additional amount of cash equal to the product of (i) $6.25
      minus the market price times (ii) the exchange ratio described in the
      next bullet; and

   .  0.85 shares of common stock, par value $.01 per share, of Plains,
      provided that if the market price is:

      - greater than $12.35, then the number of shares of Plains common stock
        equal to the quotient of (i) $10.50 divided by (ii) the market price, or

      - less than $7.65, then the number of shares of Plains common stock equal
        to the quotient of (i) $6.50 divided by (ii) the market price (but the
        market price will never be deemed to be less than $6.25 for this
        calculation).

    The ratio of Plains common stock to 3TEC common stock determined issuable
    under this bullet point is sometimes called the exchange ratio.

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<PAGE>

    The following table illustrates the consideration to be received by holders
of 3TEC common stock (and options and warrants to purchase common stock) in the
merger under nine different Plains common stock price scenarios:

<TABLE>
<CAPTION>
                                             Merger Consideration
                        --------------------------------------------------------------
                        $6.00  $6.25  $7.00  $8.00  $9.00  $10.00 $11.00 $12.00 $13.00
                        ------ ------ ------ ------ ------ ------ ------ ------ ------
<S>                     <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>
Assumed market price(1)
Exchange ratio(2)......   1.04   1.04   0.93   0.85   0.85   0.85   0.85   0.85   0.81
Stock value(3)......... $ 6.24 $ 6.50 $ 6.50 $ 6.80 $ 7.65 $ 8.50 $ 9.35 $10.20 $10.50
Cash................... $ 8.50 $ 8.50 $ 8.50 $ 8.50 $ 8.50 $ 8.50 $ 8.50 $ 8.50 $ 8.50
Additional cash(4)..... $ 0.26     --     --     --     --     --     --     --     --
Merger consideration... $15.00 $15.00 $15.00 $15.30 $16.15 $17.00 $17.85 $18.70 $19.00
</TABLE>
--------
(1) The market price of Plains common stock will be calculated at the effective
    time of the merger based upon the average closing prices of Plains common
    stock for the 20 consecutive trading days immediately preceding the third
    trading day prior to the closing.
(2) The number of shares of Plains common stock issued for each share of 3TEC
    common stock.
(3) The value of Plains common stock has been determined by multiplying the
    market price as determined under the merger agreement by the exchange
    ratio. The actual value, or trading price, of the Plains common stock on
    the closing date of the merger could be different.
(4) If the market price of Plains common stock as determined under the merger
    agreement is less than $6.25, Plains may terminate the merger agreement. If
    Plains does not terminate the merger agreement, then the exchange ratio
    will be determined using $6.25 as the market price and Plains will pay
    additional cash in an amount equal to the product of (i) $6.25 minus the
    market price times (ii) the exchange ratio.

    After the effective time of the merger, each certificate representing 3TEC
common stock will represent only a right to receive, without interest, upon
surrender, (i) the applicable merger consideration discussed above, (ii)
certain dividends and distributions discussed in the next paragraph and (iii)
cash, in lieu of fractional shares of Plains common stock, equal to the product
of (a) the amount of merger consideration payable with respect to a whole share
of common stock and (b) such fraction. If the market price of Plains common
stock is less than $6.25 per share, Plains may either (i) terminate the merger
agreement or (ii) pay the additional cash consideration discussed in the first
bulletpoint above. If, prior to the effective time of the merger, 3TEC common
stock or Plains common stock is changed as a result of a stock dividend,
subdivision, reclassification, recapitalization, split, combination or exchange
of shares, the exchange ratio and the applicable cash consideration discussed
above will be correspondingly adjusted.

    No dividends or distributions declared or made after the merger becomes
effective with a record date after such time will be paid to a holder of
certificates formerly representing shares of 3TEC common stock until
certificates reflecting such common stock have been surrendered in accordance
with the merger agreement. Subject to applicable laws, upon such surrender, the
record holder of each surrendered certificate will be paid, without interest,
the amount of dividends or other distributions with a record date after the
time when the merger becomes effective, but if the payment date for any such
dividend or distribution payable has not occurred prior to such surrender,
payment will occur at the designated payment date.

    Conversion of 3TEC Preferred Stock.  3TEC may redeem the 3TEC preferred
stock for $24.00 per share plus accrued and unpaid dividends at any time
between the record date and the effective time of the merger. If 3TEC does not
do so, and subject to the rights of stockholders discussed in the subsection
"Dissenter's Rights" below, at the effective time of the merger each
outstanding share of 3TEC preferred stock will be converted into an amount of
cash equal to $24.00 plus the total amount of all accrued and unpaid dividends
as of the time the merger becomes effective, and, after that time,

                                      72

<PAGE>

each certificate representing such shares will represent only a right to
receive such consideration without interest.

    After the time the merger becomes effective, upon presentation of
certificates for 3TEC common stock or 3TEC preferred stock, as applicable,
those certificates will be cancelled and exchanged as set forth in the merger
agreement. The merger will not affect Plains common stock or the stock of the
Plains merger subsidiary that are issued and outstanding immediately prior to
the effective time of the merger.

    Surrender and Payment.  Prior to the effective time of the merger, Plains
will deposit with American Stock Transfer & Trust Company, the exchange agent,
certificates representing the Plains common stock to be issued and cash to be
paid to the 3TEC common stockholders and, if such shares have not been redeemed
prior to the effective time of the merger, 3TEC preferred stockholders.
Promptly after the effective time of the merger, the exchange agent will send
to each holder of record of 3TEC common stock and 3TEC preferred stock
certificates a letter of transmittal and instructions for use in effecting the
exchange of their certificates for cash and, if applicable, Plains common
stock. The exchange agent will exchange the Plains common stock and cash, as
appropriate, for surrendered 3TEC common stock and 3TEC preferred stock
certificates pursuant to the terms of the merger agreement.

    Before any person, entity or organization that is not the record holder of
surrendered 3TEC common stock or 3TEC preferred stock certificate(s) receives
any of the merger consideration discussed above, (i) the surrendered stock
certificate(s) must be properly endorsed or otherwise in proper form for
transfer and (ii) the person, entity or organization owning the 3TEC common
stock or 3TEC preferred stock must pay the exchange agent any transfer or other
taxes required as a result of such issuance of merger consideration unless he,
she or it establishes to the exchange agent's satisfaction that such tax has
been paid or is not applicable.

    Any shares of Plains common stock and cash that remain unclaimed one year
after the effective time of the merger will be returned to Plains. Any holder
of 3TEC common stock or 3TEC preferred stock who has not exchanged his, her or
its certificates representing such stock prior to that time may thereafter look
only to Plains, as general creditor, to exchange their stock certificates or to
pay amounts that they are entitled pursuant to the merger agreement. If
outstanding 3TEC common stock or 3TEC preferred stock certificates are not
surrendered within six years after the effective time of the merger (or, prior
to any earlier date on which the merger consideration issuable and/or payable
with respect to such certificates would otherwise escheat to or become the
property of any governmental unit or agency), the merger consideration payable
and/or issuable with respect to those shares will become the property of Plains
to the extent permitted by applicable law. Neither 3TEC nor Plains or the
Plains merger subsidiary, however, will be liable to any holder of 3TEC common
stock or 3TEC preferred stock certificates for any amount paid, or merger
consideration delivered, to a public official pursuant to applicable abandoned
property, escheat or similar laws.

    Stock Options; Warrants; Restricted Stock.  Prior to the effective time of
the merger, 3TEC will cause all options issued under its benefit plans to be
vested and all holders of those options to exercise all the options prior to
the effective time of the merger to the extent the exercise prices of those
options are less than $17.00. Each exercised option will be converted for that
number of shares of 3TEC common stock equal to the quotient of (i) the
difference between (a) the product of (1) $17.00 times (2) the number of shares
of 3TEC common stock issuable upon exercise of such 3TEC option minus (b) the
aggregate exercise price of such 3TEC option, divided by (ii) $17.00. The
holders of options will not be required to pay the exercise price of those
options because the exercise price has been accounted for by reducing the
amount of consideration received upon exercise of the option. All out-of-the
money options (i.e., the exercise price is greater than or equal to $17.00)
will terminate at

                                      73

<PAGE>

the effective time of the merger. The shares of 3TEC common stock received upon
exercise will be exchanged in the merger for cash and Plains common stock in
the same manner as other shares of 3TEC common stock.

    At the effective time of the merger, each holder of a warrant to purchase
3TEC common stock for $3.00 per share will automatically be deemed to receive
for such warrant the consideration, as applicable, equal to the amount of such
consideration that such holder would have received for it had it been exercised
prior to the effective time of the merger, and, as a result of such exercise,
such holder received 3TEC common stock equal to the quotient of (i) the
difference between (a) the product of (1) $17.00 times (2) the number of shares
of 3TEC common stock issuable upon exercise of such warrant minus (b) the
aggregate exercise price of such warrant, divided by (ii) $17.00. The holders
of $3.00 warrants will not be required to pay the exercise price of those
warrants because the exercise price has been accounted for by reducing the
amount of consideration received upon the exercise of the warrant. Also, at the
effective time of the merger, each warrant to purchase 3TEC common stock for
$30.00 per share will be converted into a warrant giving the holder thereof the
right to receive $8.50 cash per share and the number of shares of Plains common
stock equal to the exchange ratio for each share of 3TEC common stock that
would have been purchased under such warrants had they been exercised in
connection with the merger.

    At the effective time of the merger, all remaining restrictions with
respect to shares of 3TEC restricted stock (except for 37,500 shares of
restricted stock held by Mr. Wilson and and 25,000 shares of restricted stock
held by Mr. Walker, which will be cancelled as of the effective time of the
merger) issued pursuant to 3TEC's employee benefit plans will expire, and such
restricted stock will be treated as 3TEC common stock for purposes of the
conversion of such stock.

    Appraisal Rights.  If the merger is consummated, 3TEC common and preferred
stockholders who do not vote "FOR" the adoption of the merger agreement, who
hold shares of 3TEC common stock or 3TEC preferred stock of record on the date
of making a written demand for appraisal as described below, who continuously
hold those shares through the closing of the merger, and who otherwise comply
fully with Section 262 of the DGCL, will be entitled to a judicial
determination of the fair value of their shares of 3TEC common stock or 3TEC
preferred stock exclusive of any element of value arising from the
accomplishment of the merger in accordance with the provisions of Section 262
and to receive from the surviving corporation payment of such fair value in
cash together with a fair rate of interest, if any, as determined by such
court. A proxy or vote against the adoption of the merger agreement will not
constitute a demand for appraisal.

    Under Section 262, not less than 20 calendar days prior to the special
meeting, 3TEC must notify each of the holders of its common or preferred stock
who was such on the record date for the meeting that such appraisal rights are
available and include in each such notice, a copy of Section 262. This document
constitutes such notice to the holders of record of 3TEC common stock and 3TEC
preferred stock.

    The following is a summary of the procedures to be followed under Section
262, the full text of which is attached as Annex E to this document. The
following discussion is not a complete statement of the law relating to
appraisal rights and is qualified in its entirety by reference to Annex E. 3TEC
Stockholders should read carefully the full text of Section 262 because failure
to follow any procedure set forth therein may result in the loss of appraisal
rights. Any stockholder who desires to exercise appraisal rights should review
carefully Section 262 of the DGCL before electing or attempting to exercise
appraisal rights.

    Record holders of 3TEC common stock or 3TEC preferred stock who desire to
exercise appraisal rights must not vote in favor of the merger agreement or
consent to the merger agreement in writing (including by returning a signed
proxy without indicating any voting instructions as to the proposal) and

                                      74

<PAGE>

must deliver a separate written demand for appraisal of such shares to 3TEC
prior to the taking of the vote on the merger agreement. A holder of shares of
3TEC common stock or 3TEC preferred stock wishing to exercise appraisal rights
must hold of record those shares on the date the written demand for appraisal
is made and must continue to hold those shares of record through the effective
time of the merger. The demand for appraisal will be sufficient if it
reasonably informs 3TEC of the identity of the stockholder and that the
stockholder intends to demand an appraisal of the fair value of the shares of
3TEC common stock or 3TEC preferred stock, as applicable.

    If the shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, the demand must be executed by or for the
record owner, and if the shares are owned of record by more than one person, as
in a joint tenancy or tenancy in common, the demand must be made by or for all
owners of record. An authorized agent including an agent for two or more joint
owners, may execute the demand for appraisal for a holder of record provided
the agent identifies the record holder or holders and expressly discloses in
such demand that the agent is acting as agent for the record holder or holders
of such shares.

    A record holder, such as a broker, who holds shares of 3TEC common stock or
3TEC preferred stock as a nominee for beneficial owners, some or all of whom
desire to demand appraisal, must exercise appraisal rights on behalf of such
beneficial owners with respect to the shares held for such beneficial owners.
In such case, the written demand for appraisal should set forth the number of
shares covered by such demand. Unless a demand for appraisal specifies a number
of shares, the demand will be presumed to be applicable to all shares
outstanding in the name of such record holder . If a stockholder holds shares
of common stock through a broker which in turn holds the shares through a
central securities depository nominee such as Cede & Co., a demand for
appraisal of such shares must be made by or on behalf of the depository nominee
and must identify the depository nominee as the record holder.

    BENEFICIAL OWNERS WHO ARE NOT RECORD HOLDERS AND WHO INTEND TO EXERCISE
APPRAISAL RIGHTS SHOULD INSTRUCT THE RECORD HOLDER TO COMPLY STRICTLY WITH THE
STATUTORY REQUIREMENTS WITH RESPECT TO THE DELIVERY OF WRITTEN DEMAND FOR
APPRAISAL. A DEMAND FOR APPRAISAL SUBMITTED BY A BENEFICIAL OWNER WHO IS NOT
THE RECORD HOLDER WILL NOT BE HONORED.

    Any holder of record of 3TEC common stock or 3TEC preferred stock must
deliver the written demand for appraisal prior to the taking of the vote on the
merger agreement. All demands for appraisal should be addressed to 3TEC Energy
Corporation, 700 Milam Street, Suite 1100, Houston, Texas 77002, Attention:
David S. Elkouri, Secretary.

    If the merger agreement is adopted, then within ten days after the
effective time of the merger, the surviving corporation will provide notice of
the effective time of the merger to all stockholders who have complied with
Section 262 and who have not voted in favor of or consented to the merger.

    A stockholder may withdraw a demand for appraisal in writing within 60 days
after the effective time of the merger and accept the terms of the merger.
Thereafter, the approval of the surviving corporation will be needed for such a
withdrawal. In all events, if a petition for appraisal has been filed in the
Delaware Court of Chancery, a stockholder may not withdraw without the approval
of the Court.

    Within 120 days after the effective time of the merger, in compliance with
Section 262, any stockholder who has properly demanded an appraisal and who has
not withdrawn his or her demand as provided above and the surviving corporation
each has the right to file in the Delaware Court of Chancery a petition, with a
copy served on the surviving corporation in the case of a petition filed by a
dissenting stockholder, demanding a determination of the fair value of the
shares held by all dissenting

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<PAGE>

stockholders. If, within the 120-day period following the effective time of the
merger, no petition shall have been filed as provided above, all rights to
appraisal will cease and all dissenting stockholders who owned shares of 3TEC
common stock or 3TEC preferred stock will become entitled to receive the merger
consideration for each share of 3TEC common stock or 3TEC preferred stock held,
without interest. 3TEC is not obligated, and does not currently intend, to file
such a petition.

    Any dissenting stockholder is entitled, within the 120-day period following
the effective time of the merger and upon written request to the surviving
corporation to receive from the surviving corporation a statement setting forth:

   .  the aggregate number of shares of 3TEC common stock and/or 3TEC preferred
      stock which have not voted to adopt the merger agreement and with respect
      to which demands for appraisal have been received; and

   .  the aggregate number of dissenting stockholders.

    Such statement must be mailed within ten days after a written request for
such statement has been received by the surviving corporation, or within ten
days after the expiration of the period for delivery of demands for appraisal,
as described above, whichever is later.

    Upon the filing of a petition, the Delaware court is empowered to determine
which dissenting stockholders have complied with the provisions of Section 262
and are entitled to an appraisal of their shares. The Delaware court may
require that dissenting stockholders submit their share certificates for
notation thereon of the pendency of the appraisal proceedings and the Delaware
court may dismiss the proceedings as to any stockholder who does not comply
with such requirement.

    After determining the stockholders entitled to appraisal, the Delaware
court will appraise shares of 3TEC common stock or 3TEC preferred stock owned
by the dissenting stockholders, determining the fair value of such shares. In
determining the fair value, the Delaware court is to take into account all
relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court
discussed the factors that could be considered in determining fair value in an
appraisal proceeding, stating that "proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered and that "(f)air" price
obviously requires consideration of all relevant factors involving the value of
a company. The Delaware Supreme Court has stated, that in making this
determination of fair value, the Delaware courts must consider market value,
asset value, dividends, earnings prospects, the nature of the enterprise and
any other factors which could be ascertained as of the date of the merger and
which "throw any light on future prospects of the merged corporation." The
Delaware Supreme Court noted that Section 262 provides that fair value is to be
determined "exclusive of any element of value arising from the accomplishment
or expectation of the merger."

    In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that
such exclusion is a "narrow exclusion [that] does not encompass known elements
of value" but which applies only to the speculative elements of value arising
from such accomplishment or expectation. In Weinberger, the Delaware Supreme
Court held that "elements of future value, including the nature of the
enterprise, which are known or susceptible of proof as of the date of the
merger and not the product of speculation, may be considered."

    Stockholders considering seeking appraisal should consider that the fair
value of their shares determined by the Delaware court under Section 262 could
be more than, the same as, or less than, the consideration payable pursuant to
the merger agreement. 3TEC reserves the right to assert in any appraisal
proceedings, that, for purposes of Section 262, the "fair value" of a share of
3TEC common stock or 3TEC preferred stock is less than the consideration
payable pursuant to the merger agreement.

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<PAGE>

    The Delaware court may also:

   .  determine a fair rate of interest, if any, to be paid to dissenting
      stockholders in addition to the fair value of the shares;

   .  determine the costs of the proceeding and assess such costs against the
      parties as the Delaware court deems equitable (however, costs do not
      include attorneys' and expert witnesses' fees); and

   .  upon application of any dissenting stockholder, order all or a portion of
      the expenses incurred by any dissenting stockholder in connection with
      the appraisal proceeding, including, without limitation, reasonable
      attorneys' fees and fees and expenses of experts, to be charged pro rata
      against the value of all shares entitled to appraisal.

    No appraisal proceedings in the Delaware court will be dismissed as to any
dissenting stockholder without the approval of the Delaware court, and this
approval may be conditioned upon terms which the Delaware court deems just.

    From and after the effective time of the merger, stockholders who have
demanded appraisal rights in accordance with Section 262 will not be entitled
to vote or consent by written action any shares subject to demand for appraisal
for any purpose and will not be entitled to receive payment of any dividends or
distributions payable to stockholders except dividends or distributions payable
to stockholders of a record date prior to the effective time of the merger.

    Failure to take any required step in connection with appraisal rights may
result in the loss of such rights. Any stockholder who loses such rights will
only be entitled to receive the consideration offered in the merger without
interest.

Representations and Warranties

    The merger agreement contains customary representations and warranties of
Plains and 3TEC relating to various aspects of the respective businesses and
financial statements of the parties and other matters. The representations and
warranties will not survive the merger, but they will serve as the basis of
conditions to each of Plains' and 3TEC's obligations to complete the merger.

Conduct of Business Pending the Merger

    Plains and 3TEC have agreed that, prior to the merger, each party will
operate its business in the ordinary course consistent with past practice and
will use all reasonable efforts to preserve intact its business organizations
and relationships with third parties and to keep available the services of its
present officers and key employees.

    In addition, the merger agreement places specific restrictions on the
ability of Plains and 3TEC to:

   .  adopt or amend their charters or bylaws (or similar organizational
      documents);

   .  declare, set aside or pay any dividends on common stock;

   .  merge or consolidate with another entity;

   .  make a material acquisition, enter into a new line of business or
      commence business in a new country;

   .  dispose of material assets or properties;

   .  issue securities or amend the terms of any of their outstanding
      securities;

   .  incur any indebtedness outside the ordinary course of business;

   .  increase compensation to executive officers or employees;

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   .  settle pending litigation outside the ordinary course of business;

   .  participate in new oil and gas operations where costs would exceed
      certain thresholds;

   .  enter into hedging transactions outside the ordinary course of business;

   .  adopt or amend or terminate any employee benefit plan or collective
      bargaining agreement or enter into or amend any employment, severance or
      similar contract; or

   .  enter into seismic data licenses, other than pursuant to agreements or
      commitments existing on the date of the merger agreement.

Additional Provisions

    Tax Treatment of the Merger.  Plains and 3TEC have agreed to use all
reasonable efforts to cause the merger to qualify, and will not take or permit
any actions that could prevent the merger from qualifying, as a reorganization
under the provisions of Section 368(a) of the Internal Revenue Code.

    Acquisition Proposals (No-Shop Provisions).  Until the termination of the
merger agreement, 3TEC will not solicit any offer or proposal for a merger or
acquisition of 3TEC or discuss or negotiate with third parties regarding a
merger or acquisition of 3TEC. 3TEC may, however, under certain circumstances
and upon satisfaction of certain requirements, communicate with third parties
that make bona fide unsolicited offers to merger with or acquire 3TEC. Further,
subject to certain conditions, 3TEC may, and in certain situations may be
required to, pursue a transaction that the 3TEC board determines is superior to
the merger.

    Stockholders' Meetings.  Both Plains and 3TEC will, as soon as reasonably
possible after the date of the merger agreement, (i) call an annual or special
meeting of their stockholders for the purpose of securing the approval of the
transactions contemplated by the merger agreement; (ii) distribute to their
stockholders the joint proxy statement/prospectus; (iii) use all reasonable
efforts to solicit from their stockholders proxies approving the transactions
contemplated by the merger agreement; and (iv) cooperate and consult with each
other on the foregoing matters.

    Directors' and Officers' Indemnification and Insurance.  For six years
after the effective time of the merger, the surviving corporation will
indemnify, to the full extent permitted under Delaware law, 3TEC's present and
former officers and directors against any and all losses incurred by them
because they are or were a director or officer of 3TEC. The surviving
corporation will maintain 3TEC's existing officers and directors' liability
insurance for a period of six years after the effective time of the merger to
cover any acts or omissions that occurred prior to the effective time of the
merger. The surviving corporation may substitute the policies with
substantially similar coverage and amounts containing no less advantageous
terms than those maintained by 3TEC as of the effective time of the merger.

    Board, Committees and Executive Officers.  The nominating committee of 3TEC
will select two individuals, who are reasonably acceptable to Plains, for
nomination as directors of Plains. Plains will use its best efforts to cause
them to be elected as members of its board of directors simultaneous with the
closing of the merger, and each will serve as a director for a term expiring at
Plains' next annual meeting of stockholders following the effective time of the
merger.

    Other.  Finally, other additional provisions, including those relating to
access and information, further assurances, cooperation, publicity, employee
benefit matters, additional joint actions, third party filings, acquisition of
consents, appointment of certain officers of Plains, preparation of the joint
proxy statement/prospectus and registration statement on Form S-4, stock
exchange listing, notice of certain events by the parties, site inspections,
affiliate agreements, stockholder litigation, injunctive relief for Plains and
certain Plains board approvals are contained in the merger agreement.

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<PAGE>

Conditions to Consummation of the Merger

    Conditions to the Obligations of Each Party.  Unless waived, the respective
obligations of each party to effect the merger will be subject to the
fulfillment at or prior to the effective time of the following conditions:

   .  the required approval of the stockholders of Plains and 3TEC must have
      been obtained;

   .  the absence of any, statute, injunction, order, judgment or other legal
      restraint prohibiting, enjoining or restricting the completion of the
      merger;

   .  the absence of any stop order regarding the registration statement
      relating to the merger or any proceeding for such purpose pending before
      or threatened by the SEC;

   .  the receipt of such permits, authorizations, consents, or approvals
      required to consummate the transactions contemplated by the merger
      agreement;

   .  the approval for listing of the Plains common stock to be issued in the
      merger on the New York Stock Exchange; and

   .  Plains must have received a supplemental ruling from the Internal Revenue
      Service or a tax opinion reasonably acceptable to Plains Resources from
      counsel to Plains to the effect that the transactions contemplated by the
      merger agreement would not adversely affect the tax treatment of the
      recently completed spin-off of Plains from Plains Resources under Section
      355(a) of the Internal Revenue Code.

    Conditions to the Obligations of Plains. Unless waived by Plains, the
obligation of Plains to effect the merger is subject to the satisfaction at or
prior to the effective time of the merger of the following additional
conditions, among others:

   .  compliance by 3TEC with its obligations under the merger agreement and
      the representations and warranties of 3TEC contained in the merger
      agreement being true and correct both as of the date of the merger
      agreement and as of the effective time;

   .  there must not have occurred any change in the financial condition,
      business, operations or prospects of 3TEC that would constitute a
      material adverse effect;

   .  the receipt by Plains of an opinion from its tax counsel to the effect
      that the merger will constitute a reorganization under Section 368(a) of
      the Internal Revenue Code; and

   .  each consent, waiver and approval required by 3TEC to have been obtained
      has been obtained, and 3TEC must have provided Plains with copies of all
      such consents, waivers and approvals.

    Conditions to the Obligations of 3TEC.  Unless waived by 3TEC, the
obligation of 3TEC to effect the merger is subject to the satisfaction at or
prior to the effective time to the merger of the following conditions, among
others:

   .  compliance by Plains with its obligations under the merger agreement and
      the representations and warranties of Plains contained in the merger
      agreement being true and correct both as of the date of the merger
      agreement and as of the effective time;

   .  there must not have occurred any change in the financial condition,
      business, operations or prospects of Plains that would constitute a
      material adverse effect;

   .  the receipt by 3TEC of an opinion from its tax counsel to the effect that
      the merger will constitute a reorganization under Section 368(a) of the
      Internal Revenue Code.

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<PAGE>

Termination

    The merger agreement may be terminated at any time prior to the effective
time of the merger agreement, whether before or after approval by the common
stockholders of Plains or 3TEC or the preferred stockholders of 3TEC:

   .  by the mutual written consent of Plains and 3TEC;

   .  by either Plains or 3TEC, if the effective time of the merger has not
      occurred on or before August 31, 2003, provided that the party seeking to
      terminate the merger agreement must not have materially breached its
      obligations under the merger agreement in any manner that will contribute
      to the failure to consummate the merger on or before that date;

   .  by 3TEC, if there has been a material breach by Plains of any
      representation, warranty, covenant or agreement set forth in the merger
      agreement which breach (if susceptible to cure) has not been cured in all
      material respects within 20 business days following receipt by Plains of
      notice of such breach;

   .  by Plains, if there has been a material breach by 3TEC of any
      representation, warranty, covenant or agreement set forth in the merger
      agreement which breach (if susceptible to cure) has not been cured in all
      material respects within 20 business days following receipt by 3TEC of
      notice of such breach;

   .  by either Plains or 3TEC, if any applicable law, rule or regulation that
      makes the merger illegal or if any judgment, injunction, order or decree
      restrains or prohibits the consummation of the merger;

   .  by either Plains or 3TEC, if either of the stockholder approvals
      discussed in the sections "Additional Agreements-Stockholders' Meetings"
      is not obtained;

   .  by Plains, if (i) 3TEC's board of directors withdraws, modifies or
      changes its recommendation of the merger agreement or the merger, or
      recommends to 3TEC's stockholders any merger or acquisition proposal from
      a third party; (ii) a tender offer or exchange offer for outstanding
      shares of 3TEC common stock then representing 30% or more of the combined
      power to vote generally for the election of directors is commenced, and
      3TEC's board of directors does not recommend that 3TEC's stockholders not
      tender their shares into such tender or exchange offer or (iii) 3TEC has
      breached any of its obligations relating to its additional agreements
      concerning acquisition proposals (the No-Shop Provisions);

   .  by 3TEC, if it accepts a superior proposal; or

   .  by Plains, if the average of the closing prices of Plains common stock
      for the 20 consecutive trading days immediately preceding the third
      trading day prior to the closing of the merger is less than $6.25 per
      share.

    The term "superior proposal" means an unsolicited bona fide proposal made
by a third party relating to an acquisition proposal on terms that 3TEC's board
of directors determines is reasonably likely to be consummated taking into
account the entity making such proposal and all legal, financial, regulatory
and other relevant aspects of such proposal, and 3TEC's board of directors in
good faith determines, after consultation with its financial advisors and its
outside legal counsel, that the proposal would, if consummated, result in a
transaction that is more favorable from a financial point of view to the
holders of 3TEC common stock than the merger. Before 3TEC can terminate the
merger agreement under these provisions, it must negotiate in good faith with
Plains to make such adjustments in the terms and conditions of the merger that
would result, in the opinion of 3TEC's board of directors, after consultation
with its financial advisors and outside legal counsel, in a revised Plains
proposal that is reasonably capable of being completed, and, if consummated,
may reasonably be expected to result in a transaction that is at least as
favorable from a financial point of view to the holders of 3TEC common stock as
the superior proposal.

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    If the merger agreement is terminated and the merger is abandoned, all
obligations of the parties will terminate, except the parties' obligations
relating to the effects of termination of the merger agreement; expenses in
connection with the transactions contemplated by the merger agreement;
publicity; and certain other provisions. Termination of the merger agreement
will not relieve any party from liability for any breaches of the merger
agreement occurring prior to the termination.

    If an acquisition proposal has been made by a person other than Plains or
its affiliates, and Plains terminates the merger agreement under any of the
second, fourth or sixth bulletpoints above, and, in each case, within twelve
months after such termination of the merger agreement:

   .  3TEC consummates a merger or similar transaction with a person other than
      Plains;

   .  3TEC enters into a definitive agreement regarding a merger of 3TEC with a
      person other than Plains; or

   .  (i) any person acquires (either directly or as a group) 50% or more of
      the combined power to vote generally for the election of directors of
      3TEC, and (ii) 3TEC's board of directors has taken any action for the
      benefit of such person that facilitates the acquisition by such person of
      the ownership;

then 3TEC will promptly pay (and in any event no later than one business day
after such termination) to Plains a termination fee of $9.0 million plus
Plains' expenses up to $1.0 million.

    If Plains terminates the merger agreement under the seventh bulletpoint
above or if Plains or 3TEC terminates the merger agreement pursuant to the
eighth bulletpoint above, 3TEC will promptly pay to Plains a termination fee of
$9.0 million plus Plains' expenses up to $1.0 million.

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<PAGE>

          MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

    The following summarizes the material U.S. federal income tax consequences
of the merger to holders of 3TEC common stock and 3TEC preferred stock. This
summary constitutes the opinion of Akin Gump Strauss Hauer & Feld LLP and
Thompson & Knight LLP as to the material U.S. federal income tax consequences
to the stockholders of 3TEC and Plains as a result of the merger. This summary
addresses only those stockholders who hold their shares of 3TEC common stock
and 3TEC preferred stock as a capital asset, and does not address all of the
U.S. federal income tax consequences that may be relevant to particular 3TEC
stockholders in light of their individual circumstances, or to 3TEC
stockholders who are subject to special rules, such as:

   .  financial institutions;

   .  mutual funds;

   .  tax-exempt organizations;

   .  insurance companies;

   .  dealers in securities or foreign currencies;

   .  traders in securities who elect to apply a market-to-market method of
      accounting;

   .  foreign holders;

   .  persons who hold shares of 3TEC common stock as a hedge against currency
      risk or as part of a straddle, constructive sale or conversion
      transaction; or

   .  holders who acquired their shares of 3TEC common stock upon the exercise
      of warrants or employee stock options or otherwise as compensation.

    The following also summarizes the anticipated material U.S. federal income
tax consequences of the merger to 3TEC, Plains merger subsidiary and Plains.
Included also is the effect, in the opinion of special tax counsel to Plains,
Fulbright and Jaworski L.L.P., of the merger on the tax treatment of the
spin-off of Plains from Plains Resources under Section 355 of the Code as ruled
by the Internal Revenue Service in its private letter rulings to Plains
Resources dated November 5, 2002 and May 22, 2002.

    The following summary is not binding on the Internal Revenue Service. It is
based upon the Internal Revenue Code of 1986, as amended, and the regulations,
rulings, and decisions thereunder in effect as of the date of this document,
all of which are subject to change, possibly with retroactive effect. Tax
consequences under state, local and foreign laws and U.S. federal laws other
than U.S. federal income tax laws are not addressed. 3TEC stockholders are
urged to consult their tax advisors as to the specific tax consequences to them
of the merger, including the applicability and effect of U.S. federal, state,
local and foreign income and other tax laws in their particular circumstances.

    It is a condition to the closing of the merger that 3TEC and Plains each
receive an opinion from its tax counsel to the effect that the merger
constitutes a reorganization under Section 368(a) of the Internal Revenue Code.
The opinion of 3TEC's tax counsel, Thompson & Knight LLP, also will conclude
that 3TEC and Plains shall each be a party to the reorganization, and that no
gain or loss shall be recognized by the 3TEC stockholders upon the receipt of
Plains common stock in exchange for 3TEC common stock pursuant to the merger,
except with respect to the cash portion of the merger consideration, any cash
received in lieu of fractional share interests and cash paid to dissenting
stockholders. In addition, the opinion of Plains' tax counsel, Akin Gump
Strauss Hauer & Feld LLP, will conclude that 3TEC and Plains shall each be a
party to the reorganization, and that neither Plains nor 3TEC will recognize
gain or loss as a result of the merger.

    These opinions will be based on customary assumptions and representations
made by, among others, Plains, Plains merger subsidiary and 3TEC and will not
be delivered unless the value of the Plains' stock issued in the merger
constitutes 40% or more of the value of the combined merger

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consideration. In addition to the market value of Plains common stock on the
effective dated of the merger various factors affect this determination,
including:

   .  whether the trading price of Plains common stock at the effective time of
      the merger equals the market price as determined under the merger
      agreement;

   .  the amount, if any, to be paid to 3TEC stockholders who perfect their
      appraisal rights;

   .  the amount of cash paid in lieu of fractional share interests; and

   .  whether 3TEC elects to redeem the 3TEC preferred stock prior to the
      merger.

    Accordingly, it is not possible to state with certainty the minimum trading
price of the Plains common stock at which the value of the Plains common stock
to be received in the merger will be equal to at least 40% of the value of the
combined merger consideration as of the completion of the merger. Assuming that
there are no stockholders exercising appraisal rights, no significant cash to
be paid in lieu of fractional share interests, the exchange ratio equals 0.85,
the trading price of Plains common stock at the effective time of the merger
equals the market price as determined under the merger agreement, and that, as
expected, 3TEC elects to redeem the 3TEC preferred stock prior to the merger,
then the minimum trading price of the Plains common stock at which the value of
Plains common stock to be received in the merger will be equal to at least 40%
of the value of the combined merger consideration is less than $6.00 per share.
If these assumptions prove to be inaccurate, then the minimum trading price may
be higher than $6.00 per share.

    An opinion of counsel represents counsel's best legal judgment and is not
binding on the Internal Revenue Service or any court. No ruling has been, or
will be, sought from the Internal Revenue Service as to the tax consequences of
the merger. The following discussion assumes that the merger qualifies as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code.

Tax Consequences to Holders of 3TEC Common Stock

    Recognition of Gain or Loss.  Holders of shares of 3TEC common stock that
receive shares of Plains common stock and cash in the merger will not recognize
gain or loss for U.S. federal income tax purposes, except that gain (but not
loss) will be recognized with respect to cash they receive as part of the
merger consideration. The gain will equal the lesser of (1) the amount of the
cash received and (2) the total merger consideration, minus the tax basis of
3TEC common shares exchanged. The gain recognized will be capital gain unless
the receipt of cash by the stockholder has the effect of a distribution of a
dividend, in which case the gain will be treated as ordinary dividend income to
the extent of the stockholder's ratable share of 3TEC's accumulated earnings
and profits as calculated for U.S. federal income tax purposes. For purposes of
determining whether the receipt of cash by the stockholder has the effect of a
distribution of a dividend, a stockholder will be treated as if the stockholder
first exchanged all of its shares of 3TEC common stock solely for shares of
Plains common stock and then Plains immediately redeemed a portion of the
common stock for cash that the stockholder actually received pursuant to the
merger. The Internal Revenue Service has indicated in rulings that any
reduction in the interest of a minority stockholder that exercises no control
over corporate affairs would receive capital gains (as opposed to dividend)
treatment. In determining whether the receipt of cash has the effect of a
distribution of a dividend, certain constructive ownership rules must be taken
into account.

    Tax Basis for Plains Common Stock.  Each stockholder's aggregate tax basis
in the shares of Plains common stock received in the merger will be the same as
such stockholder's aggregate tax basis in the shares of 3TEC common stock
surrendered in the merger, (1) increased by any gain

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recognized, (2) decreased by any cash received, and (3) further decreased by
the amount of any tax basis allocable to any fractional share interest for
which cash is received.

    Holding Period for Plains Common Stock.  The holding period of the shares
of Plains common stock received in the merger by a holder of shares of 3TEC
common stock will include the holding period of the shares of 3TEC common stock
that such stockholder surrendered in the merger.

    Cash Received in Lieu of a Fractional Share of Plains Common Stock.  A
holder of shares of 3TEC common stock that receives cash in lieu of a
fractional share of Plains common stock generally will recognize gain or loss
equal to the difference between the amount of cash received and such
stockholder's tax basis in the shares of 3TEC common stock allocable to the
fractional share. That gain or loss generally will constitute capital gain or
loss.

    Exercise of Appraisal Rights by 3TEC Stockholders.  In addition, a holder
of shares of 3TEC common stock who exercises appraisal rights and receives a
cash payment with respect to those shares generally will recognize gain or loss
equal to the difference between the amount of cash received and such
stockholder's tax basis in those shares. That gain or loss also generally will
constitute capital gain or loss.

    Taxation of Capital Gain or Loss.  In the case of an individual
stockholder, any of this capital gain generally will be subject to a maximum
U.S. federal income tax rate of 20% if the individual has held the shares of
3TEC common stock for more than 12 months on the date of the merger. The
deductibility of capital losses is subject to limitations for both individuals
and corporations.

    Reporting Requirements.  3TEC stockholders receiving Plains common stock in
the merger should file a statement with their United States federal income tax
returns setting forth their adjusted tax basis in the 3TEC common stock
exchanged in the merger and the fair market value of the Plains common stock
and the amount of cash received in the merger. In addition, 3TEC stockholders
will be required to retain permanent records of these facts relating to the
merger.

Tax Consequences to Holders of 3TEC Preferred Stock

    It is anticipated that 3TEC will elect to redeem all of the 3TEC preferred
stock prior to the merger. If, however, 3TEC does not redeem such stock,
holders of 3TEC preferred stock will receive solely cash in the merger. Such
holders will recognize ordinary dividend income to the extent of any cash
allocable to accrued and unpaid dividends on the 3TEC preferred stock.
Additionally, a holder of 3TEC preferred stock will recognize gain to the
extent the amount of cash received by such holder of 3TEC preferred stock
exceeds the basis in the 3TEC preferred stock. Such gain will be capital gain
unless the receipt of cash has the effect of a distribution of a dividend as
described above for holders of 3TEC common stock in "Material U.S. Federal
Income Tax Consequences--Tax Consequences to Holders of 3TEC Common
Stock--Recognition of Gain or Loss."

Tax Consequences to Plains and Plains Merger Subsidiary

    No gain or loss will be recognized by Plains or Plains merger subsidiary in
the merger. Plains merger subsidiary's tax basis in the assets acquired from
3TEC pursuant to the merger will be the same as 3TEC's tax basis in those
assets immediately prior to the merger. Plains merger subsidiary's holding
period for the assets acquired from 3TEC pursuant to the merger will include
3TEC's holding period for those assets.

    The merger will not adversely affect the tax treatment of the spin-off of
Plains from Plains Resources under Section 355 of the Code as ruled by the
Internal Revenue Service in its private letter rulings to Plains Resources
dated November 5, 2002 and May 22, 2002.

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Tax Consequences to 3TEC

    No gain or loss will be recognized by 3TEC in the merger.

Tax Consequences to Plains Stockholders

    Because shares of Plains common stock will remain unchanged in the merger,
the merger will not cause Plains stockholders to recognize any gain or loss.

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           SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

                                    Plains

    The following table sets forth consolidated and combined financial
information since January 1, 1997 that have been derived from (i) the audited
combined statements of income for Plains for each of the years ended December
31, 2001, 2000, and 1999 and combined balance sheets for Plains as of December
31, 2001 and 2000, (ii) the unaudited combined statements of income for Plains
for each of the years ended December 31, 1998 and 1997 and unaudited combined
balance sheets for Plains as of December 31, 1999, 1998 and 1997 and (iii) the
unaudited consolidated statements of income and balance sheets of Plains as of
and for each of the nine months ended September 30, 2002 and 2001. You should
read this information in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our historical combined
financial statements and notes included elsewhere in this document. The
information set forth below is not necessarily indicative of Plains' future
results.

<TABLE>
<CAPTION>
                                 Nine Months Ended
                                   September 30,                 Year Ended December 31,
                                ------------------  ------------------------------------------------
                                  2002      2001      2001      2000      1999      1998      1997
                                --------  --------  --------  --------  --------  --------  --------
                                                       (Amounts in thousands)
<S>                             <C>       <C>       <C>       <C>       <C>       <C>       <C>
Statement of Income Data:
Revenues:
   Oil and liquids............. $129,563  $133,957  $174,895  $126,434  $102,390  $ 81,416  $ 81,381
   Gas.........................    7,130    26,870    28,771    16,017     5,095     4,091     3,805
   Other operating
    revenues...................       27       468       473        --        --        --        --
                                --------  --------  --------  --------  --------  --------  --------
      Total revenues...........  136,720   161,295   204,139   142,451   107,485    85,507    85,186
                                --------  --------  --------  --------  --------  --------  --------
Costs and Expenses:
   Production expenses.........   56,826    47,995    63,795    56,228    50,527    42,823    36,571
   General and
    administrative.............    7,362     7,074    10,210     6,308     4,367     3,218     2,724
   Depreciation, depletion
    and amortization...........   21,262    16,999    24,105    18,859    13,329    13,901    10,453
   Reduction of carrying cost
    of oil and gas
    properties(1)..............       --        --        --        --        --    42,920        --
                                --------  --------  --------  --------  --------  --------  --------
      Total costs and
       expenses................   85,450    72,068    98,110    81,395    68,223   102,862    49,748
                                --------  --------  --------  --------  --------  --------  --------
Income (loss) from
 operations....................   51,270    89,227   106,029    61,056    39,262   (17,355)   35,438
Expenses of terminated public
 equity offering...............   (1,700)       --        --        --        --        --        --
Interest expense...............  (14,427)  (12,942)  (17,411)  (15,885)  (14,912)   (8,828)   (5,113)
Interest and other income......      114       459       463       343        87        74        88
                                --------  --------  --------  --------  --------  --------  --------
Income (loss) before income
 taxes and cumulative effect
 of accounting change..........   35,257    76,744    89,081    45,514    24,437   (26,109)   30,413
Income tax (expense) benefit:
   Current.....................   (5,660)   (5,180)   (6,014)   (2,431)     (505)   (4,435)  (10,916)
   Deferred....................   (8,097)  (24,443)  (28,374)  (14,334)   (4,827)   11,510    (1,364)
                                --------  --------  --------  --------  --------  --------  --------
Income (loss) before
 cumulative effect of
 accounting change.............   21,500    47,121    54,693    28,749    19,105   (19,034)   18,133
Cumulative effect of
 accounting change, net of
 tax benefit(2)................       --    (1,522)   (1,522)       --        --        --        --
                                --------  --------  --------  --------  --------  --------  --------
Net income (loss).............. $ 21,500  $ 45,599  $ 53,171  $ 28,749  $ 19,105  $(19,034) $ 18,133
                                ========  ========  ========  ========  ========  ========  ========
</TABLE>

                                      86

<PAGE>

<TABLE>
<CAPTION>
                                          Nine Months Ended
                                            September 30,                Year Ended December 31,
                                         ------------------  ----------------------------------------------
                                           2002      2001      2001     2000      1999     1998      1997
                                         --------  --------  -------- --------  -------- --------  --------
                                                    (Amounts in thousands, except per share data)
<S>                                      <C>       <C>       <C>      <C>       <C>      <C>       <C>
Net income (loss) per common share:
   Basic and diluted.................... $   0.89  $   1.89  $   2.20 $   1.19  $   0.79 $  (0.79) $   0.75
Weighted averaged common shares
 outstanding:
   Basic and diluted(3).................   24,200    24,200    24,200   24,200    24,200   24,200    24,200
Other Financial Data:
Net cash provided by operating
 activities............................. $ 58,353  $102,071  $116,808 $ 79,464  $  4,609 $ 37,182  $ 27,652
Net cash used in investing activities...   53,644   (99,453)  125,880   70,871    59,362   91,838    95,780
Net cash provided by (used in) financing
 activities.............................   (3,956)   (3,151)    8,549  (13,132)   59,690   54,587    68,158
Oil and gas capital expenditures........   53,589    99,346   125,753   70,505    59,167   91,693    95,778
EBITDA(4)...............................   70,832   106,226   130,134   79,915    52,591   39,466    45,891
Balance Sheet Data (end of period):
Cash and cash equivalents............... $    766  $     13  $     13 $    536  $  5,075 $    138  $    207
Working capital.........................  (50,500)      932       932   (6,861)   16,169  (12,148)   (7,142)
Total assets............................  541,056   516,755   516,755  401,035   360,964  277,792   239,712
Total debt..............................  288,525     1,533   236,694  227,040   240,172  180,483   122,331
Stockholders' / combined owners' equity.  120,127   180,087   180,087  111,032    82,283   63,177    85,776
</TABLE>
--------
(1)Noncash charge related to a ceiling test write-down of the capitalized costs
   of our proved oil and gas properties due to low oil prices at December 31,
   1998.
(2)Cumulative effect of adopting Statement of Financial Accounting Standards
   No. 133--"Accounting for Derivatives," or SFAS 133.
(3)Outstanding shares reflect the shares issued in September 2002 when Plains
   was capitalized.
(4)EBITDA means earnings before interest income and expenses, income taxes,
   depreciation, depletion and amortization and other income. EBITDA is not a
   measurement presented in accordance with generally accepted accounting
   principles, or GAAP, and should not be considered as an alternative to cash
   flow from operating activities as a measure of liquidity or net income as a
   measure of operating results in accordance with GAAP.
EBITDAis presented because Plains believes it provides additional information
      with respect to Plains' ability to meet its future debt service, capital
      expenditures and working capital requirements. When evaluating EBITDA,
      investors should consider, among other factors, (i) increasing or
      decreasing trends in EBITDA, (ii) whether EBITDA has remained at positive
      levels historically and (iii) how EBITDA compares to levels of interest
      expense. However, EBITDA does not necessarily indicate whether cash flow
      will be sufficient for such items as working capital requirements,
      capital expenditures or to react to changes in Plains' industry or to the
      economy in general, as certain functional or legal requirements of
      Plains' business may require Plains to use its available funds for other
      purposes. EBITDA, as presented herein, is not necessarily comparable to
      other similarly titled captions of other companies due to potential
      inconsistencies in the method of calculation.
EBITDAincludes amortization of hedge premiums of $0.6 million and $3.1 million
      for the nine months ended September 30, 2002 and 2001, respectively, and
      $3.2 million and $0.9 million for the years ended December 31, 2001 and
      2000, respectively. EBITDA is calculated as follows:

<TABLE>
<CAPTION>
                                              Nine Months
                                            Ended September
                                                  30,                    Year Ended December 31,
                                           -----------------  ---------------------------------------------
                                             2002     2001      2001      2000     1999     1998      1997
                                           -------  --------  --------  -------  -------  --------  -------
                                                                (Amounts in thousands)
<S>                                        <C>      <C>       <C>       <C>      <C>      <C>       <C>
Income before income taxes and cumulative
 effect of accounting change.............. $35,257  $ 76,744  $ 89,081  $45,514  $24,437  $(26,109) $30,413
Interest and other income.................    (114)     (459)     (463)    (343)     (87)      (74)     (88)
Interest expense..........................  14,427    12,942    17,411   15,885   14,912     8,828    5,113
Depreciation, depletion and amortization..  21,262    16,999    24,105   18,859   13,329    13,901   10,453
Reduction of carrying value of oil and gas
 properties...............................      --        --        --       --       --    42,920       --
                                           -------  --------  --------  -------  -------  --------  -------
EBITDA.................................... $70,832  $106,226  $130,134  $79,915  $52,591  $ 39,466  $45,891
                                           =======  ========  ========  =======  =======  ========  =======
</TABLE>

                                      87

<PAGE>

                                     3TEC

    The following table sets forth 3TEC's summary consolidated and combined
historical financial information that has been derived from (i) the audited
combined statements of income and cash flows for 3TEC's business for each of
the years ended December 31, 2001, 2000, 1999, 1998 and 1997, (ii) the
unaudited consolidated statements of income and cash flows for 3TEC for the
nine months ended September 30, 2002 and 2001 and (iii) 3TEC's unaudited
consolidated balance sheet as of September 30, 2002. You should read this
financial information in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations of 3TEC" and 3TEC's financial
statements and notes thereto incorporated by reference in this document.

<TABLE>
<CAPTION>
                                             Nine Months Ended
                                               September 30,                Year Ended December 31,(1)
                                            ------------------  -------------------------------------------------
                                              2002      2001       2001      2000      1999      1998      1997
                                            --------  --------  ---------  --------  --------  --------  --------
                                                        (Amounts in thousands, except per share data)
                                                (unaudited)                         (audited)
<S>                                         <C>       <C>       <C>        <C>       <C>       <C>       <C>
Statement of Income Data:
Revenues:
   Oil, gas and plant income............... $ 70,842  $ 97,690  $ 116,080  $102,148  $ 20,088  $ 15,011  $ 10,213
   Gain (loss) on sale of properties.......      (74)    3,419        815       800     1,048     1,953         8
   Gain (loss) on derivative fair value....   (9,314)       --      3,081        --        --        --        --
   Gain (loss) on derivative settlements...   (1,931)       --        162        --        --        --        --
   Other...................................      210       597        836       813     1,020       738     1,212
                                            --------  --------  ---------  --------  --------  --------  --------
      Total Revenues.......................   59,733   101,706    120,974   103,761    22,156    17,702    11,433
Costs and Expenses:
   Production expenses.....................   18,702    21,147     26,670    23,179     7,788     7,801     3,849
   Geological and geophysical..............    1,085       545      1,172       666       473       878       223
   Dry hole and impairments................    2,685     1,667     12,261        29     3,103     4,668    22,267
   Surrendered and expired acreage.........      749        --      7,875        --        --        --        --
   Stock compensation (general and
    administrative)........................      720        --         --        --       730       266       202
   Interest................................    3,043     5,619      6,773     7,556     3,205     1,972       671
   Severance payments......................       --        --         --        --       624        --        --
   Compensation plan payments..............       --        --         --        --       293        --        --
   General and administrative..............    6,928     5,159      6,991     6,141     4,122     4,266     2,361
   Depreciation, depletion and
    amortization...........................   27,237    20,544     30,983    19,779     6,691     7,116     4,567
   Other...................................      380        --        250        --        --       139       317
                                            --------  --------  ---------  --------  --------  --------  --------
      Total Expenses.......................   61,529    54,681     92,975    57,350    27,029    27,106    34,457
                                            --------  --------  ---------  --------  --------  --------  --------
Income (loss) before income taxes, minority
 interest and dividends to preferred
 stockholders..............................   (1,796)   47,025     27,999    46,411    (4,873)   (9,404)  (23,024)
Minority interest..........................       --       448        511       305        (2)       15        --
Income tax (benefit) expense...............     (702)   18,105     10,640    14,442    (1,443)   (2,830)   (7,445)
                                            --------  --------  ---------  --------  --------  --------  --------
Net income (loss).......................... $ (1,094) $ 28,472  $  16,848  $ 31,664  $ (3,432) $ (6,589) $(15,579)
Dividends to preferred stockholders........      551       562        710     1,488       574        68       604
                                            --------  --------  ---------  --------  --------  --------  --------
Net income (loss) attributable to common
 shares.................................... $ (1,645) $ 27,910  $  16,138  $ 30,176  $ (4,006) $ (6,657) $(16,184)
                                            ========  ========  =========  ========  ========  ========  ========
Basic net income (loss) per common share... $  (0.10) $   1.89  $    1.06  $   2.91  $  (1.14) $  (2.48) $  (4.76)
                                            ========  ========  =========  ========  ========  ========  ========
Diluted net income (loss) per common
 share..................................... $  (0.10) $   1.52  $    0.91  $   2.28  $  (1.14) $  (2.48) $  (4.76)
                                            ========  ========  =========  ========  ========  ========  ========
Weighted averaged common shares
 outstanding:
   Basic...................................   16,537    14,791     15,170    10,383     3,520     2,683     3,397
                                            ========  ========  =========  ========  ========  ========  ========
   Diluted.................................   16,537    19,072     18,969    13,895     3,520     2,683     3,397
                                            ========  ========  =========  ========  ========  ========  ========
Other Financial Data:
EBITDAX(2)................................. $ 32,044  $ 74,803  $  78,352  $ 73,628  $  7,579  $  4,492  $  3,492
Net cash provided by operating activities..   31,460    80,496     89,780    44,468     1,401     2,068     3,701
Net cash used in investing activities......  (34,329)  (97,724)  (122,519)  (83,771)  (80,372)  (16,958)  (14,533)
Net cash provided by (used in) financing
 activities................................  (10,941)   32,334     46,065    37,598    84,072    14,343    11,863
Oil and gas capital expenditures...........   36,931   136,039    167,414   105,906    94,402    34,058    48,068
</TABLE>

                                      88

<PAGE>

<TABLE>
<CAPTION>
                          Nine Months Ended
                            September 30,            Year Ended December 31,(1)
                          ------------------ ------------------------------------------
                            2002      2001     2001     2000     1999    1998    1997
                          --------  -------- -------- -------- -------- ------- -------
                                  (Amounts in thousands, except per share data)
                             (unaudited)                     (audited)
<S>                       <C>       <C>      <C>      <C>      <C>      <C>     <C>
Balance Sheet Data:
Cash and cash equivalents $  3,952  $ 19,542 $ 17,762 $  4,436 $  6,141 $ 1,040 $ 1,587
Working capital (deficit)   (2,378)   12,913   14,343   15,242    7,001     139   1,344
Total assets.............  338,902   371,430  363,038  254,764  149,243  57,941  37,253
Total debt...............   97,000    97,374  108,000   76,224  100,724  27,455  11,090
Stockholders' equity.....  180,593   192,872  180,712  149,595   38,112  22,558  19,866
</TABLE>
--------
/(1)/Certain reclassifications of prior period amounts have been made to
    conform to the current presentation.
/(2)/EBITDAX represents earnings before interest income and expense, income
     taxes, depreciation, depletion and amortization, impairment expense, dry
     hole expense, geological and geophysical expense and minority interest.
     3TEC believes that EBITDAX may provide additional information about its
     ability to meet its future requirements for debt service, capital
     expenditures and working capital. EBITDAX is a financial measure commonly
     used in the oil and gas industry and should not be considered in isolation
     or as a substitute for net income, operating income, cash flows from
     operating activities or any other measure of financial performance
     presented in accordance with GAAP or as a measure of 3TEC's profitability
     or liquidity. Because EBITDAX excludes some, but not all, items that
     affect net income and this measure may vary among companies, the EBITDAX
     data presented above may not be comparable to similarly titled measures of
     other companies. EBITDAX is calculated as follows:

<TABLE>
<CAPTION>
                                                  Nine Months
                                                     Ended
                                                 September 30,              Year Ended December 31,
                                               ----------------  --------------------------------------------
                                                 2002     2001     2001     2000     1999     1998     1997
                                               -------  -------  -------  -------  -------  -------  --------
                                                                   (Amounts in thousands)
<S>                                            <C>      <C>      <C>      <C>      <C>      <C>      <C>
Income (loss) before income taxes and minority
 interest..................................... $(1,796) $47,025  $27,999  $46,411  $(4,873) $(9,404) $(23,024)
Interest and other income.....................    (210)    (597)    (836)    (813)  (1,020)    (738)   (1,212)
Interest expense..............................   3,043    5,619    6,773    7,556    3,205    1,972       671
Depreciation, depletion and amortization......  27,237   20,544   30,983   19,779    6,691    7,116     4,567
Dry hole and impairments......................   2,685    1,667   12,261       29    3,103    4,668    22,267
Geological and geophysical....................   1,085      545    1,172      666      473      878       223
                                               -------  -------  -------  -------  -------  -------  --------
EBITDAX....................................... $32,044  $74,803  $78,352  $73,628  $ 7,579  $ 4,492  $  3,492
                                               =======  =======  =======  =======  =======  =======  ========
</TABLE>

                                      89

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY
             UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

    The following unaudited pro forma consolidated statements of income for the
nine months ended September 30, 2002 and the year ended December 31, 2001 have
been prepared based on the historical consolidated statements of income of
Plains, prior to the reorganization discussed below known as the Upstream
Subsidiaries of Plains Resources Inc., and 3TEC under the assumptions set forth
in the accompanying footnotes. The unaudited pro forma consolidated balance
sheet at September 30, 2002 has been prepared based on the historical
consolidated balance sheet of Plains under the assumptions set forth in the
accompanying footnotes. The reorganization and the debt issuance transactions
described below are reflected in the historical consolidated balance sheet of
Plains at September 30, 2002.

    On July 3, 2002, as provided in the Separation Agreement, Plains Resources
transferred to Plains (previously known as Stocker Resources L.P.) 100% of the
capital stock of Arguello Inc., Plains Illinois, Inc., PMCT, Inc. and Plains
Resources International Inc. (all referred to as Upstream Subsidiaries in the
historical combined financial statements) and all amounts payable to it by
Plains and its subsidiary companies. These transactions are referred to as the
"reorganization". As part of the reorganization, Plains was converted into a
Delaware corporation on September 18, 2002. The effect of the reorganization is
reflected in the Reorganization, Debt Issue and Spin-off Adjustments in the
unaudited pro forma consolidated statements of income.

    On July 3, 2002, Plains issued $200.0 million of 8.75% senior subordinated
notes due 2012 (the "8.75% Notes") at an issue price of 98.376%. Also on July
3, Plains entered into a $300.0 million revolving credit facility (the "Plains
credit facility") that provides for a borrowing base of $225.0 million and made
initial borrowings of $117.6 million. On July 3, Plains distributed the $195.3
million net proceeds from the 8.75% Notes and $116.7 million of the initial
borrowings under the Plains credit facility to Plains Resources. The effect of
these transactions is reflected in the Reorganization, Debt Issue and Spin-off
Adjustments in the unaudited pro forma consolidated statements of income.

    On December 18, 2002 Plains Resources distributed all of the issued and
outstanding shares of Plains common stock to the holders of Plains Resources
common stock on the basis of one share of Plains common stock for every one
share of Plains Resources common stock held as of the close of business on
December 11, 2002 (the "spin-off"). Prior to the spin-off Plains Resources made
a $40.0 million cash capital contribution to Plains and paid a $7.2 million
note payable that was reflected in Plains September 30, 2002 consolidated
balance sheet as a contribution receivable. In addition, prior to the spin-off
Plains Resources transferred to Plains certain assets and Plains assumed
certain liabilities of Plains Resources, primarily related to land, unproved
oil and gas properties, office equipment and pension obligations. The effect of
these transactions is reflected in the Reorganization, Debt Issue and Spin-off
Adjustments in the unaudited pro forma consolidated statements of income and in
the Spin-off Adjustments in the unaudited pro forma consolidated balance sheet.

    Prior to July 2002 certain of Plains' operations were conducted by Stocker
Resources L.P., a limited partnership of which Plains Resources and one of its
subsidiaries were the limited and general partners. As a result, when the
spin-off occurred the tax basis of certain assets and liabilities related to
such operations were retained by Plains Resources. Accordingly, the deferred
tax liability of Plains increased by $3.7 million and stockholders' equity
decreased by a corresponding amount to reflect the effect of the tax basis that
was retained by Plains Resources for tax reporting purposes. This transaction,
which had no effect on the unaudited pro forma consolidated statements of
income, is included in the Spin-off Adjustments in the unaudited pro forma
consolidated balance sheet.

                                      90

<PAGE>

    Historically, general and administrative expenses consist of our direct
expenses plus amounts allocated from Plains Resources for various operational,
financial, accounting and administrative services provided to us. We estimate
that as a result of the reorganization and the spin-off, our annual general and
administrative expenses will increase by approximately $4.6 million over the
historical amount for the year ended December 31, 2001 reflecting the
incremental costs of operating as a separate, publicly-held company.

    On February 3, 2003 Plains and 3TEC Energy Corporation announced they had
entered into a definitive agreement pursuant to which Plains will acquire 3TEC
for a combination of cash and stock. Under the terms of the agreement 3TEC
stockholders will receive $8.50 in cash and 0.85 shares of Plains common stock
for each share of 3TEC common stock, subject to certain adjustments based on
Plains' share price prior to closing. This transaction will be accounted for by
Plains using the purchase method of accounting. The effect of this transaction
is reflected in the Merger Adjustments in the unaudited pro forma consolidated
financial statements.

    The unaudited pro forma consolidated statements of income for the nine
months ended September 30, 2002 and the year ended December 31, 2001 assume the
Reorganization, Debt Issuance, Spin-off and Merger transactions occurred on
January 1, 2001. The unaudited pro forma consolidated balance sheet at
September 30, 2002 assumes such transactions occurred on that date We believe
the assumptions used provide a reasonable basis for presenting the significant
effects directly attributable to such transactions. The unaudited pro forma
consolidated financial statements do not purport to represent what our results
of operations would have been if such transactions had occurred on such dates.
These unaudited pro forma consolidated financial statements should be read in
conjunction with the Consolidated Financial Statements of Plains Exploration &
Production Company, the Combined Financial Statements of the Upstream
Subsidiaries of Plains Resources Inc., the Consolidated Financial Statements of
3TEC Energy Corporation and Management's Discussion and Analysis of Financial
Condition and Results of Operations of such companies, included elsewhere
herein.

                                      91

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

             UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
                 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
               (in thousands of dollars, except per share data)

<TABLE>
<CAPTION>
                                                 Reorganization,
                                                  Debt Issuance                                              Plains
                                        Plains    and Spin-off       Plains       3TEC        Merger        Proforma
                                      Historical   Adjustments     Proforma(8) Historical   Adjustments     Adjusted
                                      ---------- ---------------   ----------- ---------- -----------       --------
<S>                                   <C>        <C>               <C>         <C>        <C>               <C>
Revenues
    Oil, gas and plant revenues......  $136,693     $     --        $136,693    $70,842    $   (116)/(9)/   $207,419
    Gain (loss) on sale of
     properties......................        --           --              --        (74)         74/(14)/         --
    Gain (loss) on derivative fair
     value...........................        --           --              --     (9,314)      9,314/(15)/         --
    Gain (loss) on derivative
     settlements.....................        --           --              --     (1,931)      1,931/(15)/         --
                                                                                               (141)/(14)/
    Other operating revenues.........        27           --              27        210         (69)/(15)/        27
                                       --------     --------        --------    -------    --------         --------
                                        136,720           --         136,720     59,733      10,993          207,446
                                       --------     --------        --------    -------    --------         --------
Costs and Expenses
    Production expenses..............    56,826           --          56,826     18,702         188/(15)/     75,716
    Geological and geophysical.......        --           --              --      1,085      (1,085)/(14)/        --
    Dry hole and impairments.........        --           --              --      2,685      (2,685)/(14)/        --
    Surrendered and expired
     acreage.........................        --           --              --        749        (749)/(14)/        --
                                                                                               (535)/(14)/
    General and administrative.......     7,362           --           7,362      7,648          60/(15)/     14,535
                                                                                            (26,193)/(10)/
    Depreciation, depletion and                         (218)/(2)/                           17,747/(11)/
      amortization...................    21,262          679/(3)/     21,723     27,237        (495)/(12)/    40,019
                                       --------     --------        --------    -------    --------         --------
                                         85,450          461          85,911     58,106     (13,747)         130,270
                                       --------     --------        --------    -------    --------         --------
Income from Operations...............    51,270         (461)         50,809      1,627      24,740           77,176
Other Income (Expense)
    Expenses of terminated public
     equity offering.................    (1,700)          --          (1,700)        --          --           (1,700)
                                                       9,357/(1)/
                                                       4,982/(2)/
                                                     (15,796)/(4)/                            3,043/(12)/
    Interest expense.................   (14,427)       1,416/(5)/    (14,468)    (3,043)     (8,489)/(13)/   (22,957)
    Loss on derivative fair value....        --           --              --         --      (9,314)/(15)/_   (9,314)
    Loss on derivative
     settlements.....................        --           --              --         --      (1,931)/(15)/    (1,931)
    Interest and other income........                                                           132/(14)/
      (expense)......................       114           --             114       (380)        317/(15)/        183
                                       --------     --------        --------    -------    --------         --------
Income Before Income Taxes               35,257         (502)         34,755     (1,796)      8,498           41,457
    Income tax benefit
     (expense).......................   (13,757)         195/(7)/    (13,562)       702      (3,723)/(16)/   (16,583)
                                       --------     --------        --------    -------    --------         --------
Net Income (loss)....................  $ 21,500     $   (307)       $ 21,193    $(1,094)   $  4,775         $ 24,874
                                       ========     ========        ========    =======    ========         ========
Earnings Per Share--basic and
 diluted.............................  $   0.89                     $   0.88                                $   0.62
                                       ========                     ========                                ========
Average Shares Outstanding...........    24,200         (186)/(6)/    24,014                 15,923/(17)/     39,937
                                       ========     ========        ========               ========         ========
</TABLE>


                                                  (footnotes on following page)

                                      92

<PAGE>

--------

Reorganization, Debt Issuance and Spin-off Adjustments

Reorganization

(1) Reflects the reversal of historical interest expense related to amounts
    payable to Plains Resources since such amounts payable were contributed to
    Plains under the terms of the Separation Agreement.

Debt Issuance

(2) Reflects the reversal of historical amortization of debt issue costs and
    interest expense.
(3) Reflects amortization of debt issue costs for the period, on a straight
    line basis that approximates the interest method, over the life of the debt
    agreements.
(4) Reflects interest expense for the period on the 8.75% Notes ($13.3 million)
    and the Plains credit facility ($4.0 million). Interest expense with
    respect to the 8.75% Notes includes $0.2 million of amortization of
    original issue discount. Interest expense with respect to the Plains credit
    facility is computed based on Plains' average borrowing rate under the
    terms of the agreement (4.0%). A 1/8 of 1% change in the interest rate with
    respect to the Plains credit facility would result in a $0.1 million change
    in interest expense. Pro forma amount reflects interest expense after
    capitalization of $1.5 million.

Spin-off

(5) Reflects the reversal of interest expense for the period on debt retired
    using the proceeds from $47.2 million of capital contributions by Plains
    Resources. Interest expense is based on Plains' average borrowing rate
    under the Plains credit facility (4.0%). A 1/8 of 1% change in the interest
    rate would result in less than a $0.1 million change in interest expense.
(6) Reflects 141,000 shares contributed to Plains by Plains Resources prior to
    spin-off and 45,000 restricted shares distributed in the spin-off.

Income Taxes

(7) Reflects the income tax effect of (i) the Reorganization Adjustments ($3.6
    million expense); (ii) the Debt Issuance Adjustments ($4.4 million
    benefit); and (iii) the Spin-off Adjustments ($0.6 million expense) based
    on Plains' historical effective income tax rate of 39%.

Stock Appreciation Rights

(8) When the spin-off occurred, Plains employees holding options to acquire
    Plains Resources common stock received an equal number of stock
    appreciation rights, or SARs, with respect to Plains common stock. The
    exercise price of the SARs is based on the relationship between the price
    of Plains Resources common stock and Plains common stock at the time of the
    spin-off. With respect to the SARs that were in-the-money at the time of
    the spin-off, Plains recognized an initial accounting charge of $3.7
    million in December 2002 as compensation expense equal to the aggregate
    in-the-money value of the SARs deemed vested at that time. Such charge is
    not reflected in the unaudited pro forma consolidated financial statements.

    SARs are subject to variable accounting treatment. As a result, at the end
    of each quarter, Plains will compare the closing price of Plains common
    stock to the exercise price of each SAR. To the extent the closing price
    exceeds the exercise price of each SAR that is vested or for accounting
    purposes is deemed vested during the incremental period, Plains will
    recognize such excess as an accounting charge to the extent such excess had
    not been recognized in previous quarters. If such excess is less than the
    extent to which accounting charges had been recognized in previous
    quarters, Plains will recognize the difference as income in the quarter.
    These quarterly charges and income will make Plains' results of operations
    depend, in part on fluctuations in the price of Plains common stock and
    could have a material adverse effect on Plains' results of operations.

                                      93

<PAGE>

Merger Adjustments

(9) Reflects the $0.20 per barrel marketing fee Plains pays to Plains All
    American Pipeline, L.P.
(10)Reflects the reversal of 3TEC's historical DD&A expense related to oil and
    gas properties.
(11)Reflects the effect of the merger on DD&A expense on oil and gas properties
    under the full cost method.
(12)Reflects reversal of 3TEC's amortization of deferred debt issue costs and
    interest expense with respect to 3TEC's debt that was retired in the merger.
(13)Reflects interest expense for the period on $283.1 million of debt incurred
    in connection with the acquisition. Interest expense is based on our
    average borrowing rate under the Plains credit facility (4.0%). A 1/8 of 1%
    change in the interest rate would result in a $0.3 million change in
    interest expense.
(14)Reflects the reversal of certain 3TEC income items that are charged or
    credited to income under the successful efforts method of accounting that
    are capitalized under the full cost method of accounting.
(15)Reflects the reclassification of certain 3TEC revenue and expense items to
    conform to the Plains presentation.
(16)Reflects the adjustment of income tax expense to a post-merger effective
    rate of 40.0%.
(17)Reflects common shares issued in the merger.

                                      94

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

             UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
                     FOR THE YEAR ENDED DECEMBER 31, 2001
               (in thousands of dollars, except per share data)

<TABLE>
<CAPTION>
                                                 Reorganization,
                                                  Debt Issuance                                             Plains
                                        Plains    and Spin-off       Plains       3TEC        Merger       Proforma
                                      Historical   Adjustments     Proforma(7) Historical   Adjustments    Adjusted
                                      ---------- ---------------   ----------- ---------- -----------      --------
<S>                                   <C>        <C>               <C>         <C>        <C>              <C>
Revenues
    Oil, gas and plant revenues......  $203,666     $     --        $203,666    $116,080   $   (190)/(8)/  $319,556
    Gain (loss) on sale of
     properties......................        --           --              --         815       (815)/(13)/       --
    Gain (loss) on derivative fair
     value...........................        --           --              --       3,081     (3,081)/(14)/       --
    Gain (loss) on derivative
     settlements.....................        --           --              --         162       (162)/(14)/       --
                                                                                               (459)/(13)/
    Other operating revenues.........       473           --             473         836       (377)/(14)/      473
                                       --------     --------        --------    --------   --------        --------
                                        204,139           --         204,139     120,974     (5,084)        320,029
                                       --------     --------        --------    --------   --------        --------
Costs and Expenses
    Production expenses..............    63,795           --          63,795      26,670         --          90,465
    Geological and geophysical.......        --           --              --       1,172     (1,172)/(13)/       --
    Dry hole and impairments.........        --           --              --      12,261    (12,261)/(13)/       --
    Surrendered and expired
     acreage.........................        --           --              --       7,875     (7,875)/(13)/       --
    General and administrative.......    10,210           --          10,210       6,991       (529)/(13)/   16,672
                                                                                            (29,975)/(9)/
    Depreciation, depletion and                                                              24,468/(10)/
      amortization...................    24,105          905/(2)/     25,010      30,983       (672)/(11)/   49,814
                                       --------     --------        --------    --------   --------        --------
                                         98,110          905          99,015      85,952    (28,016)        156,951
                                       --------     --------        --------    --------   --------        --------
Income from Operations...............   106,029         (905)        105,124      35,022     22,932         163,078
Other Income (Expense)
                                                      17,216/(1)/
                                                     (20,982)/(3)/                            6,773/(11)/
    Interest expense.................   (17,411)       1,888/(4)/    (19,289)     (6,773)   (11,319)/(12)/  (30,608)
    Gain on derivative fair value....        --           --              --          --      3,081/(14)/     3,081
    Gain on derivative
     settlements.....................        --           --              --          --        162/(14)/       162
    Interest and other income
     (expense).......................       463           --             463        (250)       377/(14)/       590
                                       --------     --------        --------    --------   --------        --------
Income Before Income Taxes
 and Minority Interest...............    89,081       (2,783)         86,298      27,999     22,006         136,303
    Minority interest................        --           --              --        (511)        --            (511)
    Income tax benefit
     (expense).......................   (34,388)       1,074/(6)/    (33,314)    (10,640)    (8,326)/(15)/  (52,280)
                                       --------     --------        --------    --------   --------        --------
Net Income...........................  $ 54,693     $ (1,709)       $ 52,984    $ 16,848   $ 13,680        $ 83,512
                                       ========     ========        ========    ========   ========        ========
Earnings Per Share--basic and
 diluted.............................  $   2.26                     $   2.21                               $   2.09
                                       ========                     ========                               ========
Average Shares Outstanding...........    24,200         (186)/(5)/    24,014                 15,923/(16)/    39,937
                                       ========     ========        ========               ========        ========
</TABLE>

                                                  (footnotes on following page)

                                      95

<PAGE>

--------
Reorganization, Debt Issuance and Spin-off Adjustments

Reorganization

(1) Reflects the reversal of historical interest expense related to amounts
    payable to Plains Resources since such amounts payable were contributed to
    Plains under the terms of the Separation Agreement.

Debt Issuance

(2) Reflects amortization of debt issue costs for the period, on a straight
    line basis that approximates the interest method, over the life of the debt
    agreements.
(3) Reflects interest expense for the period on the 8.75% Notes ($17.7 million)
    and the Plains credit facility ($5.3 million). Interest expense with
    respect to the 8.75% Notes includes $0.2 million of amortization of
    original issue discount. Interest expense with respect to the Plains credit
    facility is computed based on Plains' average borrowing rate under the
    terms of the agreement (4.0%). A 1/8 of 1% change in the interest rate with
    respect to the Plains credit facility would result in a $0.1 million change
    in interest expense. Pro forma amount reflects interest expense after
    capitalization of $2.0 million.

Spin-off

(4) Reflects the reversal of interest expense for the period on debt retired
    using the proceeds from $47.2 million of capital contributions by Plains
    Resources. Interest expense is based on our average borrowing rate under
    the PXP credit facility (4.0%). A 1/8 of 1% change in the interest rate
    would result in a $0.1 million change in interest expense.
(5) Reflects 141,000 shares contributed to Plains by Plains Resources prior to
    spin-off and 45,000 restricted shares distributed in the spin-off.

Income Taxes

(6) Reflects the income tax effect of (i) the Reorganization Adjustments ($6.6
    million expense); (ii) the Debt Issuance Adjustments ($8.4 million
    benefit); and (iii) the Spin-off Adjustments ($0.7 million expense) based
    on Plains' historical effective income tax rate of 38.6%.

Stock Appreciation Rights

(7) When the spin-off occurred, Plains' employees holding options to acquire
    Plains Resources common stock received an equal number of stock
    appreciation rights, or SARs, with respect to Plains common stock. The
    exercise price of the SARs is based on the relationship between the price
    of Plains Resources common stock and Plains common stock at the time of the
    spin-off. With respect to the SARs that were in-the-money at the time of
    the spin-off, Plains recognized an initial accounting charge of $3.7
    million in December 2002 as compensation expense equal to the aggregate
    in-the-money value of the SARs deemed vested at that time. Such charge is
    not reflected in the unaudited pro forma consolidated financial statements.

    SARs are subject to variable accounting treatment. As a result, at the end
    of each quarter, Plains will compare the closing price of Plains common
    stock to the exercise price of each SAR that is vested or for accounting
    purposes is deemed vested during the incremental period. To the extent the
    closing price exceeds the exercise price of each SAR, Plains will recognize
    such excess as an accounting charge to the extent such excess had not been
    recognized in previous quarters. If such excess is less than the extent to
    which accounting charges had been recognized in previous quarters, Plains
    will recognize the difference as income in the quarter. These quarterly
    charges and income will make Plains' results of operations depend, in part
    on fluctuations in the price of Plains common stock and could have a
    material adverse effect on Plains' results of operations.

                                      96

<PAGE>

Merger Adjustments

(8) Reflects the $0.20 per barrel marketing fee Plains pays to Plains All
    American Pipeline, L.P.
(9) Reflects the reversal of 3TEC's historical DD&A expense related to oil and
    gas properties.
(10)Reflects the effect of the merger on DD&A expense on oil and gas properties
    under the full cost method.
(11)Reflects reversal of 3TEC's amortization of deferred debt issue costs and
    interest expense with respect to 3TEC's debt that was retired in the merger.
(12)Reflects interest expense for the period on $283.1 million of debt incurred
    in connection with the acquisition. Interest expense is based on our
    average borrowing rate under the Plains credit facility (4.0%). A 1/8 of 1%
    change in the interest rate would result in a $0.4 million change in
    interest expense.
(13)Reflects the reversal of certain 3TEC income items that are charged or
    credited to income under the successful efforts method of accounting that
    are capitalized under the full cost method of accounting.
(14)Reflects the reclassification of certain 3TEC income items to conform to
    the Plains presentation.
(15)Reflects the adjustment of income tax expense to a post-merger effective
    rate of 38.5%.
(16)Reflects Plains common shares issued in the merger.

                                      97

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

                UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
                             AT SEPTEMBER 30, 2002
                           (in thousands of dollars)

<TABLE>
<CAPTION>
                                                                                                         Plains
                                                  Plains     Spin-off        Plains       Merger        Proforma
                                                Historical  Adjustments     Proforma  Adjustments/(4)/  Adjusted
                                                ---------- -----------     ---------  ---------------  ----------
<S>                                             <C>        <C>             <C>        <C>              <C>
                   ASSETS
Current Assets
    Cash and cash equivalents.................. $     766   $     --       $     766     $  3,952      $    4,718
    Accounts receivable--Plains All American
     Pipeline, L.P.............................    22,751         --          22,751           --          22,751
    Other accounts receivable and current
     assets....................................     4,778         --           4,778       12,263          17,041
    Commodity hedging contracts................       453         --             453           --             453
    Inventories................................     5,643         --           5,643           --           5,643
                                                ---------   --------       ---------     --------      ----------
                                                   34,391         --          34,391       16,215          50,606
                                                ---------   --------       ---------     --------      ----------
Property and Equipment, at cost
    Oil and gas properties--full cost method...
    Subject to amortization....................   612,515         --         612,515      331,187         943,702
    Not subject to amortization................    35,479      2,980/(1)/     38,459       65,267         103,726
    Other property and equipment...............     1,571        501/(1)/      2,072        2,619           4,691
                                                ---------   --------       ---------     --------      ----------
                                                  649,565      3,481         653,046      399,073       1,052,119
Allowance for depreciation, depletion and
 amortization..................................  (161,858)        --        (161,858)          --        (161,858)
                                                ---------   --------       ---------     --------      ----------
                                                  487,707      3,481         491,188      399,073         890,261
                                                ---------   --------       ---------     --------      ----------
Goodwill.......................................        --         --              --      113,317         113,317
                                                ---------   --------       ---------     --------      ----------
Other Assets...................................    18,958        750/(1)/     19,708          519          20,227
                                                ---------   --------       ---------     --------      ----------
                                                $ 541,056   $  4,231       $ 545,287     $529,124      $1,074,411
                                                =========   ========       =========     ========      ==========

       LIABILITIES AND STOCKHOLDERS'
                   EQUITY
Current Liabilities
    Accounts payable and other current
     liabilities............................... $  56,143   $     --       $  56,143     $ 12,360      $   68,503
    Commodity hedging contracts................    24,880         --          24,880        6,233          31,113
    Payable to Plains Resources Inc............     3,357         --           3,357           --           3,357
    Current maturities on long-term debt.......       511         --             511           --             511
                                                ---------   --------       ---------     --------      ----------
                                                   84,891         --          84,891       18,593         103,484
                                                ---------   --------       ---------     --------      ----------
Long-Term Debt.................................   288,014    (47,200)/(2)/   240,814      283,065         523,879
                                                ---------   --------       ---------     --------      ----------
Other Long-Term Liabilities....................     3,543        577/(1)/      4,120           --           4,120
                                                ---------   --------       ---------     --------      ----------
Deferred Income Taxes..........................    44,481      3,729/(3)/     48,210       76,581         124,791
                                                ---------   --------       ---------     --------      ----------
Stockholders' Equity
                                                              47,200/(2)/
                                                              (3,729)/(3)/
    Stockholders' equity.......................   134,730      3,847/(1)/    182,048      150,885         332,933
    Accumulated other comprehensive income
     (loss)....................................   (14,603)      (193)/(1)/   (14,796)          --         (14,796)
                                                ---------   --------       ---------     --------      ----------
                                                  120,127     47,125         167,252      150,885         318,137
                                                ---------   --------       ---------     --------      ----------
                                                $ 541,056   $  4,231       $ 545,287     $529,124      $1,074,411
                                                =========   ========       =========     ========      ==========
</TABLE>

                                                  (footnotes on following page)

                                      98

<PAGE>

--------

Spin-off Adjustments

(1) Reflects the transfer from Plains Resources to Plains of certain assets and
    the assumption by Plains of certain liabilities of Plains Resources,
    primarily related to land, unproved oil and gas properties, office
    equipment and pension obligations.
(2) Reflects a $40.0 million cash capital contribution from Plains Resources
    and the payment by Plains Resources of a $7.2 million note that was
    reflected in Plains' September 30, 2002 consolidated balance sheet as a
    contribution receivable. The proceeds were received in December 2002 and
    used to retire amounts outstanding under the Plains credit facility.
(3) Reflects the effect of the tax basis, related to certain operations
    conducted prior to July 2002, that was retained by Plains Resources for tax
    reporting purposes.

Merger Adjustments

(4) Reflects the estimated pro forma allocation of the purchase price using the
    purchase method of accounting. The following is a calculation and
    allocation of the purchase price to assets acquired and liabilities assumed
    based on their relative fair value:

<TABLE>
<S>                                                                      <C>
Calculation of Estimated Purchase Price (in thousands, except as noted):

   Number of shares to be issued........................................   15,923
   Average Plains common stock price per share.......................... $   9.47
                                                                         --------
   Fair value of common stock to be issued.............................. $150,885

   Cash to 3TEC stockholders............................................  174,065
   3TEC debt retired in the merger......................................   97,000
   Deferred tax liability related to the merger.........................   76,581
   Estimated merger costs...............................................   12,000
                                                                         --------
       Estimated purchase price......................................... $510,531
                                                                         ========

Allocation of Estimated Purchase Price:

   Current assets....................................................... $ 16,215
   Oil and gas properties and equipment.................................  396,454
   Other properties and equipment.......................................    2,619
   Goodwill.............................................................  113,317
   Other assets.........................................................      519
   Current liabilities..................................................  (18,593)
                                                                         --------
       Estimated purchase price......................................... $510,531
                                                                         ========
</TABLE>

    The number of Plains shares to be issued is based on 16.7 million shares of
    3TEC common stock outstanding plus the conversion on a cashless basis of
    outstanding options to purchase 3TEC common stock and outstanding warrants
    to purchase 3TEC common stock of $3.00 per share. The average Plains common
    stock price is based on the average closing prices of Plains common stock
    during the five business day period commencing two business days before the
    merger was announced.

                                      99

<PAGE>

    Under the terms of the merger agreement, 3TEC common stockholders will
receive $8.50 in cash and 0.85 shares of Plains common stock for each share of
3TEC common stock or equivalent. This exchange ratio is subject to an upward or
downward adjustment should the market price of Plains common stock fall below
$7.65 per share or rise above $12.35 per share, respectively. The following
table reflects the effect of changes in the Plains stock price (amounts in
millions, except per share):

<TABLE>
<CAPTION>
                                            Adjusted Earnings Per Share
                                            --------------------------
                       Value    Increase     Nine Months
         Plains          of   (Decrease) in     Ended       Year Ended
         Stock  Shares Shares Stockholders' September 30,  December 31,
         Price  Issued Issued    Equity         2002           2001
         ------ ------ ------ ------------- -------------  ------------
         <S>    <C>    <C>    <C>           <C>            <C>
         $ 9.47  15.9  $150.9        --         $0.62         $2.09
         $ 7.65  15.9   121.8     (29.1)         0.62          2.09
         $ 6.65  18.3   121.8     (29.1)         0.59          1.97
         $ 6.25  19.5   121.8     (29.1)         0.59          1.97
         $12.35  15.9   196.7      45.9          0.62          2.09
         $13.35  14.7   196.7      45.9          0.64          2.15
</TABLE>

    The increase or decrease in stockholders' equity is offset by a
corresponding change in goodwill.

    If the market price of Plains common stock falls below $6.25 per share,
Plains can terminate the merger or adjust the exchange ratio so that the stock
consideration remains the same as indicated above but the cash consideration
component, which will be funded with borrowings from a new credit facility,
would increase by approximately $19.5 million for every $1.00 decrease in the
market price below $6.25 per share. Accordingly, long-term debt would increase
by $19.5 million and stockholders' equity would decrease by $19.5 million and
related interest expense would increase by approximately $0.8 million (net
income of $0.5 million or an additional decrease in earnings per share of $.01
per share) for the year ended December 31, 2001 and $0.6 million (net income of
$0.4 million or an additional decrease in earnings per share of $.01 per share)
for the nine months ended September 30, 2002.

    Effective as of January 1, 2003, 3TEC will adopt SFAS 143 which requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred and a corresponding increase
in the carrying amount of the related long-lived asset. 3TEC is currently
assessing the impact of SFAS 143 and at this time cannot reasonably estimate
the effect of adopting this standard on their historical consolidated financial
statements. In connection with the merger and under the purchase method of
accounting, Plains will assume the asset retirement obligation and record the
fair value of the obligation as of the date of the acquisition. The effect of
recording the obligation is expected to have an increase to oil and natural gas
properties subject to amortization and other long-term liabilities.

    The significant factors which contribute to the recognition of goodwill,
include but are not limited to, providing a presence in East Texas and the Gulf
Coast regions that can be used to pursue other opportunities in these core
operating areas, improve financial flexibility with more efficient access to
lower cost capital and higher returns from synergies in having a broader and
more diversified reserve base and the ability to acquire an established
business with an assembled workforce. In addition, additional goodwill has been
recorded due to the application of purchase accounting rules which require that
deferred taxes be recorded at undiscounted amounts.

    The cash to 3TEC stockholders is based on $8.50 per share to be paid with
respect to 16.7 million shares of 3TEC common stock outstanding plus the
converted options to purchase 3TEC common stock and warrants to purchase 3TEC
common stock for $3.00 per share. 3TEC preferred stockholders will receive
$24.00 per share for each of the 0.6 million preferred shares outstanding.

                                      100

<PAGE>

The cash to pay the 3TEC stockholders and retire the 3TEC debt will be funded
by a new credit facility to be obtained by Plains.

The purchase price allocation is subject to changes in the fair value of 3TEC's
working capital and other assets and liabilities on the effective date and the
actual merger costs incurred.

                    PLAINS EXPLORATION & PRODUCTION COMPANY

                             PROFORMA RESERVE DATA

<TABLE>
<CAPTION>
                                                                                      Plains
                                                              Plains       3TEC      Proforma
-                                                          -----------  ---------  -----------
<S>                                                        <C>          <C>        <C>
Estimated Quantities of Oil & Gas Reserves at December 31,
  2001
   Proved Reserves
       Oil (MBbl).........................................     223,293      5,337      228,630
       Gas (MMcf).........................................      96,217    231,266      327,483
   Proved Developed Reserves
       Oil (MBbl).........................................     119,248      4,705      123,953
       Gas (MMcf).........................................      59,101    175,659      234,760
Standardized Measure of Discounted Future Net Cash Flows
  at December 31, 2001
   Future cash inflows.................................... $ 3,662,137  $ 628,537  $ 4,290,674
   Future development costs...............................    (305,261)   (54,418)    (359,679)
   Future production expense..............................  (1,714,132)  (188,783)  (1,902,915)
   Future income tax expense..............................    (537,252)   (58,051)    (595,303)
                                                           -----------  ---------  -----------
   Future net cash flows..................................   1,105,492    327,285    1,432,777
   Discounted at 10% per year.............................    (721,025)  (145,686)    (866,711)
                                                           -----------  ---------  -----------
   Standardized measure of discounted future net cash
     flows................................................ $   384,467  $ 181,599  $   566,066
                                                           ===========  =========  ===========
</TABLE>


                                      101

<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS OF PLAINS

    The following information should be read in connection with the information
contained in the financial statements and notes thereto included in this
document.

General

    Plains is an independent oil and gas company primarily engaged in the
upstream activities of acquiring, exploiting, developing and producing oil and
gas in the United States. Plains' core areas of operation are:

   .  onshore California, primarily in the LA Basin, and offshore California in
      the Point Arguello unit; and

   .  the Illinois Basin in southern Illinois and Indiana.

    Plains follows the full cost method of accounting whereby all costs
associated with property acquisition, exploration, exploitation and development
activities are capitalized. Plains' revenues are derived from the sale of oil,
gas and natural gas liquids. Plains recognizes revenues when its production is
sold and title is transferred. Plains' revenues are highly dependent upon the
prices of, and demand for, oil and gas. Historically, the markets for oil and
gas have been volatile and are likely to continue to be volatile in the future.
The prices Plains receives for its oil and gas and its levels of production are
subject to wide fluctuations and depend on numerous factors beyond its control,
including supply and demand, economic conditions, foreign imports, the actions
of OPEC, political conditions in other oil-producing countries, and
governmental regulation, legislation and policies. Under the SEC's full cost
accounting rules, Plains reviews the carrying value of its proved oil and gas
properties each quarter. These rules generally require that Plains price its
future oil and gas production at the oil and gas prices in effect at the end of
each fiscal quarter to determine a ceiling value of its properties. The rules
require a write-down if Plains' capitalized costs exceed the allowed "ceiling."
Plains has had no write-downs due to these ceiling test limitations since 1998.
Given the volatility of oil and gas prices, it is likely that Plains' estimate
of discounted future net revenues from proved oil and gas reserves will
fluctuate in the near term. If oil and gas prices decline significantly in the
future, write-downs of Plains' oil and gas properties could occur. Write-downs
required by these rules do not directly impact Plains' cash flows from
operating activities. Decreases in oil and gas prices have had, and will likely
have in the future, an adverse effect on the carrying value of Plains' proved
reserves and its revenues, profitability and cash flow.

    To manage its exposure to commodity price risks, Plains uses various
derivative instruments to hedge its exposure to oil sales price fluctuations.
Plains' hedging arrangements provide it protection on the hedged volumes if oil
prices decline below the prices at which these hedges are set. However, if oil
prices increase, ceiling prices in Plains' hedges may cause it to receive less
revenues on the hedged volumes than it would receive in the absence of hedges.
Plains does not currently have any gas hedges. Gains and losses from hedging
transactions are recognized as revenues when the associated production is sold.

    Plains' oil and gas production expenses include salaries and benefits of
field personnel, electric costs, maintenance costs, production, ad valorem and
severance taxes, and other costs necessary to operate its producing properties.
Depletion of capitalized costs of producing oil and gas properties is provided
using the units of production method based upon proved reserves. For the
purposes of computing depletion, proved reserves are redetermined as of the end
of each year and on an interim basis when deemed necessary. General and
administrative expenses consist primarily of salaries and

                                      102

<PAGE>

related benefits of administrative personnel, office rent, systems costs and
other administrative costs. Plains estimates that as a result of the
reorganization and spin-off discussed in the section "Questions and Answers
About the Merger," its annual general and administrative expenses will increase
by approximately $4.6 million over the amount reported for the year ended
December 31, 2001 reflecting the incremental costs of operating as a separate,
publicly-held company.

    Tax expense and effective tax rates have been calculated based on the tax
sharing agreement covering all the members of the consolidated group on a
combined basis for such periods.

Corporate Reorganization and Spin-Off

    Under the terms of a Master Separation Agreement between Plains and Plains
Resources, on July 3, 2002 Plains Resources contributed to Plains (i) 100% of
the capital stock of its wholly owned subsidiaries Arguello Inc., Plains
Illinois, Inc., PMCT Inc. and Plains Resources International Inc.; and (ii) all
amounts payable to it by Plains and Plains' subsidiary companies. In addition,
between July and December 2002 Plains Resources made an aggregate of $52.2
million in cash contributions to Plains. Plains used the capital contributions
to reduce the outstanding debt under its revolving credit facility.

    Prior to December 18, 2002 Plains was a wholly-owned subsidiary of Plains
Resources. On December 18, 2002 Plains Resources distributed 100% of Plains
common stock to the holders of record of Plains Resources' common stock as of
December 11, 2002. Each Plains Resources stockholder received one share of
Plains common stock for each share of Plains Resources common stock held.
Plains Resources received a favorable private letter ruling from the Internal
Revenue Service stating that, for United States federal income tax purposes,
this distribution by Plains Resources of Plains' capital stock qualified as a
tax-free distribution under Section 355 of the Internal Revenue Code. The
spin-off was completed to, among other things:

   .  allow Plains Resources to obtain cost savings through improved access to
      capital markets for its midstream affiliate, PAA;

   .  allow Plains Resources and Plains to focus corporate strategies and
      management teams for each business; and

   .  simplify Plains Resources' and Plains' corporate structure.

                                      103

<PAGE>

Results of Operations

    The following table reflects the components of Plains' oil and gas sales
prices and sets forth its operating revenues, costs and expenses on a BOE basis:

<TABLE>
<CAPTION>
                                           Nine Months Ended
                                            September 30,    Year Ended December 31,
                                           ----------------  ----------------------
                                            2002     2001     2001    2000    1999
                                           ------   ------   ------  ------  ------
<S>                                        <C>      <C>      <C>     <C>     <C>
Average oil sales price ($/Bbl)
    Average NYMEX......................... $25.45   $27.81   $26.01  $30.25  $19.25
    Hedging revenue (expense).............  (1.25)   (1.03)    0.03   (9.51)  (1.06)
    Differential..........................  (4.06)   (4.66)   (4.76)  (4.22)  (3.73)
                                           ------   ------   ------  ------  ------
    Net realized.......................... $20.14   $22.12   $21.28  $16.52  $14.46
                                           ======   ======   ======  ======  ======
    Average gas sales price ($/Mcf)....... $ 2.81   $10.75   $ 8.58  $ 5.26  $ 1.61
                                           ======   ======   ======  ======  ======
    Average sales price per BOE........... $19.94   $24.85   $23.20  $17.46  $14.13
    Average production expenses per BOE...   8.29     7.41    (7.27)  (6.89)  (6.64)
                                           ------   ------   ------  ------  ------
    Gross Margin per BOE.................. $11.65   $17.44   $15.93  $10.57  $ 7.49
    G&A per BOE...........................  (1.07)   (1.09)   (1.16)  (0.77)  (0.57)
                                           ------   ------   ------  ------  ------
    Gross profit per BOE.................. $10.58   $16.35   $14.77  $ 9.80  $ 6.92
                                           ======   ======   ======  ======  ======
DD&A per BOE (oil and gas properties)..... $ 3.04   $ 2.58   $ 2.70  $ 2.25  $ 1.72
</TABLE>

Comparison of Nine Months Ended September 30, 2002 to Nine Months Ended
September 30, 2001

    Operating revenues.  Plains' operating revenues decreased 15%, or $24.6
million, to $136.7 million for the nine months ended September 30, 2002 from
$161.3 million for the nine months ended September 30, 2001. The decrease was
primarily due to lower realized prices for oil and gas that reduced revenues by
$32.3 million. Higher volumes increased revenues by $8.2 million.

    Plains' daily oil sales volumes increased 6%, or 1.4 MBbls, to 23.6 MBbls
per day for the nine months ended September 30, 2002 from 22.2 MBbls for the
nine months ended September 30, 2001 primarily due to the additional interest
Plains acquired in the Point Arguello unit in July 2002. Plains' daily gas
sales volumes increased 2%, or 0.1 MMcf, to 9.3 MMcf per day for the nine
months ended September 30, 2002 from 9.2 MMcf for the nine months ended
September 30, 2001.

    Plains' average realized price for oil and natural gas liquids decreased
9%, or $1.98, to $20.14 per Bbl for the nine months ended September 30, 2002
from $22.12 per Bbl for the nine months ended September 30, 2001. The average
NYMEX oil price decreased 8%, or $2.36, to $25.45 per Bbl for the nine months
ended September 30, 2002 from $27.81 per Bbl for the nine months ended
September 30, 2001. An increase in Plains' hedging expense per barrel, from
$1.03 per barrel for the nine months ended September 30, 2001 to $1.25 per
barrel for the same period in 2002 was partially offset by a 13%, or $0.60 per
Bbl improvement in location and quality differentials over the same periods.
The average realized price for gas decreased 74%, or $7.94, to $2.81 per Mcf
for the nine months ended September 30, 2002 from $10.75 per Mcf in 2001. Gas
prices were unusually high in 2001, particularly in California.

    Production expenses.  Plains' production expenses increased 18%, or $8.8
million, to $56.8 million for the nine months ended September 30, 2002 from
$48.0 million for the nine months ended
September 30, 2001. On a per unit basis, production expenses increased 12%, or
$0.88 per BOE, to

                                      104

<PAGE>

$8.29 per BOE for the nine months ended September 30, 2002 from $7.41 per BOE
for the nine months ended September 30, 2001. Production expenses for 2001 were
reduced by approximately $0.34 per BOE as a result of nonrecurring credits
(primarily the sale of certain California emissions credits). Excluding these
credits, production expenses increased 7% per BOE during the period, primarily
due to higher electricity costs in California and Plains' increased ownership
percentage in the Point Arguello unit.

    General and administrative expense.  Plains' G&A expense increased 4%, or
$0.3 million, to $7.4 million for the nine months ended September 30, 2002 from
$7.1 million for the nine months ended September 30, 2001.

    Depreciation, depletion and amortization.  DD&A increased 25%, or $4.3
million, to $21.3 million for the nine months ended September 30, 2002 from
$17.0 million for the nine months ended September 30, 2001, primarily due to an
increase in the oil and gas DD&A rate to $3.04 per BOE for the nine months
ended September 30, 2002 from $2.58 per BOE for the nine months ended September
30, 2001. The increase was primarily due to the increase in costs subject to
DD&A as a result of Plains' 2001 capital program.

    Expenses of terminated public equity offering.  In conjunction with the
termination of Plains' proposed public equity offering Plains expensed costs
incurred as of September 30, 2002 of $1.7 million.

    Interest expense.  Plains' interest expense increased 11%, or $1.5 million,
to $14.4 million for the nine months ended September 30, 2002 from $12.9
million for the nine months ended September 30, 2001, reflecting higher debt
balances during 2002, offset slightly by lower interest rates.

    Income tax expense.  Plains' income tax expense decreased $15.8 million to
$13.8 million for the nine months ended September 30, 2002 from $29.6 million
for the nine months ended September 30, 2001. The decrease was primarily due to
decreases in pre-tax income. An increase in Plains' overall effective tax rate
from 38.6% for the nine months ended September 30, 2001 to 39.0% for the nine
months ended September 30, 2002 partially offset the effect of the decrease in
pre-tax income. Plains' currently payable effective tax rate was 16.1% for the
nine months ended September 30, 2002 as compared to 6.7% for the nine months
ended September 30, 2001. The increased currently payable effective rate in
2002 primarily reflects lower expenditures that are expensed for tax purposes
and capitalized for financial reporting purposes.

Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000

    Operating revenues.  Plains' operating revenues increased 43%, or $61.6
million, to $204.1 million in 2001 from $142.5 million in 2000. The increase
primarily reflects higher realized oil and gas prices. Increased prices
contributed $46.7 million in additional revenues, and increased sales volumes
contributed $14.9 million.

    Plains' daily oil sales volumes increased 8%, or 1.6 MBbls, to 22.5 MBbls
in 2001 from 20.9 MBbls in 2000. Plains' daily gas sales volumes increased 11%,
or 0.9 MMcf, to 9.2 MMcf in 2001 from 8.3 MMcf in 2000. Production increases
were primarily attributable to the continuing development of Plains' onshore
California properties.

    Plains' average realized price for oil increased 29%, or $4.76, to $21.28
per Bbl in 2001 from $16.52 per Bbl in 2000. The average NYMEX oil price
decreased 14%, or $4.24, to $26.01 per Bbl in 2001 from $30.25 per Bbl in 2000.
The NYMEX decrease was more than offset by a $9.54 per Bbl increase in the
hedging margin. The average realized price for gas increased 63%, or $3.32, to
$8.58 per Mcf in 2001 from $5.26 per Mcf in 2000. Gas prices were unusually
high in 2001, particularly in California.

                                      105

<PAGE>

    Production expenses.  Plains' production expenses increased 13%, or $7.6
million, to $63.8 million in 2001 from $56.2 million in 2000. Expenses for 2001
were reduced by $2.2 million due to the sale of California emission credits.
Excluding the credits, production expenses on a BOE basis increased 9%, or
$0.63, to $7.52 per BOE in 2001 from $6.89 per BOE in 2000. The increase is
primarily due to increased volumes and higher electricity costs in California.

    General and administrative expense.  Plains' G&A expense increased 62%, or
$3.9 million, to $10.2 million in 2001 from $6.3 million in 2000. This increase
was primarily due to a $3.7 million increase in G&A expenses allocated by
Plains Resources. The increase in Plains Resources' G&A expenses was primarily
due to costs related to its 2001 corporate reorganization.

    Depreciation, depletion and amortization.  Plains' DD&A expense increased
28%, or $5.2 million, to $24.1 million in 2001 from $18.9 million in 2000, as
its oil and gas DD&A rate increased 20%, or $0.45, to $2.70 per BOE in 2001
from $2.25 per BOE in 2000. DD&A is affected by many factors, including
production levels, costs incurred in the acquisition, exploitation and
development of proved reserves and estimates of proved reserve quantities and
future development costs. The increase in Plains' DD&A rate in 2001 was
primarily due to its capital program resulting in higher costs being subject to
DD&A and, to a lesser extent, to higher estimated future development costs.

    Interest expense.  Plains' interest expense increased 10%, or $1.5 million,
to $17.4 million in 2001 from $15.9 million in 2000, reflecting higher amounts
owed to Plains Resources which were partially offset by lower interest rates.

    Income tax expense.  Plains' income tax expense increased 105%, or $17.6
million, to $34.4 million in 2001 from $16.8 million in 2000. The increase was
primarily due to the increase in Plains' operating income. Plains' effective
tax rate was 38.6% in 2001 compared to 36.8% in 2000.

    Cumulative effect.  The cumulative effect of accounting change recognized
for the year ended December 31, 2001 was for the adoption of Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities," as amended.

Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999

    Operating revenues.  Plains' operating revenues increased 33%, or $35.0
million, to $142.5 million in 2000 from $107.5 million in 1999. The increase
was primarily due to higher realized oil and gas prices. Increased prices
contributed $25.3 million in additional revenues and increased sales volumes
contributed $9.7 million.

    Plains' daily oil sales volumes increased 8%, or 1.5 MBbls, to 20.9 MBbls
in 2000 from 19.4 MBbls in 1999. The volume increase is primarily due to a full
year of production from Plains' offshore California property, which was
acquired in mid-1999. Plains' daily gas sales volumes decreased 4%, or 0.4
MMcf, to 8.3 MMcf in 2000 from 8.7 MMcf in 1999.

    Plains' average realized price for oil increased 14%, or $2.06, to $16.52
per Bbl in 2000 from $14.46 per Bbl in 1999. The average NYMEX oil price
increased 57%, or $11.00, to $30.25 per Bbl in 2000 from $19.25 per Bbl in
1999. Plains did not participate in the full amount of this increase, as hedges
that it put into place in the latter part of 1999, when oil prices were
significantly lower, decreased its realized price by $9.51 per Bbl in 2000. The
average realized price for gas increased 227%, or $3.65, to $5.26 per Mcf in
2000 from $1.61 per Mcf in 1999.

    Production expenses.  Plains' production expenses increased 11%, or $5.7
million, to $56.2 million in 2000 from $50.5 million in 1999. Increased volumes
accounted for $3.8 million of the

                                      106

<PAGE>

increase. On a BOE basis, production expenses increased 4%, or $0.25, to $6.89
per BOE in 2000 from $6.64 per BOE in 1999, primarily reflecting a full year of
production from Plains' offshore California property, increased gas fuel costs
and higher oilfield service costs.

    General and administrative expense.  Plains' G&A expense increased 44%, or
$1.9 million, to $6.3 million in 2000 from $4.4 million in 1999. This increase
was primarily due to an increase in the number of employees in the latter part
of 1999 and an increase in G&A expenses allocated by Plains Resources.

    Depreciation, depletion and amortization.  Plains' DD&A expense increased
41%, or $5.6 million, to $18.9 million in 2000 from $13.3 million in 1999, as
its oil and gas DD&A rate increased 31%, or $0.53, to $2.25 per BOE in 2000
from $1.72 per BOE in 1999. DD&A is affected by many factors, including
production levels, costs incurred in the acquisition, exploitation and
development of proved reserves and estimates of proved reserve quantities and
future development costs. The increase in Plains' DD&A rate in 2000 was
primarily due to higher estimated future development costs. This increase
reflects a doubling of Plains' proved undeveloped reserves from the beginning
of 1999 to the end of 2000.

    Interest expense.  Plains' interest expense increased 7%, or $1.0 million,
to $15.9 million in 2000 from $14.9 million in 1999, primarily reflecting
higher interest rates.

    Income tax expense.  Plains' income tax expense increased 214%, or $11.4
million, to $16.7 million in 2000 from $5.3 million in 1999. Plains' income tax
expense in 1999 was reduced by $3.8 million as a result of the reversal of a
valuation allowance established with respect to the deferred tax benefit
related to the $42.9 million reduction on carrying costs of oil and gas
properties recognized in 1998. Excluding this benefit, Plains' income tax
expense for 1999 was $9.1 million. Plains' effective tax rate was 36.8% in 2000
compared to 37.2% in 1999.

Liquidity and Capital Resources

    Historically, Plains' primary sources of liquidity have been cash generated
from its operations and financing activity through its parent, Plains
Resources. Plains believes that it has sufficient liquidity through its cash
from operations and borrowing capacity under its revolving credit facility to
meet its short-term and long-term normal recurring operating needs, debt
service obligations, contingencies and anticipated capital expenditures.

    On July 3, 2002 Plains issued $200.0 million of 8.75% senior subordinated
notes due 2012. The senior subordinated notes are Plains' unsecured general
obligations, are subordinated in right of payment to all of Plains' existing
and future senior indebtedness and are jointly and severally guaranteed on a
full, unconditional basis by all of Plains' existing and future domestic
restricted subsidiaries. On July 3, 2002 Plains also entered into a $300.0
million revolving credit facility with a borrowing base of $225.0 million.

    Plains distributed the net proceeds of $195.3 million from the senior
subordinated notes and $116.7 million in initial borrowings under its credit
facility to Plains Resources, which used it to repay debt. Plains' guarantees
of Plains Resources debt facilities were terminated when it retired such
obligations.

    In addition, in connection with the merger agreement, Plains expects to
replace its existing credit facility with a new credit facility with an
anticipated borrowing base of $400.0 million. Plains may access the equity
markets or debt markets to assist in financing the purchase of 3TEC or
otherwise increase its liquidity.

                                      107

<PAGE>

    At September 30, 2002 Plains had a working capital deficit of approximately
$50.5 million. Approximately $24.4 million of the working capital deficit is
attributable to the fair value of Plains' hedges. In accordance with SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities", the fair
value of all derivative instruments is recorded on the balance sheet. Gains and
losses on hedging instruments are included in oil and gas revenues in the
period that the related volumes are delivered. The hedge agreements provide for
monthly settlement based on the differential between the agreement price and
actual NYMEX oil price. Cash received for sale of physical production will be
based on actual market prices and will generally offset any gains or losses on
the hedge instruments. The remaining working capital deficit will be financed
through cash flow and borrowings under Plains' credit facility.

    As of January 31, 2003 Plains had $39.0 million outstanding under its
$300.0 million revolving credit facility which it entered into on July 3, 2002.
The credit facility provides for a borrowing base of $225.0 million that will
be reviewed every six months, with the lenders and Plains each having the right
to one annual interim unscheduled redetermination, and adjusted based on
Plains' oil and gas properties, reserves, other indebtedness and other relevant
factors, and matures in 2005. Additionally, the credit facility contains a
$30.0 million sub-limit on letters of credit (of which $5.2 million had been
issued as of January 31, 2002). To secure borrowings, Plains pledged 100% of
the shares of stock of its domestic subsidiaries and gave mortgages covering
80% of the total present value of its domestic oil and gas properties.

    Amounts borrowed under the current credit facility bear an annual interest
rate, at Plains' election, equal to either: (i) the Eurodollar rate, plus from
1.375% to 1.75%; or (ii) the greatest of (1) the prime rate, as determined by
JPMorgan Chase Bank, (2) the certificate of deposit rate, plus 1.0%, or (3) the
federal funds rate, plus 0.5%; plus an additional 0.125% to 0.5% for each of
(1)-(3). The amount of interest payable on outstanding borrowings is based on
(1) the utilization rate as a percentage of the total amount of funds borrowed
under the credit facility to the borrowing base and (2) Plains' long-term debt
rating. Commitment fees and letter of credit fees under the credit facility are
based on the utilization rate and long-term debt rating. Commitment fees range
from 0.375% to 0.5% of the unused portion of the borrowing base. Letter of
credit fees range from 1.375% to 1.75%. The issuer of any letter of credit
receives an issuing fee of 0.125% of the undrawn amount. Plains' domestic
subsidiaries unconditionally guarantee payment of borrowings under the credit
facility.

    The credit facility contains negative covenants that limit Plains' ability,
as well as the ability of its subsidiaries, among other things, to incur
additional debt, pay dividends on stock, make distributions of cash or
property, change the nature of their business or operations, redeem stock or
redeem subordinated debt, make investments, create liens, enter into leases,
sell assets, sell capital stock of subsidiaries, create subsidiaries, guarantee
other indebtedness, enter into agreements that restrict dividends from
subsidiaries, enter into certain types of swap agreements, enter into gas
imbalance or take-or-pay arrangements, merge or consolidate and enter into
transactions with affiliates. In addition, the credit facility requires Plains
to maintain a current ratio, which includes availability, of at least 1.0 to
1.0 and a ratio of total debt to earnings before interest, depreciation,
depletion, amortization and income taxes of no more than 4.5 to 1.0.

    Plains' senior subordinated notes are unsecured general obligations, are
subordinated in right of payment to all of its existing and future senior
indebtedness and are jointly and severally guaranteed on a full, unconditional
basis by all of its existing and future domestic restricted subsidiaries. The
indenture governing the notes contains covenants that limit Plains' ability, as
well as the ability of its subsidiaries, among other things, to incur
additional indebtedness, make certain investments, make restricted payments,
sell assets, enter into agreements containing dividends and other payment
restrictions affecting subsidiaries, enter into transactions with affiliates,
create liens, merge, consolidate and transfer assets and enter into different
lines of business. In the event of a change of control, as

                                      108

<PAGE>

defined in the indenture, Plains will be required to make an offer to
repurchase the notes at 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of the repurchase. The indenture governing the
notes permitted the spin-off and the spin-off did not, in itself, constitute a
change of control for purposes of the indenture.

    The senior subordinated notes are not redeemable until July 1, 2007. On or
after that date they are redeemable, at Plains' option, at 104.375% of the
principal amount for the twelve-month period ending June 30, 2008, at 102.917%
of the principal amount for the twelve-month period ending June 30, 2009, at
101.458% of the principal amount for the twelve-month period ending June 30,
2010 and at 100% of the principal amount thereafter. In each case, accrued
interest is payable to the date of redemption.

    Plains has been assigned a Ba3 senior implied rating and the notes have
been assigned a B2 rating by Moody's Investor Service Inc. Plains has also been
assigned a BB- corporate credit rating by Standard and Poor's Corp. All of
these ratings are below investment grade. As a result, at times Plains may have
difficulty accessing capital markets or raising capital on favorable terms.

    As the owner of 100% of Plains' capital stock, Plains Resources made an
aggregate of $52.2 million of cash contributions to Plains from the date of
Plains' reorganization to the date of the spin-off. These contributions were
part of the working capital for the upstream assets contributed to Plains.
These contributions increased stockholder's equity by $52.2 million, of which
$5.0 million was reflected in the third quarter of 2002 and the remaining $47.2
million was reflected in the fourth quarter of 2002. Plains used these funds to
reduce the outstanding debt under its revolving credit facility.

Capital Requirements

    During 2002, Plains expects to make aggregate capital expenditures of
approximately $65.0 million, compared to $125.8 million and $70.5 million in
2001 and 2000, respectively. The 2002 capital expenditure level was reduced
from the 2001 amount to manage debt levels and allow flexibility in pursuing
acquisition opportunities.

    Plains intends to make aggregate capital expenditures of approximately
$65.0 million in 2002. In addition, Plains intends to continue to pursue the
acquisition of underdeveloped producing properties. Plains believes that it
will have sufficient cash flow from operating activities and from borrowings
under its new credit facility to fund its planned capital expenditures.

    During 2002, Plains expects to spend approximately $56.0 million on
maintaining, developing and exploiting its oil and gas properties and pursuing
acquisition opportunities. Plains expects approximately $48.0 million of these
capital expenditures will be for exploitation projects in onshore California.
The 2002 capital program incorporates the results of various analyses and field
studies and includes Plains' drilling approximately 88 total wells, including 8
injection wells and numerous injection realignment related workovers. In
addition, Plains' 2002 estimated capital expenditures include $9.0 million of
capitalized interest and general and administrative costs allocable directly to
acquisition, exploitation and development activities.

                                      109

<PAGE>

Commitments and Contingencies

    At September 30, 2002, the aggregate amounts of contractually obligated
payment commitments for the next five years are as follows (in thousands):

<TABLE>
<CAPTION>
                             2002 2003 2004  2005   2006 Thereafter
                             ---- ---- ---- ------- ---- ----------
            <S>              <C>  <C>  <C>  <C>     <C>  <C>
            Long-term debt.. $--  $511 $511 $90,700 $--   $196,803
            Operating leases  11    13   --      --  --         --
                             ---  ---- ---- ------- ---   --------
                             $11  $524 $511 $90,700 $--   $196,803
                             ===  ==== ==== ======= ===   ========
</TABLE>

    The long-term debt amounts consist principally of amounts due under Plains'
credit facility and its senior subordinated notes.

    Although Plains maintains an inspection program designed to prevent and, as
applicable, to detect and address releases of oil into the environment from its
upstream operations, it may experience such releases in the future, or discover
releases that were previously unidentified. Damages and liabilities incurred
due to any future environmental releases from Plains' assets may substantially
affect its business.

    Under the amended terms of an asset purchase agreement with respect to
certain of Plains' onshore California properties, commencing with the year
beginning January 1, 2000, and each year thereafter, Plains is required to plug
and abandon 20% of the then remaining inactive wells, which currently aggregate
approximately 149. To the extent Plains elects not to plug and abandon the
number of required wells, it is required to escrow an amount equal to the
greater of $25,000 per well or the actual average plugging cost per well in
order to provide for the future plugging and abandonment of such wells. In
addition, Plains is required to expend a minimum of $600,000 per year in each
of the ten years beginning January 1, 1996, and $300,000 per year in each of
the succeeding five years to remediate oil contaminated soil from existing well
sites, provided there are remaining sites to be remediated. In the event Plains
does not expend the required amounts during a calendar year, it is required to
contribute an amount equal to 125% of the actual shortfall to an escrow
account. Plains may withdraw amounts from the escrow account to the extent it
expends excess amounts in a future year. Through September 30, 2002, Plains has
not been required to make contributions to an escrow account.

    In connection with the acquisitions of its interest in the Point Arguello
field, offshore California, Plains assumed its 52.6% share of (1) plugging and
abandoning all existing well bores, (2) removing conductors, (3) flushing
hydrocarbons from all lines and vessels and (4) removing/abandoning all
structures, fixtures and conditions created subsequent to closing. The seller
retained the obligation for all other abandonment costs, including but not
limited to (1) removing, dismantling and disposing of the existing offshore
platforms, (2) removing and disposing of all existing pipelines and (3)
removing, dismantling, disposing and remediation of all existing onshore
facilities.

    Although Plains obtained environmental studies on its properties in
California and Illinois and it believes that such properties have been operated
in accordance with standard oil field practices, certain of the fields have
been in operation for more than 90 years, and current or future local, state
and federal environmental laws and regulations may require substantial
expenditures to comply with such rules and regulations. In connection with the
purchase of certain of its onshore California properties, Plains received a
limited indemnity for certain conditions if they violate applicable local,
state and federal environmental laws and regulations in effect on the date of
such agreement. Plains believes that it does not have any material obligations
for operations conducted prior to its acquisition of the properties, other than
its obligation to plug existing wells and those normally associated with
customary oil field operations of similarly situated properties. There can be
no assurance that current

                                      110

<PAGE>

or future local, state or federal rules and regulations will not require Plains
to spend material amounts to comply with such rules and regulations or that any
portion of such amounts will be recoverable under the indemnity.

    Consistent with normal industry practices, substantially all of Plains' oil
and gas leases require that, upon termination of economic production, the
working interest owners plug and abandon non-producing wellbores, remove tanks,
production equipment and flow lines and restore the wellsite. Plains has
estimated that at December 31, 2001 the costs to perform these tasks was
approximately $19.3 million, net of salvage value and other considerations.

    As is common within the industry, Plains has entered into various
commitments and operating agreements related to the exploration and development
of and production from proved oil and gas properties and the marketing,
transportation, terminalling and storage of oil. It is Plains management's
belief that such commitments will be met without a material adverse effect on
Plains' financial position, results of operations or cash flows.

    On September 18, 2002 Stocker Resources Inc., or Stocker, Plains' general
partner before Plains converted from a limited partnership to a corporation,
filed a declaratory judgment action against Commonwealth Energy Corporation, or
Commonwealth, in the Superior Court of Orange County, California relating to
the termination of an electric service contract. Stocker is seeking a
declaratory judgment that it was entitled to terminate the contract and that
Commonwealth has no basis for proceeding against Stocker's related $1.5 million
performance bond. Also on September 18, 2002, Stocker was named a defendant in
an action brought by Commonwealth in the Superior Court of Orange County,
California for breach of the electric service contract. Commonwealth is seeking
unspecified damages. Under the master separation agreement described on pages
[  ], Plains will be required to indemnify Stocker for damages it incurs as a
result of this action. Plains understands that Stocker intends to defend its
rights vigorously in this matter.

    In the ordinary course of its business, Plains is a claimant and/or
defendant in various other legal proceedings. Plains does not believe that the
outcome of these legal proceedings, individually or in the aggregate, will have
a material adverse effect on its financial condition, results of operations or
cash flows.

Industry Concentration

    Financial instruments which potentially subject Plains to concentrations of
credit risk consist principally of accounts receivable with respect to its oil
and gas operations and derivative instruments related to its hedging
activities. PAA is the exclusive marketer/purchaser for all of Plains' equity
oil production. This concentration has the potential to impact Plains' overall
exposure to credit risk, either positively or negatively, in that PAA may be
affected by changes in economic, industry or other conditions. Plains does not
believe the loss of PAA as the exclusive purchaser of its equity production
would have a material adverse affect on its results of operations. Plains
believes PAA could be replaced by other purchasers under contracts with similar
terms and conditions. The contract counterparties for Plains' derivative
commodity contracts are all major financial institutions with Standard & Poor's
ratings of A or better. Three of the financial institutions are participating
lenders in the Plains' credit facility, with one such counterparty holding
contracts that represent approximately 32% of the fair value of all of Plains'
open positions at September 30, 2002.

    There are a limited number of alternative methods of transportation for
Plains' production. Substantially all of Plains' oil and gas production is
transported by pipelines, trucks and barges owned by third parties. The
inability or unwillingness of these parties to provide transportation services
to Plains for a reasonable fee could result in Plains having to find
transportation alternatives, increased

                                      111

<PAGE>

transportation costs or involuntary curtailment of a significant portion of its
oil and gas production which could have a negative impact on future results of
its operations or cash flows.

Critical Accounting Policies and Factors that May Affect Future Results

    Based on the accounting policies which Plains has in place, certain factors
may impact its future financial results. The most significant of these factors
and their effect on certain of Plains' accounting policies are discussed below.

    Commodity pricing and risk management activities.  Prices for oil and gas
have historically been volatile. Decreases in oil and gas prices from current
levels will adversely affect Plains' revenues, results of operations, cash
flows and proved reserves. If the industry experiences significant prolonged
future price decreases, this could be materially adverse to Plains' operations
and its ability to fund planned capital expenditures.

    Periodically, Plains enters into hedging arrangements relating to a portion
of its oil production to achieve a more predictable cash flow, as well as to
reduce its exposure to adverse price fluctuations. Hedging instruments used are
typically fixed price swaps and collars and purchased puts and calls. While the
use of these types of hedging instruments limits Plains' downside risk to
adverse price movements, Plains is subject to a number of risks, including
instances in which the benefit to revenues is limited when commodity prices
increase. For a further discussion concerning Plains' risks related to oil and
gas prices and its hedging programs, see "-Quantitative and Qualitative
Disclosures about Market Risks".

    Write-downs under full cost ceiling test rules.  Under the SEC's full cost
accounting rules, Plains reviews the carrying value of its proved oil and gas
properties each quarter. Under these rules, capitalized costs of proved oil and
gas properties (net of accumulated depreciation, depletion and amortization,
and deferred income taxes) may not exceed a "ceiling" equal to:

   .  the standardized measure (including, for this test only, the effect of
      any related hedging activities); plus

   .  the lower of cost or fair value of unproved properties not included in
      the costs being amortized (net of related tax effects).

    These rules generally require that Plains price its future oil and gas
production at the oil and gas prices in effect at the end of each fiscal
quarter and require a write-down if its capitalized costs exceed this
"ceiling," even if prices declined for only a short period of time. Plains has
had no write-downs due to these ceiling test limitations since 1998. Given the
volatility of oil and gas prices, it is likely that Plains' estimate of
discounted future net revenues from proved oil and gas reserves will change in
the near term. If oil and gas prices decline significantly in the future, even
if only for a short period of time, write-downs of Plains' oil and gas
properties could occur. Write-downs required by these rules do not directly
impact Plains' cash flows from operating activities.

    Oil and gas reserves.  The proved reserve information included in this
document is based on estimates prepared by outside engineering firms. Estimates
prepared by others may be higher or lower than these estimates.

    Estimates of proved reserves may be different from the actual quantities of
oil and gas recovered because such estimates depend on many assumptions and are
based on operating conditions and results at the time the estimate is made. The
actual results of drilling and testing, as well as changes in production rates
and recovery factors, can vary significantly from those assumed in the
preparation of reserve estimates. As a result, such factors have historically,
and can in the future, cause significant upward and downward revisions to
proved reserve estimates.

                                      112

<PAGE>

    You should not assume that PV-10 or the standardized measure is the current
market value of Plains' estimated proved oil and gas reserves. In accordance
with SEC requirements, Plains bases the estimated discounted future net
revenues from proved reserves on prices and costs on the date of the estimate.
Actual future prices and costs may be materially higher or lower than the
prices and costs as of the date of the estimate.

    A large portion of Plains' proved reserve base (approximately 93% at
December 31, 2001) is comprised of oil properties that are sensitive to oil
price volatility. Historically, Plains has experienced significant upward and
downward revisions to its proved reserve volumes and values as a result of
changes in year-end oil and gas prices and the corresponding adjustment to the
projected economic life of such properties. Prices for oil and gas are likely
to continue to be volatile, resulting in future downward and upward revisions
to Plains' proved reserve base.

    Plains' rate of recording DD&A is dependent upon its estimate of proved
reserves including future development and abandonment costs as well as its
level of capital spending. If the estimates of proved reserves decline, the
rate at which Plains records DD&A expense increases, reducing its net income.
This decline may result from lower market prices, which may make it uneconomic
to drill for and produce higher cost fields. The decline in proved reserve
estimates may impact the outcome of the "ceiling" test discussed above. In
addition, increases in costs required to develop its reserves would increase
the rate at which Plains records DD&A expense. Plains is unable to predict
changes in future development costs as such costs are dependent on the success
of its exploitation and development program, as well as future economic
conditions.

Recent Accounting Pronouncements

    In June 2001 Statement of Accounting Standards, or SFAS, No. 143,
"Accounting for Asset Retirement Obligations" was issued. SFAS No. 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred and a corresponding increase
in the carrying amount of the related long-lived asset. After recording, the
asset retirement cost will be allocated to expense using a systematic and
rational method. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. Plains is currently assessing the impact of SFAS No. 143 and at
this time Plains cannot reasonably estimate the effect of this statement on its
consolidated financial position, results of operations or cash flows.

    In April 2002 SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64. Amendment of FASB Statement No. 13, and Technical Corrections", was issued.
SFAS 145 rescinds SFAS 4 and SFAS 64 related to classification of gains and
losses on debt extinguishment such that most debt extinguishment gains and
losses will no longer be classified as extraordinary. SFAS 145 also amends SFAS
13 with respect to sales leaseback transactions. The provisions of SFAS 145
have no effect on Plains' financial statements.

    In July 2002 SFAS No. 146, "Accounting For Costs Associated with Exit or
Disposal Activities" was issued. SFAS 146 is effective for exit or disposal
activities initiated after December 31, 2002 and does not require previously
issued financial statements to be restated. Plains will account for exit or
disposal activities initiated after December 31, 2002 in accordance with the
provisions of SFAS 146.

Qualitative and Quantitative Disclosures About Market Risks

    Plains is exposed to various market risks, including volatility in oil and
gas commodity prices and interest rates. Although Plains has routinely hedged a
substantial portion of its oil production and intends to continue this
practice, substantial future oil and gas price declines would adversely affect
its overall results, and therefore its liquidity. Furthermore, low oil and gas
prices could affect Plains' ability

                                      113

<PAGE>

to raise capital on favorable terms. Decreases in the prices of oil and gas
have had, and could have in the future, an adverse effect on the carrying value
of Plains' proved reserves and its revenues, profitability and cash flow. To
manage its exposure, Plains monitors current economic conditions and its
expectations of future commodity prices and interest rates when making
decisions with respect to risk management. Plains does not enter into
derivative transactions for speculative trading purposes. Substantially all of
Plains' derivative contracts are exchanged or traded with major financial
institutions and the risk of credit loss is considered remote.

    SFAS No. 133.  For purposes of its combined financial statements, on
January 1, 2001 Plains implemented SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138, or
SFAS 133. Under SFAS 133, all derivative instruments are recorded on the
balance sheet at fair value. If the derivative does not qualify as a hedge or
is not designated as a hedge, the gain or loss on the derivative is recognized
currently in earnings. To qualify for hedge accounting, the derivative must
qualify either as a fair value hedge, cash flow hedge or foreign currency
hedge. Currently, Plains uses only cash flow hedges and the remaining
discussion will relate exclusively to this type of derivative instrument. If
the derivative qualifies for hedge accounting, the gain or loss on the
derivative is deferred in accumulated Other Comprehensive Income, or OCI, a
component of Plains' stockholders' equity, to the extent the hedge is effective.

    The relationship between the hedging instrument and the hedged item must be
highly effective in achieving the offset of changes in cash flows attributable
to the hedged risk both at the inception of the contract and on an ongoing
basis. Hedge accounting is discontinued prospectively when a hedge instrument
becomes ineffective. Gains and losses deferred in OCI related to cash flow
hedges for which hedge accounting has been discontinued remain unchanged until
the related product has been delivered. If it is probable that a hedged
forecasted transaction will not occur, deferred gains or losses on the hedging
instrument are recognized in earnings immediately.

    Plains formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objectives and strategy for
undertaking the hedge. Hedge effectiveness is measured on a quarterly basis.
This process includes specific identification of the hedging instrument and the
hedged item, the nature of the risk being hedged and the manner in which the
hedging instrument's effectiveness will be assessed. At the inception of the
hedge and on an ongoing basis, Plains assesses whether the derivatives used in
hedging transactions are highly effective in offsetting changes in cash flows
of hedged items. As of September 30, 2002 all open positions related to
production from Plains' oil and gas properties qualified for hedge accounting.

    Unrealized gains and losses on hedging instruments reflected in OCI, and
adjustments to carrying amounts on hedged volumes, are included in oil and gas
revenues in the period that the related volumes are delivered. Gains and losses
of hedging instruments that represent hedge ineffectiveness, as well as any
amounts excluded from the assessment of hedge effectiveness, are recognized
currently in oil and gas revenues. For purposes of its combined financial
statements, effective October 2001 Plains implemented Derivatives
Implementation Group, Issue G20, "Cash Flow Hedges: Assessing and Measuring the
Effectiveness of a Purchased Option Used in a Cash Flow Hedge", or DIG Issue
G20, which provides guidance for assessing the effectiveness on total changes
in an option's cash flows rather than only on changes in the option's intrinsic
value. Implementation of DIG Issue G20 has reduced earnings volatility since it
allows Plains to include changes in the time value of purchased options and
collars in the assessment of hedge effectiveness. Time value changes were
previously recognized in current earnings since Plains excluded them from the
assessment of hedge effectiveness. Oil and gas revenues for the year ended
December 31, 2001 include a $3.1 million non-cash loss related to the
ineffective portion of the cash flow hedges representing the fair value change
in the time value of options for the nine months before the implementation of
DIG Issue G20.

                                      114

<PAGE>

    Plains utilizes various derivative instruments to hedge its exposure to
price fluctuations on oil sales. The derivative instruments consist primarily
of cash-settled oil option and swap contracts entered into with financial
institutions. Plains does not currently have any gas hedges. Plains also uses
interest rate swaps to manage the interest rate exposure on its credit facility.

    On January 1, 2001, in accordance with the transition provisions of SFAS
133, Plains recorded a gain of $7.0 million in OCI representing the cumulative
effect of an accounting change to recognize at fair value all cash flow
derivatives. Plains recorded cash flow hedge derivative assets and liabilities
of $9.7 million and $4.2 million, respectively, and a net-of-tax non-cash
charge of $1.5 million was recorded in earnings as a cumulative effect
adjustment.

    At December 31, 2001, OCI consisted of $26.6 million ($15.9 million, net of
tax) of unrealized gains on Plains' open oil hedging instruments. As oil prices
increased significantly during the first nine months of 2002 the fair value of
Plains' open oil hedging positions decreased $51.0 million ($30.3 million after
tax). At September 30, 2002, OCI consisted of $24.4 million ($14.4 million
after tax) of unrealized losses on Plains' open oil hedging instruments and
$0.3 million ($0.2 million, net of tax) loss related to Plains' interest rate
swap. At September 30, 2002 the assets and liabilities related to Plains' open
oil hedging instruments were included in current assets ($0.2 million), other
assets ($2.1 million), current liabilities ($24.9 million), other long-term
liabilities ($1.8 million) and deferred income taxes (a tax benefit of $10.0
million).

    During the first nine months of 2002, $7.5 million ($4.6 million net of
tax) in losses from the settlement of crude oil hedging instruments were
reclassified from OCI and charged to income as a reduction of oil sales
revenues. Oil sales revenues for the period have also been reduced by a $0.6
million non-cash expense related to the amortization of option premiums. As of
September 30, 2002, $14.6 million of deferred net losses on derivative
instruments recorded in OCI are expected to be reclassified to earnings during
the next twelve-month period.

    Commodity price risk.  As of February 6, 2003, Plains had the following
open hedge positions with respect to its oil properties:

<TABLE>
<CAPTION>
                                               Barrels per Day
                                             -------------------
                                              2003   2004  2005
                                             ------ ------ -----
                <S>                          <C>    <C>    <C>
                Swaps
                   Average price $24.22/bbl.     --     --    --
                   Average price $23.81/bbl. 19,250     --    --
                   Average price $23.82/bbl.     -- 17,500    --
                   Average price $23.57/bbl.     --     -- 5,000
</TABLE>

    Based on estimated fourth quarter 2002 production, these positions result
in Plains having hedged approximately 75%, 69% and 20% of production in 2003,
2004 and 2005, respectively. Location and quality differentials attributable to
Plains' properties and the cost of the hedges are not included in the foregoing
prices. Because of the quality and location of Plains' oil production these
adjustments will reduce Plains' net price per Bbl.

    The agreements provide for monthly cash settlements based on the
differential between the agreement price and the actual NYMEX price. Gains or
losses are recognized in the month of related production and are included in
oil and gas sales revenues. These contracts resulted in a decrease in revenues
of $8.1 million and $6.3 million for the nine months ended September 30, 2002
and 2001, respectively, as well as an increase (decrease) in revenues of $0.3
million, $(72.8) million and $(7.5) million for the years ended December 31,
2001, 2000 and 1999, respectively. As of September 30, 2002 Plains had an
unrealized loss of $14.4 million, net of tax, with respect to these contracts.
The estimated fair value of the hedges is included in Plains' balance sheet as
of September 30, 2002.

                                      115

<PAGE>

    The fair value of outstanding oil derivative commodity instruments and the
change in fair value that would be expected from a 10% price decrease are shown
in the table below (in millions):

<TABLE>
<CAPTION>
                                            As of September 30,
                                     ---------------------------------
                                           2002             2001
                                     ----------------- ---------------
                                             Effect of       Effect of
                                      Fair   10% Price Fair  10% Price
                                      Value  Decrease  Value Decrease
                                     ------  --------- ----- ---------
         <S>                         <C>     <C>       <C>   <C>
         Swaps and options contracts $(24.2)   $30.1   $12.5   $21.8
</TABLE>

    The fair value of the swaps and option contracts are estimated based on
quoted prices from independent reporting services compared to the contract
price of the swap, and approximate the gain or loss that would have been
realized if the contracts had been closed out at period end. All hedge
positions offset physical positions exposed to the cash market. None of these
offsetting physical positions are included in the above table. Price risk
sensitivities were calculated by assuming an across-the-board 10% decrease in
price regardless of term or historical relationships between the contractual
price of the instruments and the underlying commodity price. In the event of an
actual 10% change in prompt month oil prices, the fair value of Plains'
derivative portfolio would typically change less than that shown in the table
due to lower volatility in out-month prices.

    The contract counterparties for Plains' derivative commodity contracts are
all major financial institutions with Standard & Poor's ratings of A or better.
Three of the financial institutions are participating lenders in Plains'
revolving credit facility, with one counterparty holding contracts that
represent approximately 32% of the fair value of all open positions as of
September 30, 2002.

    Plains' management intends to continue to maintain hedging arrangements for
a significant portion of Plains' production. These contracts may expose Plains
to the risk of financial loss in certain circumstances. Plains' hedging
arrangements provide it protection on the hedged volumes if oil prices decline
below the prices at which these hedges are set, but ceiling prices in its
hedges may cause it to receive less revenues on the hedged volumes than it
would receive in the absence of hedges.

    Interest rate risk.  Plains' credit facility is sensitive to market
fluctuations in interest rates. Plains uses interest rate swaps to hedge
underlying debt obligations. These instruments hedge specific debt issuances
and qualify for hedge accounting. The interest rate differential is reflected
as an adjustment to interest expense over the life of the instruments. Plains
entered into an interest rate swap for an aggregate notional principal amount
of $7.5 million that fixes the interest rate on that amount of borrowing under
its credit facility at 3.9% plus the LIBOR margin set forth in its credit
facility. The swap expires in October 2004.

                                      116

<PAGE>

                           INFORMATION ABOUT PLAINS

Overview

    Plains is an independent oil and gas company primarily engaged in the
upstream activities of acquiring, exploiting, developing and producing oil and
gas in the United States. Plains' core areas of operation are:

   .  onshore California, primarily in the LA Basin, and offshore California in
      the Point Arguello unit; and

   .  the Illinois Basin in southern Illinois and Indiana.

    Plains owns a 100% working interest in and operates all of its properties,
except for offshore California, in which it owns a 52.6% working interest and
where it is the operator. Plains' reserves are generally mature but
underdeveloped, have produced significant volumes since initial discovery and
have significant estimated remaining reserves. Plains opportunistically hedges
portions of its oil production to manage its exposure to commodity price risk.

    The following table sets forth information with respect to Plains' oil and
gas properties as of and for the year ended December 31, 2001:

<TABLE>
<CAPTION>
                                         California
                                      ----------------
                                                       Illinois Basin
                                      Onshore Offshore   and Other    Total
                                      ------- -------- -------------- ------
                                              (Dollars in millions)
    <S>                               <C>     <C>      <C>            <C>
    Proved reserves
    MMBOE............................  211.8      5.0        22.5      239.3
    Percent oil......................    93%      98%         98%        93%
    Proved developed reserves (MMBOE)  112.0      3.8        13.3      129.1
    Production (MBOE)................  6,347    1,431       1,000      8,778
    PV-10(1)......................... $577.7   $  6.9      $ 58.6     $643.2
    Standardized measure(2)..........                                 $384.5
</TABLE>
--------
(1) Based on year-end 2001 spot market prices of $19.84 per Bbl of oil and
    $2.58 per Mcf of gas. The PV-10 and standardized measure have been reduced
    to reflect the abandonment costs of certain properties. PV-10 represents
    the standardized measure before deducting estimated future income taxes.
(2) Estimated future income taxes are calculated on a combined basis using the
    statutory income tax rate, accordingly, the standardized measure is
    presented in total only.

    During the five-year period ended December 31, 2001 Plains drilled 561
development wells, 558 of which were successful. During this period, Plains
incurred aggregate oil and gas acquisition, exploitation, development and
exploration costs of $442.9 million, resulting in proved reserve additions of
177.9 MMBOE, at an average reserve replacement cost of $2.49 per BOE, which
Plains believes to be among the lowest of its peer group. During that five-year
period, which Plains believes is a useful period for measurement since its
reserve replacement costs have historically fluctuated on a year to year basis,
approximately 99% of its oil and gas capital expenditures were for acquisition,
exploitation and development activities. During that same period, the average
replacement cost for large domestic exploration and production companies was
$6.57 per barrel.

Recent Developments

    Spin-off.  On December 18, 2002 Plains Resources distributed 100% of
Plains' common stock to the holders of record of Plains Resources common stock
as of December 11, 2002. Approximately

                                      117

<PAGE>

24,059,448 shares, or 100% of the outstanding shares of Plains common stock,
were distributed in the spin-off. Plains Resources received a letter ruling
from the Internal Revenue Services stating that, for United Stated federal
income tax purposes, this distribution by Plains Resources of Plains capital
stock qualified as a tax free distribution under Section 355 of the Internal
Revenue Code. Additionally, the indenture governing Plains' notes permitted the
spin-off discussed above, and the spin-off did not, in itself, constitute a
"change of control" for purposes of Plains' indenture. Since the spin-off, (i)
Plains Resources Inc. has not had an ownership interest in Plains, and (ii)
Plains has been an independent company.

    The spin-off was completed to, among other things:

   .  allow Plains Resources to obtain cost savings through improved access to
      capital markets for its midstream affiliate, PAA;

   .  allow Plains Resources and Plains to focus corporate strategies and
      management teams for each business; and

   .  simplify Plains Resources' and Plains' corporate structure.

    Reorganization and Terminated Initial Public Offering.  To effect Plains'
spin-off from Plains Resources, both of them entered into a master separation
agreement on July 3, 2002 providing for (i) the separation of substantially all
of the upstream assets and liabilities of Plains Resources, other than its
Florida operations and (ii) an internal reorganization with Plains Resources,
including Plains' conversion from a Delaware limited partnership into a
Delaware corporation. The master separation agreement also set forth the
related agreements that Plains entered into with Plains Resources including an
employee matters agreement, tax allocation agreement, intellectual property
agreement, two transition services agreements and a technical services
agreement.

    Under the terms of the master separation agreement, on July 3, 2002, Plains
Resources contributed to Plains (i) 100% of the capital stock of its wholly
owned subsidiaries Arguello Inc., Plains Illinois, Inc., PMCT Inc. and Plains
Resources International Inc.; and (ii) all amounts payable to it by Plains and
Plains' subsidiaries. In addition, between July and December 2002 Plains
Resources made an aggregate of $52.2 million in cash contributions to Plains.
Plains used the capital contributions to reduce the outstanding debt under its
revolving credit facility.

    On June 21, 2002 Plains filed a registration statement on Form S-1 with the
SEC for the initial public offering, or the IPO, of its common stock. Plains
terminated the IPO in October 2002, primarily due to market conditions. As a
result, costs and expenses of $1.7 million incurred in connection with the IPO
were charged to expense during the third quarter of 2002. Plains estimates that
additional charges of $0.7 to $0.8 million relating to the IPO will occur in
the fourth quarter of 2002.

    Financings.  On July 3, 2002 Plains issued $200.0 million of 8.75% senior
subordinated notes due 2012. The notes are Plains' unsecured general
obligations, are subordinated in right of payment to all of Plains' existing
and future indebtedness and are jointly and severally guaranteed on a full and
unconditional basis by all of Plains' existing and future domestic restricted
subsidiaries.

    On July 3, 2002 Plains also entered into a $300.0 million revolving credit
facility. The credit facility provides for a borrowing base of $225.0 million
that will be reviewed every six months, with the lenders and Plains each having
the right to one annual interim unscheduled redetermination, and adjusted based
on Plains' oil and gas properties, reserves, other indebtedness and other
relevant factors, and matures in 2005. As of January 31, 2003 Plains had $39.0
million outstanding under this credit facility. Additionally, the credit
facility contains a $30.0 million sub-limit on letters of credit (of which $5.2
million had been issued as of January 31, 2003). To secure borrowings, Plains
pledged 100% of the shares of

                                      118

<PAGE>

stock of its domestic subsidiaries and gave mortgages covering 80% of the total
present value of its domestic oil and gas properties.

    In addition, in connection with the merger, Plains expects to replace its
existing credit facility with a new credit facility with an anticipated
borrowing base of $400.0 million.

Oil and Gas Reserves

    The following tables set forth certain information with respect to Plains'
reserves based upon reserve reports prepared by the independent petroleum
consulting firms of Netherland, Sewell & Associates, Inc. and Ryder Scott
Company, L.P. in 2001, and H.J. Gruy and Associates, Inc., Netherland, Sewell &
Associates, Inc. and Ryder Scott Company, L.P. in 2000 and 1999. The reserve
volumes and values were determined under the method prescribed by the SEC,
which requires the application of year-end prices for each year, held constant
throughout the projected reserve life.

<TABLE>
<CAPTION>
                                      Year Ended December 31,
                                   ------------------------------
                                     2001      2000       1999
                                   -------- ---------- ----------
                                       (Dollars in thousands)
              <S>                  <C>      <C>        <C>
              Oil (Mbbls):
              Proved developed....  119,248    105,679    100,758
              Proved undeveloped..  104,045     98,708     94,455
                                   -------- ---------- ----------
                 Total............  223,293    204,387    195,213
                                   ======== ========== ==========
              Gas (MMcf):
              Proved developed....   59,101     52,184     49,255
              Proved undeveloped..   37,116     41,302     41,618
                                   -------- ---------- ----------
                 Total............   96,217     93,486     90,873
                                   ======== ========== ==========
                 Total (MBOE).....  239,329    219,968    210,359
                                   ======== ========== ==========
              PV-10:(1)
              Proved developed.... $454,095 $  982,752 $  628,451
              Proved undeveloped..  189,125    321,430    477,907
                                   -------- ---------- ----------
                 Total............ $643,220 $1,304,182 $1,106,358
                                   ======== ========== ==========
              Standardized measure $384,467 $  789,438 $  727,286
</TABLE>
--------
(1) Based on year-end spot market prices of: (a) $19.84 per Bbl of oil and
    $2.58 per Mcf of gas for 2001; (b) $26.80 per Bbl of oil and $13.70 per Mcf
    of gas for 2000; and (c) $25.60 per Bbl of oil and $2.37 per Mcf of gas for
    1999. PV-10 represents the standardized measure before deducting estimated
    future income taxes.

    There are numerous uncertainties inherent in estimating quantities and
values of proved reserves, and in projecting future rates of production and
timing of development expenditures. Many of the factors that impact these
estimates are beyond Plains' control. Reservoir engineering is a subjective
process of estimating the recovery from underground accumulations of oil and
gas that cannot be measured in an exact manner, and the accuracy of any reserve
estimate is a function of the quality of available data, engineering and
geological interpretation, and judgment. Because all reserve estimates are to
some degree speculative, the quantities of oil and gas that are ultimately
recovered, production and operating costs, the amount and timing of future
development expenditures, and future oil and gas sales prices may all differ
from those assumed in these estimates. In addition, different reserve engineers
may make different estimates of reserve quantities and cash flows based upon
the same available data. Therefore, the PV-10 shown above represents estimates
only and should not be construed as the current market value of the estimated
oil and gas reserves attributable to Plains' properties.

                                      119

<PAGE>

    In accordance with SEC guidelines, the reserve engineers' estimates of
future net revenues from Plains' properties, and the present value of the
properties, are made using oil and gas sales prices in effect as of the dates
of such estimates and are held constant throughout the life of the properties,
except where the guidelines permit alternate treatment, including the use of
fixed and determinable contractual price escalations but excluding the effect
of any hedges Plains has in place. The prices used in Plains' reserve reports
as of December 31, 2001 of $15.31 per Bbl of oil and $2.56 per Mcf of gas
reflect the year-end spot market prices of $19.84 per Bbl of oil and $2.58 per
Mcf of gas, as adjusted for variations based on location and quality of oil.
Historically, the prices for oil and gas have been volatile and are likely to
continue to be volatile in the future.

Exploitation and Development

    Exploitation strategy.  Plains implements its exploitation plan with
respect to its properties by:

   .  enhancing product price realizations;

   .  optimizing production practices;

   .  realigning and expanding injection processes;

   .  drilling wells; and

   .  performing stimulations, recompletions, artificial lift upgrades and
      other operating margin and reserve enhancements.

    After Plains acquires a property, it may also seek to increase its interest
in the property by acquiring nearby acreage, pursuing farm-in drilling
arrangements and purchasing minority interests in the property.

    By implementing its exploitation plan, Plains seeks to increase cash flows
and enhance the value of its asset base. In doing so, Plains adds to and
enhances its proved reserves. During the five-year period ended December 31,
2001 Plains' additions to proved reserves totaled 120.6 MMBOE, or approximately
332% of cumulative net production for this period. Plains added these reserves
at an aggregate average cost of $3.17 per BOE, excluding reserves added as a
result of its acquisition activities. Reserve additions related solely to
Plains' acquisition activities totaled 57.3 MMBOE and were added at an
aggregate average cost of $1.06 per BOE.

    Plains believes that its properties in its core areas hold potential for
additional increases in production, reserves and cash flow. In that regard, as
a result of Plains' 2002 capital program and preliminary 2003 capital program,
Plains currently expects to achieve a 3% to 5% growth rate in production from
its properties in 2003. However, Plains can give no assurance that increases
will be achieved.

    During 2002, Plains expects to spend approximately $56.0 million
maintaining, developing and exploiting its oil and gas properties and pursuing
acquisition opportunities. Plains expects approximately $48.0 million of these
capital expenditures will be for exploitation projects in onshore California.
The 2002 capital program incorporates the results of various analyses and field
studies and includes Plains' drilling approximately 88 total wells, including 8
injection wells and numerous injection realignment related workovers.

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<PAGE>

    Exploitation projects.  The following table sets forth information with
respect to Plains' oil and gas properties (dollars in millions):

<TABLE>
<CAPTION>
                                                                 Illinois
                                            Onshore    Offshore    Basin
                                           California California and other
                                           ---------- ---------- ---------
    <S>                                    <C>        <C>        <C>
    Year(s) discovered....................  1906-1966    1981       1905
    Year acquired.........................  1992-1998    1999       1995
    Proved reserves at acquisition (MMBOE)       68.6     6.4       17.3

    As of December 31, 2001:
    Proved reserves MMBOE.................      211.8     5.0       22.5(2)
    Percent oil...........................        93%     98%        98%
    Proved developed reserves (MMBOE).....      112.0     3.8       13.3
    PV-10(1).............................. $    577.7   $ 6.9      $58.6
</TABLE>
--------
(1) Based on year-end 2001 spot market prices of $19.84 per Bbl of oil and
    $2.58 per Mcf of gas. PV-10 represents the standardized measure before
    deducting estimated future income taxes. Plains' standard measure at
    December 31, 2001 was $384.5 million. The PV-10 and standardized measure
    have been reduced to reflect the abandonment costs of certain properties.
(2) 21.1 MMBOE of these reserves are in the Illinois Basin and the remaining
    reserves are attributed to other properties Plains holds in the United
    States.

Onshore California

    LA Basin.  In 1992 Plains acquired from Chevron U.S.A., Inc. substantially
all of its producing oil properties in the LA Basin. These interests included
the Inglewood, East Beverly Hills, San Vicente and South Salt Lake fields.
Following the initial acquisition Plains expanded its holdings in this area by
acquiring additional interests within the existing fields, including all of
Texaco Exploration and Production, Inc.'s interest in its Vickers lease, which
further consolidated Plains' holdings in the Inglewood field. Plains refers to
all of its properties in the LA Basin acquired before 1997 collectively as the
"LA Basin properties". Plains holds a 100% working interest in the LA Basin
properties.

    The LA Basin properties consist of oil reserves discovered at various times
between 1924 and 1966. Plains has performed various exploitation activities,
including drilling additional production and injection wells, returning
previously marginal wells to economic production, optimizing pre-existing
waterflood operations, initiating new waterfloods, optimizing artificial lift,
increasing the capacity and efficiency of facilities, upgrading facilities to
maintain regulatory compliance, reducing unit production expenses and improving
marketing margins. Additionally, Plains continuously updates and performs
technical studies to identify new investment opportunities on these properties.
Through these acquisition and exploitation activities, Plains' net average
daily production from this area has increased from approximately 6,700 BOE per
day in 1992 to 12,300 BOE per day in the first nine months of 2002.

    In December 1995, Plains negotiated an agreement with a unit of
ChevronTexaco to remediate sections of Plains' LA Basin properties impacted by
prior drilling and production operations. Under this agreement, ChevronTexaco
agreed to investigate contamination at the LA Basin properties and potentially
remediate specific areas contaminated with hazardous substances, such as
volatile organic substances and heavy metals, and Plains agreed to excavate and
remediate nonhazardous oil contaminated soils. Plains is obligated to construct
and operate, for the next eight years, at least a five-acre parcel of land as
bioremediation cells for oil contaminated soils designated for excavation and
treatment by ChevronTexaco. Although Plains believes that it does not have any
material obligations for operations conducted before its acquisition of the
properties from ChevronTexaco other than its obligation to plug existing wells
and those normally associated with customary oil field operations of

                                      121

<PAGE>

similarly situated properties (such as Plains' agreement with ChevronTexaco
described above), these amounts may not be recoverable from ChevronTexaco,
either under Plains' agreement or the limited indemnity from ChevronTexaco
contained in the original purchase agreement.

    In 2001 Plains spent $66.8 million on capital projects on the LA Basin
properties, the most significant of which were drilling 42 production and 15
injection wells. In 2002 Plains expects to spend $34.5 million on capital
projects, which will include drilling 22 production wells and four injection
wells, performing numerous recompletions and workovers, and modifying various
production and injection facilities.

    Plains is also assessing the application of 3-D seismic technology to
further evaluate the unproved reserves in its LA Basin properties. Plains
expects to shoot the 3-D survey in 2003, interpretation of the data should
occur in 2003 and any drilling based on the results may take place in late 2003
and in 2004 and 2005. This will be the first application of 3-D seismic
technology in an onshore LA Basin field. Also in the Inglewood field, Plains
has initiated a 20-well evaluation program using cased hole resistivity logging
technology. This technology potentially identifies commercially producible
sands behind casing in older wells. Furthermore, Plains expects these analyses
to provide it with a more complete understanding of the field thereby
potentially allowing Plains to improve the waterflood program. Finally, Plains
is considering alternatives to procuring electricity for the field such as a
self or cogeneration facility.

    Montebello.  In March 1997 Plains expanded its operations in the LA Basin
by acquiring Chevron USA's interest in the Montebello field, which included a
100% working interest (99.2% net revenue interest) in 55 producing oil wells
and related facilities and approximately 450 acres of surface fee land. Plains'
net average daily production from this field has increased from 930 BOE per day
at the time of acquisition to 2,500 BOE per day in the first nine months of
2002. Since the acquisition, Plains has drilled a total of 48 producing wells
and 22 injection wells. During 2000, Plains evaluated the field reservoir
information and prepared a comprehensive waterflood development plan. In 2001
Plains spent $13.0 million on capital projects in the Montebello field, the
most significant of which was drilling 17 production and three injection wells.
In 2002 Plains expects to spend $11.0 million on capital projects, which
include drilling 12 production wells and six injection wells, performing
numerous workovers and increasing the capacity of the production and injection
facilities.

    Arroyo Grande.  In November 1997 Plains acquired a 100% working interest
(94% net revenue interest) in the Arroyo Grande field located in San Luis
Obispo County, California, from subsidiaries of Shell Oil Company. Plains also
acquired surface and related development rights to approximately 1,000 acres
included in the 1,500-acre producing unit. The field is primarily under
continuous steam injection and, at Plains' acquisition date, was producing
approximately 1,600 BOE per day (approximately 1,500 BOE net to Plains'
interest) of 14 degree API gravity oil from 70 wells. Since acquiring this
property, Plains has drilled additional wells to downsize the injection
patterns in the currently developed area from five acres to one and a quarter
acres to accelerate recoveries, and realigned steam injection within these
areas to increase the efficiency of the recovery process. Plains also curtailed
steam injection by about 50% immediately following the acquisition due to low
oil prices. Although oil prices subsequently rebounded, Plains maintained
injection at this low rate pending its analysis of the saturation inputs
provided by the infill drilling program, and in 2001 due to excessive gas fuel
costs. As a result, base volumes declined considerably, but this decline was
offset by the wells Plains drilled to downsize the injection patterns.

    In 2001 Plains spent $10.6 million on capital projects in the Arroyo Grande
field, the most significant of which was drilling 19 production and 11
injection wells and installing a gas processing facility to reduce third-party
fuel gas purchases. During 2002 Plains reduced capital expenditures to $1.5
million to allow time to assess the results of the 2001 drilling program and
prepare to expand its steam flood in 2003-2004. Plains is also reviewing a plan
to optimize steam handling and produced

                                      122

<PAGE>

water disposal during 2002. Plains' net average daily production from this
field was approximately 1,900 BOE per day during the first nine months of 2002.

    Mt. Poso.  During 1998 Plains acquired the Mt. Poso field from Aera Energy
LLC. The Mt. Poso field is located near Bakersfield, California, in Kern
County. When Plains acquired the field, it was producing 900 BOE per day of 15
to 17 degree API gravity oil and added 7.7 MMBOE to Plains' proved reserves.
Since acquisition, Plains has undertaken an aggressive recompletion and
drilling program targeting the Pyramid Hills formation, completing a 107-well
drilling program in 2000-2001. In 2001 Plains spent $10.3 million on capital
projects in the Mt. Poso field, the most significant of which was drilling 43
production wells and recompleting 38 wells. During 2002 Plains reduced capital
expenditures as it will focus on optimizing operating costs, including the
installation of electrical generation facilities, and reviewing past drilling
results to identify future drilling potential. In 2002 Plains expects to spend
$1.0 million on capital projects to optimize its producing infrastructure.
Plains' net average daily production from this field was 1,600 BOE during the
first nine months of 2002.

Offshore California

    Point Arguello.  In July 1999 Plains acquired Chevron USA's 26.3% working
interest in the Point Arguello unit and the various partnerships owning the
related transportation, processing and marketing infrastructure. Plains is the
operator for the Point Arguello unit which consists of three offshore
platforms. Chevron USA retained responsibility for certain abandonment costs,
including: (1) removing, dismantling and disposing of the existing offshore
platforms; (2) removing and disposing of all existing pipelines; and (3)
removing, dismantling, disposing and remediating all existing onshore
facilities. Plains assumed Chevron USA's 26.3% share of all other abandonment
costs.

    In 2001 Plains spent $5.6 million on capital projects in the Point Arguello
unit, the most significant of which was drilling six production wells and a
number of recompletion and stimulation workovers. In 2002 Plains expects to
spend $6.0 million on capital projects, which includes drilling three
development wells and converting five wells to electric submersible lift
systems, and various recompletions and stimulations.

    In August 2002 Plains acquired an additional 26.3% working interest from
subsidiaries of Phillips Petroleum Company in the Point Arguello unit and the
various partnerships owning the related transportation, processing and
marketing infrastructure with effect from April 1, 2002. The seller retained
responsibility for certain abandonment costs, including: (1) removing,
dismantling and disposing of the existing offshore platforms; (2) removing and
disposing of all pipelines; and (3) removing, dismantling, disposing and
remediating all existing onshore facilities. Plains assumed the seller's share
of the costs of plugging the wells and flushing the lines. As consideration for
receiving the transferred properties and assuming the obligations described
above Plains received $2.4 million. In addition, Plains received $2.6 million
as its share of revenues less costs for the period from April 1 to July 30,
2002. This transaction doubled Plains' working interest in the Point Arguello
unit to 52.6%.

    At the time Plains acquired its interest in Point Arguello, its net average
daily production from this unit was 5,200 BOE. During the first nine months of
2002 Plains' net average daily production was 4,200 BOEs including the interest
acquired effective August 1, 2002.

    Rocky Point.  Part of one of Plains' leases in the Point Arguello unit is
partially unitized in the Rocky Point unit, which is adjacent to the Point
Arguello unit. As a result, Plains is the operator and has an agreement that
entitles it to participate with at least a 52.6% working interest in the
development of the Rocky Point unit. Plains is particularly interested in this
unit because five exploratory wells were drilled into it in 1983-1984, and
these wells tested at 3,500, 1,629, 1,100, 604 and 120 Bbls per day.
Accordingly, Plains is currently seeking regulatory approval to allow near-term

                                      123

<PAGE>

development of its lease in the Rocky Point unit by drilling extended-reach
wells from the Point Arguello platforms. While Plains must obtain a larger rig
and several regulatory permits and other agreements among the working interest
owners, it believes that if it resolves these issues, it may be able to drill
in the Rocky Point unit. There can be no assurance, however, that any such
drilling can or will occur or that Plains will recover economic quantities of
oil and gas from the Rocky Point unit. The other two leases that compose the
Rocky Point unit are subject to litigation between the federal government and
the state of California concerning the state's ability to review MMS approvals
of lease suspensions for consistency with the state's Coastal Management
Program and cannot be developed until the resolution of such litigation.

    Other Offshore California.  Similar to Rocky Point, portions of two other
nearby undeveloped offshore units, Sword and Bonito, could be developed by
extended reach wells originating from the Point Arguello unit platforms. Plains
has no interest in Sword unit and an approximate 2.6% interest in Bonito unit.
To develop the Sword or Bonito units from the Point Arguello platforms, the
Sword and Bonito unit owners would have to secure all necessary permits and
regulatory approvals and reach a commercial agreement for the use of the Point
Arguello infrastructure. In addition, currently the Sword and Bonito units are
subject to litigation between the federal government and the state of
California concerning the state's ability to review MMS approvals of lease
suspensions for consistency with the state's Coastal Management Program and
cannot be developed until the resolution of such litigation. There can be no
assurance, however, that such development will occur. Plains is not the
operator of the Sword or Bonito units.

Illinois Basin

    In December 1995 Plains acquired its properties in the Illinois Basin from
Marathon Oil Company. In 2001 Plains spent $9.5 million on capital projects in
the Illinois Basin, the most significant of which was drilling 42 production
and nine injection wells and various water injection realignment projects. In
2002, Plains expects to spend $7.0 million on capital projects, which includes
drilling 37 development wells. In addition, Plains is continuing to evaluate
the feasibility and potential implementation of a pilot program to field test
an alkaline-surfactant enhanced oil recovery process. Plains' production from
the Illinois Basin averaged 2,600 Bbls of oil per day in the first nine months
of 2002.

Other

    Plains' 2001 capital expenditures included $9.9 million of capitalized
interest and general and administrative costs allocable directly to
acquisition, exploitation and development activities. Its 2002 estimated
capital expenditures include $9.0 million of capitalized interest and general
and administrative costs allocable directly to acquisition, exploitation and
development activities.

Exploration and acquisition expenditures

    The following table summarizes the costs incurred during the last three
years for Plains' exploitation and development, exploration and acquisition
activities.

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                             ------------------------
                                               2001    2000    1999
                                             -------- ------- -------
                                                  (In thousands)
          <S>                                <C>      <C>     <C>
          Exploitation and development costs $123,778 $68,186 $54,996
          Exploration costs.................      286     293     796
          Property acquisition costs:
             Unproved properties............       44      73     879
             Proved properties..............    1,645   1,953   2,496
                                             -------- ------- -------
          Total............................. $125,753 $70,505 $59,167
                                             ======== ======= =======
</TABLE>

                                      124

<PAGE>

    Exploitation and development costs include expenditures of $58.5 million in
2001, $20.6 million in 2000 and $10.7 million in 1999 related to the
development of proved undeveloped reserves included in Plains' proved oil and
gas reserves at the beginning of each year. Plains' year-end 2001 standardized
measure includes future development costs related to proved undeveloped
reserves of $25.5 million in 2002, $58.9 million in 2003 and $45.2 million in
2004.

Production and Sales

    The following table presents information with respect to oil and gas
production attributable to Plains' properties, the revenues Plains derived from
the sale of this production, average sales prices it received and its average
production expenses during the nine months ended September 30, 2002 and 2001,
and the years ended December 31, 2001, 2000 and 1999.

<TABLE>
<CAPTION>
                                     Nine Months Ended
                                       September 30,    Year Ended December 31,
                                     ----------------- --------------------------
                                       2002     2001     2001     2000     1999
                                     -------- -------- -------- -------- --------
<S>                                  <C>      <C>      <C>      <C>      <C>
Production:
   Oil (MBbl).......................    6,433    6,057    8,219    7,654    7,081
   Gas (MMcf).......................    2,540    2,499    3,355    3,042    3,163
       Total (MBOE).................    6,856    6,473    8,778    8,161    7,608
Oil and gas revenues (In thousands):
   Oil.............................. $129,563 $133,957 $174,895 $126,434 $102,390
   Gas..............................    7,130   26,870   28,771   16,017    5,095
   Other(1).........................       27      468      473        -        -
                                     -------- -------- -------- -------- --------
       Total revenues............... $136,720 $161,295 $204,139 $142,451 $107,485
                                     ======== ======== ======== ======== ========
Average realized prices (hedged):
   Oil ($/Bbl)(2)................... $  20.14 $  22.12 $  21.28 $  16.52 $  14.46
   Gas ($/Mcf)......................     2.81    10.75     8.58     5.26     1.61
   BOE ($/BOE)......................    19.94    24.85    23.20    17.46    14.13
Expenses ($/BOE):
   Average production expenses......     8.29     7.41     7.27     6.89     6.64
   General and administrative.......     1.07     1.09     1.16     0.77     0.57
   Depletion, depreciation and
     amortization...................     3.04     2.58     2.70     2.25     1.72
</TABLE>
--------
(1) Other revenues represents electricity related sales.
(2) Includes the effect of hedges, which was ($1.25), ($1.03), $.03, ($9.51)
    and ($1.06) in each of the above periods, respectively.

    Pursuant to an oil marketing agreement, PAA is the exclusive purchaser of
all of Plains' equity oil production.

Product Markets and Major Customers

    Plains' revenues are highly dependent upon the prices of, and demand for,
oil and gas. Historically, the markets for oil and gas have been volatile and
are likely to continue to be volatile in the future. The prices Plains receives
for its oil and gas production and the levels of its production are subject to
wide fluctuations and depend on numerous factors beyond its control, including
seasonality, economic conditions, foreign imports, political conditions in
other oil-producing and gas-producing countries, the actions of OPEC, and
domestic government regulation, legislation and policies. Decreases in oil and
gas prices have had, and could have in the future, an adverse effect on the
carrying value of Plains' proved reserves and its revenues, profitability and
cash flow.

                                      125

<PAGE>

    To manage its exposure to commodity price risks, Plains uses various
derivative instruments to hedge its exposure to price fluctuations on oil
sales. Plains' hedging arrangements provide it protection on the hedged volumes
if oil prices decline below the prices at which these hedges are set. However,
ceiling prices in its hedges may cause Plains to receive less revenues on the
hedged volumes than it would receive in the absence of hedges. Plains does not
currently have any gas hedges.

    Deregulation of gas prices has increased competition and volatility of gas
prices. Prices received for Plains' gas are subject to seasonal variations and
other fluctuations. All of its gas production is currently sold under various
arrangements at spot indexed prices.

    Substantially all of Plains' oil and gas production is transported by
pipelines, trucks and barges owned by third parties. The inability or
unwillingness of these parties to provide transportation services to Plains for
a reasonable fee could result in Plains having to find transportation
alternatives, increased transportation costs or involuntary decreases in a
significant portion of its oil and gas production.

    Pursuant to an oil marketing agreement, PAA is the exclusive purchaser of
all of Plains' equity oil production. The marketing agreement provides that PAA
will purchase for resale at market prices all of Plains' equity oil production.
Plains pays PAA a marketing and administration fee of $0.20 per barrel and
reimburses PAA for its reasonable expenses incurred in transporting or
exchanging Plains' oil. Plains has agreed to renegotiate the marketing and
administration fee in good faith every three years. Under the marketing
agreement, PAA has also agreed to, upon Plains' request and reimbursement for
its reasonable expenses, market certain of Plains' gas and gas liquids and
negotiate Plains' gas purchase agreements. If Plains were to lose PAA as the
exclusive purchaser of its equity production, Plains believes PAA could be
replaced by other purchasers under contracts with similar terms and conditions.
However, PAA's role as the exclusive purchaser for all of Plains' equity oil
production does have the potential to impact its overall exposure to credit
risk, either positively or negatively, in that PAA may be affected by changes
in economic, industry or other conditions.

Productive Wells and Acreage

    As of December 31, 2001 Plains had working interests in 2,057 gross (2,031
net) active producing oil wells. The following table sets forth information
with respect to Plains' developed and undeveloped acreage as of December 31,
2001.

<TABLE>
<CAPTION>
                                          December 31, 2001
                                     ---------------------------------
                                     Developed Acres Undeveloped Acres
                                     --------------- -----------------
                                     Gross    Net     Gross    Net(1)
                                     ------  ------   -------  ------
              <S>                    <C>     <C>     <C>       <C>
              Onshore California....  8,889   8,844    8,928    5,296
              Offshore California(2) 15,326   4,033   41,720    1,449
              Illinois and other(3). 17,777  15,482   69,360   49,101
                                     ------  ------   -------  ------
                 Total.............. 41,992  28,359  120,008   55,846
                                     ======  ======   =======  ======
</TABLE>
--------
(1) Less than 10% of total net undeveloped acres are covered by leases that
    expire from 2002 through 2004.
(2) Excludes 1,632 undeveloped acres (net) that Plains has the right to acquire
    under an option agreement.
(3) Includes 53,022 gross undeveloped acres and 42,505 net undeveloped acres
    that will be transferred to Plains in accordance with the terms of the
    separation agreement.

                                      126

<PAGE>

Drilling Activities

    Information with regard to Plains' developmental well drilling activities
during the years ended December 31, 2001, 2000 and 1999 is set forth below:

<TABLE>
<CAPTION>
                                 Year Ended December 31,
                           -----------------------------------
                              2001        2000        1999
                           ----------- ----------- -----------
                           Gross  Net  Gross  Net  Gross  Net
                           ----- ----- ----- ----- ----- -----
                 <S>       <C>   <C>   <C>   <C>   <C>   <C>
                 Oil...... 168.0 163.4 156.0 154.0 105.0 105.0
                 Gas......     -     -     -     -     -     -
                 Dry......   1.0   1.0   2.0   2.0     -     -
                           ----- ----- ----- ----- ----- -----
                    Total. 169.0 164.4 158.0 156.0 105.0 105.0
                           ===== ===== ===== ===== ===== =====
</TABLE>

Real Estate

    Plains currently owns surface and mineral rights in the following tracts of
real property, portions of which are used in its oil and gas operations:

<TABLE>
<CAPTION>
      Property                   Location              Approximate acreage
      --------                   --------              -------------------
      <S>           <C>                                <C>
      Inglewood.... Los Angeles County, California               40
      Montebello... Los Angeles County, California              450
      Arroyo Grande San Luis Obispo County, California        1,045
      Mt. Poso..... Kern County, California                   1,230
      Gaviota...... Santa Barbara County, California            160
</TABLE>

    In the course of Plains' business, certain of its properties may be subject
to easements or other incidental property rights and legal requirements that
may affect the use and enjoyment of its property. For instance, 183 of Plains'
acres in the Montebello field have been designated as California Coastal Sage
Scrub.

Title to Properties

    Plains' properties are subject to customary royalty interests, liens
incident to operating agreements, liens for current taxes and other burdens,
including other mineral encumbrances and restrictions. Plains does not believe
that any of these burdens materially interfere with its use of the properties
in the operation of its business.

    Plains believes that it has generally satisfactory title to or rights in
all of its producing properties. As is customary in the oil and gas industry,
Plains makes minimal investigation of title at the time it acquires undeveloped
properties. Plains makes title investigations and receives title opinions of
local counsel only before it commences drilling operations. Plains believes
that it has satisfactory title to all of its other assets. Although title to
its properties is subject to encumbrances in certain cases, Plains believes
that none of these burdens will materially detract from the value of its
properties or from its interest therein or will materially interfere with its
use in the operation of its business.

Competition

    Plains' competitors include major integrated oil and gas companies and
numerous independent oil and gas companies, individuals and drilling and income
programs. Many of its larger competitors possess and employ financial and
personnel resources substantially greater than Plains'. These competitors are
able to pay more for productive oil and gas properties and exploratory
prospects and to define, evaluate, bid for and purchase a greater number of
properties and prospects than Plains' financial or human resources permit.
Plains' ability to acquire additional properties and to discover

                                      127

<PAGE>

reserves in the future will depend on its ability to evaluate and select
suitable properties and to consummate transactions in a highly competitive
environment. In addition, there is substantial competition for capital
available for investment in the oil and gas industry.

Regulation

    Plains' operations are subject to extensive regulations. Many federal,
state and local departments and agencies are authorized by statute to issue,
and have issued, laws and regulations binding on the oil and gas industry and
its individual participants. The failure to comply with these rules and
regulations can result in substantial penalties. The regulatory burden on the
oil and gas industry increases Plains' cost of doing business and,
consequently, affects its profitability. However, Plains does not believe that
it is affected in a significantly different manner by these laws and
regulations than are its competitors. Due to the myriad of complex federal,
state and local regulations that may affect Plains directly or indirectly, you
should not rely on the following discussion of certain laws and regulations as
an exhaustive review of all regulatory considerations affecting its operations.

    OSHA.  Plains is subject to the requirements of the federal Occupational
Safety and Health Act, as amended, or OSHA, and comparable state statutes that
regulate the protection of the health and safety of workers. In addition, the
OSHA hazard communication standard, the United States Environmental Protection
Agency community-right-to-know regulations, and similar state statutes require
that Plains maintains certain information about hazardous materials used or
produced in its operations and that it provides this information to its
employees, state and local government authorities and citizens. Plains believes
that its operations are in substantial compliance with OSHA requirements,
including general industry standards, record keeping requirements and
monitoring of occupational exposure to regulated substances.

    MMS.  Plains' oil and gas operations on offshore leases located in federal
waters are regulated by the MMS. The MMS has broad authority over these
operations. It must approve and grant permits in connection with Plains'
drilling and development plans. Additionally, the MMS has promulgated
regulations requiring offshore production facilities to meet stringent
engineering and construction specifications restricting the flaring or venting
of gas, governing the plugging and abandonment of wells and controlling the
removal of production facilities. Under certain circumstances, the MMS may
require the suspension or termination of any of Plains' operations on federal
leases, as discussed in "Risk Factors-Governmental agencies and other bodies,
including those in California, might impose regulations that increase Plains'
costs and may terminate or suspend Plains' operations," and has proposed
regulations that would permit it to expel unsafe operators from offshore
operations. The MMS has also established rules governing the calculation of
royalties and the valuation of oil produced from federal offshore leases and
regulations regarding costs for gas transportation. Delays in the approval of
plans and issuance of permits by the MMS because of staffing, economic,
environmental or other reasons could adversely affect Plains' operations.

    Regulation of production.  The production of oil and gas is subject to
regulation under a wide range of federal and state statutes, rules, orders and
regulations. State and federal statutes and regulations require permits for
drilling operations, drilling bonds and reports concerning operations. The
states in which Plains owns and operates properties have regulations governing
conservation matters, including provisions for the unitization or pooling of
oil and gas properties, the establishment of maximum rates of production from
oil and gas wells and the regulation of the spacing, plugging and abandonment
of wells. Many states also restrict production to the market demand for oil and
gas, and several states have indicated interest in revising applicable
regulations. These regulations limit the amount of oil and gas Plains can
produce from its wells and limit the number of wells or the locations at which
it can drill. Also, each state generally imposes an ad valorem, production or
severance tax with respect to production and sale of oil, gas and natural gas
liquids within its jurisdiction.

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    Pipeline regulation.  Plains has pipelines to deliver its production to
sales points. Plains' pipelines are subject to regulation by the United States
Department of Transportation with respect to the design, installation, testing,
construction, operation, replacement, and management of pipeline facilities. In
addition, Plains must permit access to and copying of records, and must make
certain reports and provide information, as required by the Secretary of
Transportation. The states in which Plains has pipelines have comparable
regulations. Some of Plains' pipelines related to the Point Arguello unit are
also subject to regulation by the Federal Energy Regulatory Commission, or
FERC. Plains believes that its pipeline operations are in substantial
compliance with applicable requirements.

    Sale of gas.  The FERC regulates interstate gas pipeline transportation
rates and service conditions. Although the FERC does not regulate gas producers
such as Plains, the agency's actions are intended to foster increased
competition within all phases of the gas industry. To date, the FERC's
pro-competition policies have not materially affected Plains' business or
operations. It is unclear what impact, if any, future rules or increased
competition within the gas industry will have on Plains' gas sales efforts.

    The FERC, the United States Congress or state regulatory agencies may
consider additional proposals or proceedings that might affect the gas
industry. Plains cannot predict when or if these proposals will become
effective or any effect they may have on its operations. Plains does not
believe, however, that any of these proposals will affect it any differently
than other gas producers with which it competes.

    Environmental.  Plains' operations and properties are subject to extensive
and changing federal, state and local laws and regulations relating to safety,
health and environmental protection, including the generation, storage,
handling, emission and transportation of materials and the discharge of
materials into the environment. Other statutes that provide protection to
animal and plant species and which may apply to Plains' operations include, but
are not necessarily limited to, the Marine Mammal Protection Act, the Marine
Protection, Research and Sanctuaries Act, the Fish and Wildlife Coordination
Act, the Fishery Conservation and Management Act, the Migratory Bird Treaty Act
and the National Historic Preservation Act. These laws and regulations may
require the acquisition of a permit or other authorization before construction
or drilling commences and for certain other activities, limit or prohibit
construction, drilling and other activities on certain lands lying within
wilderness or wetlands and other protected areas; and impose substantial
liabilities for pollution resulting from Plains' operations. The permits
required for various of Plains' operations are subject to revocation,
modification and renewal by issuing authorities.

    As with the oil and gas industry generally, Plains' compliance with
existing and anticipated laws and regulations increases its overall cost of
business, including its capital costs to construct, maintain, upgrade and close
equipment and facilities. Although these regulations affect its capital
expenditures and earnings, Plains believes that they do not affect its
competitive position because its competitors that comply with such laws and
regulations are similarly affected, except as discussed in "Risk
Factors--Environmental liabilities could adversely affect Plains' financial
condition". Environmental laws and regulations have historically been subject
to change, and Plains is unable to predict the ongoing cost to it of complying
with these laws and regulations or the future impact of these laws and
regulations on its operations. If a person violates these environmental laws
and regulations and any related permits, they may be subject to significant
administrative, civil and criminal penalties, injunctions and construction bans
or delays. If Plains were to discharge hydrocarbons or hazardous substances
into the environment, it could, to the extent the event is not insured, incur
substantial expense, including both the cost to comply with applicable laws and
regulations and claims made by neighboring landowners and other third parties
for personal injury and property damage. For additional information, see "Risk
Factors--Environmental liabilities could adversely affect Plains' financial
condition".

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    Permits.  Plains' operations are subject to various federal, state and
local regulations that include requiring permits for the drilling of wells,
maintaining bonding and insurance requirements to drill, operate, plug and
abandon, and restore the surface associated with its wells, and regulating the
location of wells, the method of drilling and casing wells, the surface use and
restoration of properties upon which wells are drilled, the plugging and
abandonment of wells, the disposal of fluids and solids used in connection with
its operations and air emissions associated with its operations. Also, Plains
has permits from the city and county of Los Angeles, California, the city of
Culver City, California, the county of Kern, California, and the county of
Santa Barbara, California to operate oil, gas and related pipelines and
equipment that run within the boundaries of these governmental entities.

Plugging, Abandonment and Remediation Obligations

    Under the amended terms of an asset purchase agreement with respect to
certain of Plains' onshore California properties, commencing with the year
beginning January 1, 2000, and each year thereafter, Plains is required to plug
and abandon 20% of the then remaining inactive wells, which currently aggregate
approximately 149. To the extent Plains elects not to plug and abandon the
number of required wells, it is required to escrow an amount equal to the
greater of $25,000 per well or the actual average plugging cost per well in
order to provide for the future plugging and abandonment of such wells. In
addition, Plains is required to expend a minimum of $600,000 per year in each
of the ten years beginning January 1, 1996, and $300,000 per year in each of
the succeeding five years to remediate oil contaminated soil from existing well
sites, provided there are remaining sites to be remediated. If Plains does not
expend the required amounts during a calendar year, it is required to
contribute an amount equal to 125% of the actual shortfall to an escrow
account. It may withdraw amounts from the escrow account to the extent it
expends excess amounts in a future year. Through September 30, 2002, Plains has
not been required to make contributions to an escrow account.

    In connection with the acquisitions of its interests in the Point Arguello
field, offshore California, Plains assumed its 52.6% share of (1) plugging and
abandoning all existing well bores, (2) removing conductors, (3) flushing
hydrocarbons from all lines and vessels and (4) removing/abandoning all
structures, fixtures and conditions created subsequent to closing. The sellers
retained the obligation for all other abandonment costs, including but not
limited to (1) removing, dismantling and disposing of the existing offshore
platforms, (2) removing and disposing of all existing pipelines and (3)
removing, dismantling, disposing and remediation of all existing onshore
facilities.

    Although Plains obtained environmental studies on its properties in
California and Illinois and it believes that such properties have been operated
in accordance with standard oil field practices, certain of the fields have
been in operation for more than 90 years, and current or future local, state
and federal environmental laws and regulations may require substantial
expenditures to comply with such rules and regulations. In connection with the
purchase of certain of its onshore California properties, Plains received a
limited indemnity for certain conditions if they violate applicable local,
state and federal environmental laws and regulations in effect on the date of
such agreement. Plains believes that it does not have any material obligations
for operations conducted prior to its acquisition of the properties, other than
its obligation to plug existing wells and those normally associated with
customary oil field operations of similarly situated properties. Current or
future local, state or federal rules and regulations may require Plains to
spend material amounts to comply with such rules and regulations, and there
will be no assurance that any portion of such amounts will be recoverable under
the indemnity.

    Consistent with normal industry practices, substantially all of Plains' oil
and gas leases require that, upon termination of economic production, the
working interest owners plug and abandon non-producing wellbores, remove tanks,
production equipment and flow lines and restore the wellsite. Plains has
estimated that at December 31, 2001 the costs to perform these tasks was
approximately $19.3 million, net of salvage value and other considerations.

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Legal Proceedings

    In the ordinary course of its business, Plains is a claimant or defendant
in various legal proceedings. Plains does not believe that the outcome of these
legal proceedings, individually or in the aggregate, will have a material
adverse effect on its financial condition, results of operations or cash flows.

    On September 18, 2002 Stocker Resources Inc., or Stocker, Plains' general
partner before Plains converted from a limited partnership to a corporation,
filed a declaratory judgment action against Commonwealth Energy Corporation, or
Commonwealth, in the Superior Court of Orange County, California relating to
the termination of an electric service contract. Stocker is seeking a
declaratory judgment that it was entitled to terminate the contract and that
Commonwealth has no basis for proceeding against Stocker's related $1.5 million
performance bond. Also on September 18, 2002, Stocker was named a defendant in
an action brought by Commonwealth in the Superior Court of Orange County,
California for breach of the electric service contract. Commonwealth is seeking
unspecified damages. Under the master separation agreement described on pages
[   ], Plains will be required to indemnify Stocker for damages it incurs as a
result of this action. Plains understands that Stocker intends to defend its
rights vigorously in this matter.

    At this time, Plains is not in a position to express a judgment concerning
the potential exposure or likely outcome of this matter.

Employees

    As of December 31, 2002 Plains had 350 full-time employees, 250 of whom
were field personnel involved in oil and gas producing activities. Plains
believes its relationship with its employees is good. None of Plains' employees
is covered by a collective bargaining agreement.

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  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                              OPERATIONS OF 3TEC

    The following information should be read in connection with the information
contained in the financial statements and notes thereto included and
incorporated by reference in this document.

General

    3TEC is engaged in the acquisition, development, production and exploration
of primarily gas reserves. 3TEC's properties are concentrated in East Texas and
the Gulf Coast region, both onshore and in the shallow waters of the Gulf of
Mexico. 3TEC's management and technical staff have substantial experience in
each of these areas. As of December 31, 2001, 3TEC had estimated total net
proved reserves of 263 Bcfe, of which approximately 88% were gas and
approximately 77% were proved developed, with an estimated PV-10 value of $212
million (using SEC pricing parameters at December 31, 2001 ($2.57/Mcf and
$19.84/Bbl)).

    Prior to 2002, 3TEC increased its reserves and production principally
through acquisitions. 3TEC focused on properties that have had a substantial
proved reserve component and which 3TEC's management believed to have
additional exploitation opportunities. Recently, 3TEC has also acquired a
number of drilling prospects covered by an extensive 3-D seismic database that
3TEC believes have exploration potential. 3TEC has assembled an experienced
management team and technical staff with expertise in property acquisitions and
development, reservoir engineering, exploration and financial management.

Description of Critical Accounting Policies

    Oil and Gas Properties.  3TEC uses the successful efforts method of
accounting for its oil and gas properties. Under this method, all development
and acquisition costs of proved properties are capitalized and amortized on a
unit-of-production basis over the remaining life of proved developed reserves
or proved reserves, as applicable. Exploration expenses, including geological
and geophysical expenses and delay rentals, are charged to expense as incurred.
Costs of drilling exploratory wells are initially capitalized, but charged to
expense if and when the well is determined to be unsuccessful. Expenditures for
repairs and maintenance to sustain or increase production from the existing
producing reservoir are charged to expense as incurred. Expenditures to
recomplete a current well in a different or additional proven or unproven
reservoir are capitalized pending determination that economic reserves have
been added. If the recompletion to an unproven reservoir is not successful, the
expenditures are charged to expense. Expenditures for redrilling or directional
drilling in a previously abandoned well are classified as drilling costs to a
proven or unproven reservoir for determination of capital or expense.
Significant tangible equipment added or replaced is capitalized. Expenditures
to construct facilities or increase the productive capacity from existing
reserves are capitalized. Internal costs directly associated with the
development and exploitation of properties are capitalized as a cost of the
property and are classified accordingly in 3TEC's financial statements. Oil
volumes are converted to equivalent Mcfe's at the rate of one barrel to six
Mcfe.

    3TEC is required to assess the need for an impairment of capitalized costs
of oil and gas properties and other long-lived assets whenever events or
circumstances indicate that the carrying value of those assets may not be
recoverable. If impairment is indicated based on a comparison of the asset's
carrying value to its undiscounted expected future net cash flows, then it is
recognized to the extent that the carrying value exceeds fair value. Any
impairment charge incurred is recorded in accumulated depletion, depreciation,
and amortization, or DD&A, to reduce 3TEC's recorded basis in the asset. Each
part of this calculation is subject to a large degree of management judgment,
including the determination of a property's reserves, future cash flows, and
fair value.

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    3TEC's management's assumptions used in calculating oil and gas reserves or
regarding the future cash flows or fair value of 3TEC's properties are subject
to change in the future. Any change could cause impairment expense to be
recorded, reducing 3TEC's net income and its basis in the related asset. Future
prices received for production and future production costs may vary, perhaps
significantly, from the prices and costs assumed for purposes of calculating
reserve estimates. There can be no assurance that the proved reserves will be
developed within the periods estimated or that prices and costs will remain
constant. Actual production may not equal the estimated amounts used in the
preparation of reserve projections. As these estimates change, the amount of
calculated reserves change. Any change in reserves directly impacts 3TEC's
estimate of future cash flows from the property, as well as the property's fair
value. Additionally, as 3TEC's management's views related to future prices
change, this changes the calculation of future net cash flows and also affects
fair value estimates. Changes in either of these amounts will directly impact
the calculation of impairment.

    DD&A expense is also directly affected by 3TEC's reserve estimates. Any
change in reserves directly impacts the amount of DD&A expense 3TEC recognizes
in a given period. Assuming no other changes, such as an increase in
depreciable base, as 3TEC's reserves increase the amount of DD&A expense in a
given period decreases and vice versa. Changes in future commodity prices would
likely result in increases or decreases in estimated recoverable reserves.

    3TEC also uses estimates to record its accrual for oil and gas revenues.
The volume portion of the accrual of revenue for a given period is based upon
field production reports (both operated and non-operated), estimates of
production added via drilling or acquisitions, historical production averages
and natural production declines of 3TEC's properties. The price component of
3TEC's accrual for revenue incorporates historical averages of its sales as
compared to the monthly closing NYMEX price for gas and the West Texas
Intermediate index price for oil.

    Several factors can impact 3TEC's ability to estimate its production volume
such as the fact that a significant portion of 3TEC's production is operated by
third parties. Reliance on accurate and timely data from the operators of these
properties can change the actual amounts of production for which 3TEC receives
payments. Additionally, production meters that are manually read can be
different than the volume metered at 3TEC's sales points.

    Both 3TEC's estimate of sold volumes and the estimate of the price received
for these sales is adjusted on an on-going basis as 3TEC receives payment for
the accrued volumes. Changes in the estimates of the accrual are adjusted for
in subsequent periods as payment is received or additional supporting data is
obtained.

    Bad Debt Expense.  3TEC routinely assesses the recoverability of all
material trade and other receivables to determine their collectibility. 3TEC
historically has not required collateral or other performance guarantees from
creditworthy counterparties. Many of our receivables are from joint interest
owners on property of which 3TEC is the operator. Thus, 3TEC may have the
ability to withhold future revenue disbursements to cover any non-payment of
joint interest billings. 3TEC's oil and natural gas receivables quickly
turnover, usually one month for oil and two months for gas; thus, signaling any
problem accounts in a timely manner. Counterparties to 3TEC's derivative
commodity contracts are routinely reviewed for creditworthiness to determine
the realizability of any related derivative assets 3TEC might carry on its
books. This review of receivables and counterparties is heavily dependent on
the judgment of 3TEC management. If it is determined that the carrying value of
a receivable or financial instrument might not be recoverable, 3TEC records an
allowance to the extent 3TEC believes the receivable or asset is not
recoverable. The determination as to what extent a receivable or asset might be
impaired is also heavily dependent on the judgment of management. As more
information becomes known related to a particular counterparty or customer,
management will continually reassess previous judgments and any resulting
change in the related allowance could have

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a material positive or negative effect on 3TEC's financial position and results
of operations in the period of the change.

    Derivative Activities.  3TEC uses various financial instruments in the
normal course of its business to manage and reduce price volatility and other
market risks associated with its oil and gas production. This activity is
referred to as risk management. These arrangements are structured to reduce
3TEC's exposure to commodity price decreases, but they can also limit the
benefit 3TEC might otherwise receive from commodity price increases. 3TEC's
risk management activity is generally accomplished through over-the-counter
forward derivative contracts executed with large financial institutions.

    Effective January 1, 2001, 3TEC adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities". This standard requires 3TEC to recognize all of its
derivative and hedging instruments in its consolidated balance sheets as either
assets or liabilities and measure them at fair value. If a derivative does not
qualify for hedge accounting, it must be adjusted to fair value through
earnings. However, if a derivative does qualify for hedge accounting, depending
on the nature of the hedge, changes in fair value can be offset against the
change in fair value of the hedged item through earnings or recognized in other
comprehensive income until such time as the hedged item is recognized in
earnings.

    To qualify for cash flow hedge accounting, the cash flows from the hedging
instrument must be highly effective in offsetting changes in cash flows due to
changes in the underlying items being hedged. In addition, all hedging
relationships must be designated, documented, and reassessed periodically.
3TEC's gas derivative financial instruments were not designated as hedges at
the time the instruments were executed and, as such, these instruments are
marked-to-market through earnings each period.

Liquidity and Capital Resources

    Cash Flow.  3TEC believes that its cash flows from operations are adequate
to meet the requirements of operating its business. However, future cash flows
are subject to a number of variables, including 3TEC's level of production and
prices, and 3TEC cannot assure that operations and other capital resources will
provide cash in sufficient amounts to maintain planned levels of capital
expenditures. 3TEC's principal operating sources of cash include sales of gas
and oil production.

    3TEC's earnings before earnings before interest income and expense, income
taxes, depreciation and amortization, impairment expense, dry hole expense,
geological and geophysical expense, and minority interest, or EBITDAX, for the
years ended December 31, 2001 and 2000, were $75.8 million and $74.4 million,
respectively. For the year 2002, 3TEC budgeted approximately $45- 65 million
for capital expenditures depending on the price of gas and drilling costs in
2002. The low-end of the range is based on an average gas price of $2.50/MMbtu.
Pricing increases to $3.00/MMbtu and above will move 3TEC's capital
expenditures into the higher end of the range. 3TEC is obligated to pay
dividends of approximately $740,000 per year on the 3TEC Preferred Stock which
it may pay in either cash or in additional shares of 3TEC Preferred Stock
during the three years ending February 1, 2003.

    3TEC's activities in 2001 were been financed through operating cash flow
and bank borrowings. 3TEC's primary source of financing for acquisitions has
been borrowing under its credit facility described below.

    Credit Facility.  3TEC has in place a $250 million credit facility with
Bank One, NA as agent and seven other banks. The credit facility matures August
31, 2004 and as of September 30, 2002 had a borrowing base of $160 million. As
of September 30, 2002, 3TEC was paying an average of 3.36% per annum interest
on the principal balance of $97 million under the credit facility. Prior to
maturity, no

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payments of principal are required so long as the borrowing base exceeds the
loan balance. The borrowings under the credit facility are secured by
substantially all of 3TEC's oil and gas properties.

    The following table illustrates 3TEC's contractual obligations outstanding
at December 31, 2001:

<TABLE>
<CAPTION>
                             Payments Due By Period
                             ----------------------

      Contractual Obligations  Total  2002  2003-2004 2005-2006 Thereafter
      ----------------------- ------- ----- --------- --------- ----------
                                             (in thousands)
      <S>                     <C>     <C>   <C>       <C>       <C>
         Long-term debt...... 108,000    --  108,000       --        --
         Operating leases....   7,298 1,142    2,650    1,737     1,769
            Totals........... 115,298 1,142  110,650    1,737     1,769
</TABLE>

    Market Risk.  3TEC generally sells its oil at local field prices paid by
the principal purchasers of oil. The majority of 3TEC's gas production is sold
at spot prices. Accordingly, 3TEC is generally subject to the commodity prices
for these resources as they vary from time to time.

    Inflation and Changes in Prices.  3TEC's revenues and the value of its oil
and gas properties have been and will be affected by changes in gas and oil
prices. 3TEC's ability to maintain current borrowing capacity and to obtain
additional capital on attractive terms is also substantially dependent on gas
and oil prices. These prices are subject to significant seasonal and other
fluctuations that are beyond 3TEC's ability to control or predict. Costs and
expenses are affected by the level of inflation. Should current conditions in
the industry be sustained, increased competition resulting in a relative
shortage of oilfield supplies and/or services, and inflationary cost pressures
may continue.

    Derivative Activities.  3TEC's derivative contracts in effect at September
30, 2002 will impact its liquidity for the periods covered by these contracts.
3TEC anticipates that the cash flow from its physical production will provide
sufficient liquidity to settle any obligation generated by the monthly
settlement terms of 3TEC's derivative contract activities. Since September 30,
2002, the contract months for October and November have settled for cash
payments of $3.1 million. NYMEX futures prices for gas at October 31, 2002 are
above 3TEC's collar established for the period December 2002 to March 2003.
Cash prices received by 3TEC for its gas production have historically been
highly correlated with NYMEX prices. At October 31, 2002, the fair value of
3TEC's open derivative positions was a $3.1 million mark-to-market loss. A 10%
increase to the October 31 NYMEX prices would result in settlements of the open
contract months (December 2002 through March 2003) for 3TEC's derivatives to
increase by $0.7 million while a 10% decrease would result in a $2.3 million
decrease to these contract settlements versus the October 31, 2002
mark-to-market loss.

    You should read the following discussion and analysis together with 3TEC's
audited consolidated financial statements and the related notes for the fiscal
year ended December 31, 2001, filed in 3TEC's 2001 Form 10-KSB, incorporated
herein by reference. 3TEC's revenue, profitability, and future rate of growth
are dependent upon prevailing prices for oil and gas, which, in turn, depend
upon numerous factors such as economic, political, and regulatory developments
as well as competition from other sources of energy. The energy markets
historically have been highly volatile, and future decreases in prices could
have an adverse effect on 3TEC's financial position, results of operations,
quantities of reserves that may be economically produced, and access to capital.

Comparison of Nine Months Ended September 30, 2002 Compared to Nine Months
Ended September 30, 2001

    Oil and Gas Revenues.  Revenues from oil and gas operations decreased 28%,
or $26.9 million, to $70.8 million for the nine months ended September 30, 2002
from $97.7 million for the nine months ended September 30, 2001. The decrease
is attributable to lower commodity prices received

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by 3TEC during the period ($22.25/Bbl and $2.99/Mcf in 2002 versus $25.25/Bbl
and $4.76/Mcf in 2001), partially offset by higher daily production volumes due
to recent drilling successes.

    Gain (loss) on Sale of Properties.  The loss on sale of properties for the
nine months ended September 30, 2002 amounted to $0.1 million compared to a
gain of $3.4 million during the same period of 2001. The variance is a result
of 3TEC's divestment of non-strategic oil and gas properties in 2001 versus
minimal divestiture activity in 2002.

    Derivatives Fair Value and Settlements.  The loss on derivatives fair value
of $9.3 million for the nine months ended September 30, 2002 represents the
fair value mark-to-market adjustment made related to 3TEC's open positions at
December 31, 2001 versus the open positions at September 30, 2002. During the
first quarter of 2002 3TEC unwound the floor portion of the April 2002 through
October 2002 contract for a gain of approximately $5.8 million. Additionally,
approximately $1.1 million in cash settlements were received by 3TEC for a
derivative contract that covered the contract period of November 2001 through
March 2002, which expired during the first quarter of 2002. During the third
quarter of 2002, 3TEC had derivatives settlement payments of approximately $4.1
million. There were no derivative contracts in place at September 30, 2001.

    Production Expense.  Production expense for the nine months ended September
30, 2002, decreased 11%, or $2.4 million, to $18.7 million compared to $21.1
million during the same period of 2001. Lease operating expenses on an $/Mcfe
basis decreased to $0.47/Mcfe from $0.59/Mcfe, while production, severance and
ad valorem taxes decreased to $0.24/Mcfe from $0.31/Mcfe. Lower per unit
operating costs associated with 3TEC's acquired properties and higher per unit
operating costs of properties sold by 3TEC during the 2nd and 3rd quarters of
2001 are attributed to the current period decreases. Lower realized commodity
prices during the nine months ended September 30, 2002 of $3.10/Mcfe vs.
$4.64/Mcfe in 2001 is the principal reason for the decrease in taxes.

    Geological and Geophysical.  Geological and geophysical expense for the
nine months ended September 30, 2002 increased 120%, or $.6 million, to $1.1
million compared to $0.5 million in 2001. The increase is attributed primarily
to 3TEC's exploratory activities and related costs incurred for acquisition and
reprocessing of seismic data.

    Dry Hole and Impairments.  Dry hole and impairments increased by $1.0
million in the nine months ended September 30, 2002 as a result of plugging and
abandoning a well during the period and an impairment charge recognized on a
well where reserves have declined as a result of reservoir and production
problems.

    Surrendered and Expired Acreage.  The increase in surrendered and expired
acreage is attributed to geological and geophysical costs associated with
exploratory activities.

    General and Administrative Expense.  General and administrative expense for
the nine months ended September 30, 2002 increased by $1.8 million compared to
the same period in 2001. The increase is attributable to continued increases in
staffing levels as a result of 3TEC's significant growth.

    Restricted Stock Expense.  During the nine months ended September 30, 2002,
3TEC recognized restricted stock compensation expense (general and
administrative) of $0.7 million which is attributed to the share grants made to
certain officers of 3TEC that were approved at 3TEC's annual meeting in May,
2002.

    Interest.  Interest expense during the nine-month period ended September
30, 2002 decreased 46%, or $2.6 million, to $3.0 million compared to $5.6
million for the same period ending September 30, 2001. The decrease is
attributable to lower interest rates quarter over quarter (approximately 3.8%
in 2002 versus 6.6% in 2001).

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    Depreciation, Depletion and Amortization Expense.  DD&A increased 33%, or
$6.7 million, to $27.2 million for the nine months ended September 30, 2002
from $20.5 million for the nine months ended September 30, 2001. The increase
in DD&A recorded is attributed to 3TEC's production growth and the impact of
its developmental drilling activities whereby 3TEC converts proved undeveloped
reserves into proved developed producing reserves.

    Income Taxes.  For the nine months ended September 30, 2002, 3TEC recorded
a tax benefit of $0.7 million compared to a tax provision of $18.1 million
during the same period in 2001. The benefit recorded in 2002 reflects 3TEC's
net loss at the expected effective tax rate for 2002 of approximately 39%.

    Dividends to Preferred Stockholders.  Dividends to 3TEC preferred
stockholders of approximately $0.6 million in the nine months ended September
30, 2002 are comparable to the $0.6 million for the nine months ended September
30, 2001. 3TEC currently pays only the Series D Dividend, which is paid
semi-annually on March 31 and September 30.

Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000

    Revenue.  Total revenue for the year ended December 31, 2001 increased 17%,
or $17.2 million, to $121.0 million over total revenue for 2000 of $103.8
million. Oil, gas and plant income revenues for the 2001 period increased 14%,
or $14.0 million, to $116.1 million compared to $102.1 million in 2000.
Realized prices for 3TEC's production was $4.12/Mcfe in 2001 compared to
$4.20/Mcfe in 2000, while production volumes increased to 28,065 Mmcfe in 2001
compared to 24,598 Mmcfe in 2000. Realized price increases for 2001 and 2000
were reflective of the continued strong commodity price environment in the
industry. Comparability of 3TEC's revenues and volumes were both driven by an
significant drilling program in 2001 and 2000 and the acquisitions of Magellan
properties in February 2000, the CWR properties in May 2000 and the Classic
properties in January 2001, offset by the 2001 property divestments which were
all significant contributors to the year over year increases.

    Gain on Sale of Properties and Other Revenue.  In 2001 and 2000, property
divestments resulted in the recognition of gains of $0.8 million and $0.8
million, respectively. 3TEC continues to actively review and manage its
property portfolio for divestiture of non-strategic properties. Other revenues
in 2001 increased 25%, or $0.2 million, to $1.0 million compared to $0.8
million in 2000. Other revenue consists primarily of interest, delay rental and
lease bonus income.

    Gain on Derivative Fair Value.  During the fourth quarter of 2001, 3TEC
entered into certain derivative transactions that were not designated as hedges
and therefore are required under generally accepted accounting principals to be
"marked-to-market." At December 31, 2001, these contracts had a fair market
value of $3.1 million.

    Expenses.  Total expenses for the year ended December 31, 2001 increased
59%, or $34.6 million, to $93.0 million from total expenses in 2000 of $57.4
million. Comparability of total expenses was impacted by the increase in dry
hole and impairment expenses, surrendered and expired acreage and the increase
in depreciation, depletion and amortization. On a per Mcfe basis, 3TEC's lease
operating expenses decreased by 7% to $0.57 in 2001 from $0.61 in 2000.

    Production, severance and ad valorem tax was flat at $0.27/Mcfe in 2001 vs.
$0.27/Mcfe in 2000. General and administrative expense was $0.25/Mcfe in 2001
compared to $0.25/Mcfe in 2000, interest expense $0.24/Mcfe vs. $0.31/Mcfe in
2000, and DD&A $1.10/Mcfe in 2001 compared to $0.80/Mcfe in 2000. Lease
operating expenses on a unit basis were impacted by 3TEC's Classic Acquisition
and 2001 divestiture program. The properties in the Classic acquisition were
gas wells with lower lease operating costs as compared to the divested
properties that had higher lease operating costs which were primarily

                                      137

<PAGE>

oil producers. Production, severance and ad valorem taxes were comparable year
over year as expected with average sales prices on an Mcfe basis being
$4.12/Mcfe in 2001 vs. $4.20/Mcfe in 2000.

    The increase on a per unit basis to DD&A is attributed to the Classic
acquisition and 3TEC's developmental drilling program. At the time 3TEC
acquired the stock of Classic Resources, Inc., the historical tax basis of the
Classic properties were carried over to 3TEC's books. A corresponding deferred
tax liability was recorded in 3TEC's purchase price allocation for the
difference between the allocated value and the historical tax basis. This
"gross-up" to record the deferred tax liability, resulted in approximately $29
million being added to the depletable book basis of the Classic properties.
3TEC's development drilling activities during 2001 also contributed to the
increase in its DD&A rate in 2001 due to a majority of the proved undeveloped
reserves associated with these capitalized costs associated having been already
included in 3TEC's December 31, 2000 reserve report estimate. Thus, additional
costs were added to a relatively static reserve figure, thereby increasing the
per unit rate.

    Income Taxes.  3TEC recorded a $10.6 million income tax provision during
2001 as compared to a $14.4 million income tax provision for 2000. The results
from 3TEC's operations generated pre-tax income of $28.0 million during 2001
compared with a pre-tax income of $46.4 million in 2000. During 2001, 3TEC's
effective tax rate was approximately 38%. In 2001, 3TEC expects to pay
approximately $1.6 million in current taxes. 3TEC paid $7.9 million in taxes
for 2000.

    Net Income.  3TEC's 2001 net income decreased 47%, or $14.9 million, to
$16.8 million compared to $31.7 million in 2000.

    Dividends to Preferred Stockholders.  Dividends to 3TEC preferred
stockholders decreased 53%, or $0.8 million, to $0.7 million in 2001 from 2000
dividends of $1.5 million. 3TEC redeemed its Series C preferred stock in
September, 2000 and recognized a non-cash charge to dividend expense of $0.5
million in 2000.

Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999

    Revenue.  Total revenue for the year ended December 31, 2000 increased
368%, or $81.6 million, to $103.8 million over total revenue for 1999 of $22.2
million. Oil, gas and plant income revenues for the 2000 period were $102.1
million compared to $20.0 million in 1999, an increase of $82.1 million (411%).
Realized prices for 3TEC's production was $4.20/Mcfe in 2000 compared to
$2.43/Mcfe in 1999, while production volumes increased to 24,598 Mmcfe in 2000
compared to 7,930 Mmcfe in 1999. Realized price increases for 2000 over 1999
were reflective of the strong commodity price environment in the industry,
while being only minimally impacted by 3TEC's hedging activities in both years
($2.1 million loss in 2000 on oil hedging, and $0.2 million loss on gas hedging
in 1999). Comparability of 3TEC's revenues and volumes were both driven by an
aggressive developmental drilling program in 2000 and the acquisition of the
Floyd Oil properties in November 1999, the Magellan properties in February 2000
and the CWR properties in May 2000, which were all significant contributors to
the year over year increases.

    Gain on Sale of Properties and Other Revenue.  In 2000 and 1999, property
divestments resulted in the recognition of gains of $0.8 million and $1.0
million, respectively. 3TEC continues to actively review and manage its
property portfolio for divestiture of non-strategic properties. Other revenues
in 2000 were $0.8 million compared to $1.0 million in 1999. Other revenue
consists primarily of interest, delay rental and lease bonus income.

    Expenses.  Total expenses for the year ended December 31, 2000 increased
113%, or $31.4 million, to $57.4 million from total expenses in 1999 of $27.0
million. Comparability of total expenses was significantly impacted by 3TEC's
aggressive developmental drilling program and the acquisition of the Floyd Oil
properties in November 1999, the Magellan properties in February 2000 and the
CWR

                                      138

<PAGE>

properties in May 2000. On a per Mcfe basis, 3TEC's lease operating expenses
decreased by 24% to $0.61 in 2000 from $0.80 in 1999. Production, severance and
ad valorem tax increased by 59% to $0.27/Mcfe in 2000 from $0.17/Mcfe in 1999.
Additionally, general and administrative, interest and depreciation, depletion
and amortization, or DD&A, expenses all rose on a dollar basis in 2000 but
decreased on a per Mcfe basis. General and administrative expense was
$0.25/Mcfe in 2000 compared to $0.52/Mcfe in 1999, interest expense $0.31/Mcfe
vs. $0.40/Mcfe in 1999, and DD&A $0.80/Mcfe in 2000 compared to $0.84/Mcfe in
1999.

    Income Taxes.  3TEC recorded a $14.4 million income tax provision during
2000 as compared to a $1.4 million income tax benefit for 1999. The results
from 3TEC's operations generated pre-tax income of $46.1 million during 2000
compared with a pre-tax loss of $4.9 million in 1999. During 2000 3TEC's
effective tax rate was approximately 32%. Also, 3TEC became a cash taxpayer in
2000, with $8.0 million of the 2000 provision recorded as a current tax payable.

    Net Income.  3TEC's 2000 net income of $31.7 million is compared to the
$3.4 million net loss in 1999. As discussed in the revenue and expenses
paragraphs above, 3TEC's significant drilling and acquisition success during
2000, coupled with a very strong commodity price environment and cost
containment and improved efficiencies on a per unit basis, all attributed to
the current year net income result.

    Dividends to Preferred Stockholders.  Dividends to preferred stockholders
increased 150%, or $0.9 million, to $1.5 million from 1999 dividends of $0.6
million. During 2000, 3TEC issued a new preferred stock series, Series D, in
connection with the Magellan acquisition, which accounted for $0.6 million of
the increase. Additionally, during the third quarter of 2000, 3TEC redeemed its
Series C preferred stock and recognized a non-cash charge to dividend expense
of $0.5 million.

                                      139

<PAGE>

                            INFORMATION ABOUT 3TEC

Background

    3TEC is engaged in the acquisition, development, production and exploration
of oil and gas reserves. 3TEC's properties are concentrated in East Texas and
the Gulf Coast region, both onshore and in the shallow waters of the Gulf of
Mexico. As of December 31, 2001, 3TEC had estimated total net proved reserves
of 263 Bcfe, of which approximately 231 Bcfe, or 88%, were gas and
approximately 204 Bcfe, or 77%, were proved developed, with an estimated SEC
Case PV-10 value of $212 million. 3TEC exited 2001 at a net daily production
rate of approximately 85 MMcfe.

    3TEC has increased its reserves and production principally through
acquisitions and drilling. 3TEC focuses on properties that have a substantial
proved reserve component and which 3TEC's management believes to have
additional exploitation opportunities. Additionally, 3TEC has also acquired a
number of drilling prospects covered by an extensive 3-D seismic database that
3TEC believes have exploration potential. 3TEC has assembled an experienced
management team and technical staff with expertise in property acquisitions and
development, reservoir engineering, exploration and financial management.

    In August 1999, W/E Energy Company L.L.C., or W/E LLC, an entity which was
owned by affiliates of EnCap Investments L.L.C., or EnCap, and Floyd C. Wilson,
purchased a controlling interest in 3TEC for approximately $20.5 million in
cash and $875,000 in producing properties. Concurrently with the investment by
W/E LLC, Mr. Wilson was named 3TEC's Chairman and Chief Executive Officer.
Following the change in control in August 1999 discussed below, during the
fourth quarter of 1999 and the first half of 2000 3TEC closed several
transactions that further changed its senior management team, capital structure
and property base. During the fourth quarter of 2001, W/E LLC was dissolved and
its holdings of 3TEC common stock and warrants were distributed to its members.

Oil and Gas Properties

    The following tables set forth certain information with respect to 3TEC's
reserves based upon reserve reports prepared by the independent petroleum
consulting firm of Ryder Scott Company, L.P. The reserve volumes and values
were determined under the method prescribed by the SEC, which requires the
application of year-end prices for each year, held constant throughout the
projected reserve life.

<TABLE>
<CAPTION>
                                      As of December 31, 2001
                -------------------------------------------------------------------
                Estimated Net Proved Reserves         Percent   Proved      Budgeted
                ----------------------------- PV-10    Total  Undeveloped 2002 Capital
                 Gas        Oil       Total   Value    PV-10   Drilling   Expenditures
                (Mmcf)   (MBbls)(1)  (Mmcfe)  ($000)   Value   Locations     ($000)
                -------  ----------  -------  ------- ------- ----------- ------------
<S>             <C>      <C>         <C>      <C>     <C>     <C>         <C>
East Texas..... 150,934    1,322     158,866  110,546  52.1%      144        17,675
Gulf Coast Area  28,536    1,338      36,564   59,567  28.1%        2        13,170
Other Areas....  51,796     2677      67,858   42,236  19.8%        9        15,774
                -------    -----     -------  -------  ----       ---        ------
   Total....... 231,266    5,337     263,288  212,349   100%      155        46,619(2)
                =======    =====     =======  =======  ====       ===        ======
</TABLE>
--------
(1) Includes oil, condensate and plant products barrels.
(2) As discussed in "Management's Discussion and Analysis of Financial
    Condition and Results of Operations of 3TEC--Liquidity and Capital
    Resources--Cash Flow," 3TEC's 2002 capital expenditure budget will range
    between $45-$65 million and be dependent on the price of gas. The $46.6
    million reflected in the table assumes a $2.50/Mmbtu average price for
    2002. Gas prices in excess of $2.50/Mmbtu will allow 3TEC to expand its
    average capital expenditure program up to $65 million.

                                      140

<PAGE>

    East Texas.  3TEC's properties in the East Texas area produce primarily
from the Cotton Valley formation, which ranges in depth from approximately
10,000 feet to 11,500 feet. As of September 2002, 3TEC's estimated net daily
production from this area was 37 MMcfe per day. The producing formations of
this area tend to contain multiple producing horizons and are typically low
permeability sands that require fracture stimulation to achieve optimal
producing rates. This type of fracture stimulation usually results in
relatively high initial production rates that decline rapidly during the first
year of production and subsequently stabilize at fairly low, more easily
predictable annual decline rates. Much of 3TEC's production in this area is
from wells that have been producing for several years and are in their latter,
more stable stage of production, resulting in a relatively long reserves to
production ratio. Additionally, reservoirs with multiple producing horizons
typically provide numerous recompletion and workover opportunities to enhance
proved reserves and production. 3TEC has identified approximately 130 proved
undeveloped drilling locations in this region. Many of these development
drilling locations are based on a change in regulatory field rules that now
permit wells to be drilled on 80 acre spacing as opposed to 160 acre spacing.
This type of infill drilling is generally effective in low permeability sands,
such as the Cotton Valley formation, where one wellbore is only capable of
draining an area less than the permitted spacing. Rosewood, White Oak,
Glenwood, Beckville, Oak Hill and Carthage are 3TEC's largest fields in this
area.

    Gulf Coast.  3TEC has established a substantial base of proved reserves and
undeveloped acreage with significant exploration potential both onshore and in
the shallow waters of the Gulf of Mexico. As of September 2002, 3TEC's
estimated net daily production from this area was 28 Mmcfe per day. 3TEC owns
significant proved reserves in the Breton Sound Block 34/35, Garden City South,
Chandeleur Sound Block 68, East Roanoke, Black Bayou and Bay de Chene fields in
South Louisiana. 3TEC's production in this area is primarily from the Tex W, MA
series and Hackberry formations that range from approximately 9,000 feet to
16,200 feet in depth. 3TEC is participating in a 102 square mile 3-D seismic
survey adjacent to 3TEC's South Garden City field in the Bayou Carlin area of
St. Mary Parish that 3TEC believes has significant exploration potential. In
addition, 3TEC has license to 180 square miles of 3-D seismic data in the
Breton Sound/Main Pass/Chandeleur Sound area that 3TEC continues to evaluate
for additional exploration drilling opportunities.

    Other Areas.  In South Texas, 3TEC's three largest fields are the Stuart
City, Segundo/Owen and NE Thompsonville fields. As of September 2002, 3TEC's
estimated net daily production from this area was 6 MMcfe per day. 3TEC has
identified 11 proved undeveloped drilling locations in this area. Most of these
proved undeveloped locations will target low permeability sands that require
fracture stimulation to achieve optimal production rates.

    3TEC owns interests in numerous fields in the Anadarko, San Juan, Arkoma
and Permian basins of Oklahoma, Texas and New Mexico. As of September 2002,
3TEC's estimated net daily production from these areas was 12 MMcfe per day.
3TEC's largest fields in these areas are Puerto Chiquito and Basin in the San
Juan basin and West Stigler in eastern Oklahoma. These fields are generally
characterized as mature producing properties that have very stable, low rates
of decline and a relatively small amount of development drilling and
exploitation potential.

Gas and Oil Reserves

    The following table presents 3TEC's estimated net proved gas and oil
reserves and the PV-10 value of 3TEC's reserves as of December 31, 2001, 2000,
and 1999. The period end prices of oil and gas at December 31, 2001, 2000, and
1999, used in the PV-10 calculation were $19.84, $25.31 and $23.64 per barrel
of oil and $2.57, $9.40 and $2.23 per thousand cubic feet of natural gas,
respectively. 3TEC's estimated net proved gas and oil reserves and the PV-10
value of 3TEC's reserves as of December 31, 2001, 2000, and 1999, are based on
a reserve report prepared by Ryder Scott Company, L.P. for 3TEC's properties.
The PV-10 values shown in the table are not intended to represent the current
market value of the estimated gas and oil reserves 3TEC owns.

                                      141

<PAGE>

<TABLE>
<CAPTION>
                                                                December 31,
                                                        ----------------------------
                                                          2001      2000      1999
                                                        -------- ---------- --------
<S>                                                     <C>      <C>        <C>
Proved Reserves:
   Gas (MMcf)..........................................  231,266    237,693  159,699
   Oil (MBbls)(1)......................................    5,337     10,672    9,835
   Gas equivalents (MMcfe).............................  263,288    301,725  218,709
Proved Developed Reserves:
   Gas (MMcf)..........................................  175,659    177,252  122,914
   Oil (MBbls) (1).....................................    4,705      9,895    9,358
   Gas equivalents (MMcfe).............................  203,889    236,622  179,062
Estimated future net cash flows before income taxes (in
  thousands)........................................... $385,335 $1,996,831 $370,258
PV-10 value (in thousands)............................. $212,349 $1,047,364 $198,615
</TABLE>
--------
(1) Includes oil, condensate and plant product barrels.

    There are numerous uncertainties in estimating quantities of proved
reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond 3TEC's control. See
"Information About Plains - Oil and Gas Reserves" for a discussion of these
uncertainties and their impact or reported reserves.

Volumes, Prices and Operating Expenses

    The following table presents information regarding the production volumes
of, average sales prices received for, and average production costs associated
with, 3TEC's sales of oil and gas for the periods indicated.

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                 ----------------------------
                                                    2001       2000     1999
                                                 -------    -------    ------
  <S>                                            <C>        <C>        <C>
  Net Production Data:
     Gas (MMcf).................................  22,352     17,764     4,738
     Oil (MBbls)................................     952      1,139       532
     Natural gas equivalents (MMcfe)............  28,065     24,598     7,930
  Average Sale Price:
     Gas ($ per Mcf)(1)......................... $  4.15(1) $  4.12    $ 2.18
     Oil ($ per Bbl)............................   23.95      25.11(2)  16.88
     Natural gas equivalents ($ per Mcfe).......    4.12       4.20(2)   2.53
  Expenses: ($ per Mcfe)
     Lease operations........................... $  0.60    $  0.62    $ 0.80
     Production, severance and ad valorem taxes.    0.27       0.27      0.17
     Gathering, transportation and other........    0.14       0.09      0.02
     General and administrative.................    0.25       0.25      0.52
     Depreciation, depletion and amortization...    1.10       .080      0.84
</TABLE>
--------
(1) Does not include the effect of 3TEC's derivatives activities, which was
    approximately $162,000 of cash settlements during 2001.
(2) Includes the effect of 3TEC's hedging contracts.

                                      142

<PAGE>

Development, Exploration and Acquisition Capital Expenditures

    The following table presents information regarding 3TEC's net costs
incurred in the purchase of properties and in exploration and development
activities.

<TABLE>
<CAPTION>
                                        Years Ended December 31,
                                      ----------------------------
                                         2001       2000    1999
                                      --------    -------- -------
                                             (in thousands)
             <S>                      <C>         <C>      <C>
             Acquisition............. $ 84,325(1) $ 79,865 $91,424
             Exploration.............   19,731         695     824
             Development.............   63,358      25,346   2,154
                                      --------    -------- -------
                Total costs incurred. $167,414    $105,906 $94,402
                                      ========    ======== =======
</TABLE>
--------
(1) Excludes approximately $29 million of acquisition costs related to deferred
    taxes recorded in connection with the Classic acquisition.

Drilling Activity

    The following table shows 3TEC's drilling activity for the years ended
December 31, 2001, 2000 and 1999. In the table, "gross" refers to the total
wells in which 3TEC has a working interest and "net" refers to gross wells
multiplied by 3TEC's working interest in these wells.

<TABLE>
<CAPTION>
                                     Year Ended December 31,
                                ----------------------------------
                                   2001        2000        1999
                                ----------- ----------- ----------
                                Gross  Net  Gross  Net  Gross Net
                                ----- ----- ----- ----- ----- ----
             <S>                <C>   <C>   <C>   <C>   <C>   <C>
             Exploration Wells:
                Productive.....   4    2.52  --      --  --     --
                Non-Productive.   5    1.93  --      --   5   0.90
                                 --   -----  --   -----  --   ----
                    Total......   9    4.45  --      --   5   0.90
                                 ==   =====  ==   =====  ==   ====
             Development Wells:
                Productive.....  71   26.80  66   18.30  21   5.67
                Non-Productive.   2    1.30  --      --  --     --
                                 --   -----  --   -----  --   ----
                    Total......  73   28.10  66   18.30  21   5.67
                                 ==   =====  ==   =====  ==   ====
</TABLE>

Productive Wells

    The following table sets forth the number of productive gas and oil wells
in which 3TEC owned a working interest as of December 31, 2001.

<TABLE>
<CAPTION>
                                        Total Productive
                                          Wells
                                        ----------------
                                        Gross     Net
                                        -----     ---
                              <S>       <C>       <C>
                              Gas......   870     393
                              Oil......   131      61
                                          -----    ---
                                 Total. 1,001     454
                                          =====    ===
</TABLE>

    Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections to commence
deliveries and oil wells awaiting connection to production facilities.
Additionally, 3TEC owns a royalty interest in 177 wells and an overriding
royalty interest in 826 wells. At December 31, 2001, 3TEC operated
approximately 344 wells.

                                      143

<PAGE>

Acreage Data

    The following table presents information regarding 3TEC's developed and
undeveloped leasehold acreage as of December 31, 2001. Developed acreage refers
to acreage within producing units and undeveloped acreage refers to acreage
that has not been placed in producing units.

<TABLE>
<CAPTION>
                                         Undeveloped
                      Developed Acreage    Acreage         Total
                      ----------------- ------------- ---------------
                       Gross     Net    Gross   Net    Gross    Net
                      -------  -------  ------ ------ ------- -------
            <S>       <C>      <C>      <C>    <C>    <C>     <C>
            Texas.... 130,720   63,767  17,089  7,150 147,809  70,917
            Louisiana  24,966    9,526  15,747  6,825  40,713  16,351
            Oklahoma.  23,764    8,947   1,040    865  24,804   9,812
            Other....  81,770   31,969   1,307    776  83,077  32,745
                      -------  -------  ------ ------ ------- -------
               Total. 261,220  114,209  35,183 15,616 296,403 129,825
                      =======  =======  ====== ====== ======= =======
</TABLE>

    Excluded from the acreage data are approximately 33,495 net mineral acres
3TEC owns, primarily in La Fourche, St. Mary and Terrebonne parishes of
Louisiana, all of which 3TEC believes have potential for oil and gas
exploration.

Marketing

    3TEC has marketed the gas and oil produced from its properties through
typical channels for these products. 3TEC generally sells its oil at local
field prices paid by the principal purchasers of oil. The majority of 3TEC's
gas production is sold at current market rates.

    Both gas and oil are purchased by marketing companies, pipelines, major oil
companies, public utilities, industrial customers and other users and
processors of petroleum products. 3TEC is not confined to, or dependent upon,
any one purchaser or small group of purchasers. Accordingly, the loss of a
single purchaser, or a few purchasers, would not have a long-term material
effect on its business because there are numerous purchasers in the areas in
which 3TEC sells its production.

    To manage its exposure to price risks in the marketing of its gas and oil
production, 3TEC enters into gas and oil price derivative arrangements with
respect to a portion of its expected production. As of February 11, 2003 3TEC
had the following commodity derivatives in place:

<TABLE>
       <S>                                                        <C>
       Gas Hedges (MMbtu)
          2003
              Swaps--$5.60/MMbtu (February)...................... 40,000
              Swaps--$5.02/MMbtu (March-December)................ 50,000
              Collar--$3.20 x $3.54/MMbtu (January-March)........ 30,000
          2004
              Swaps--$4.45/MMbtu (January-December).............. 20,000
              Collar--$4.00 x $5.15/MMbtu (January-December)..... 20,000
       Oil Hedges (Bbls/d)
          2003
              Swaps--$29.62/Bbl (March-December).................  1,000
          2004
              Swaps--$24.94/Bbl (January-December)...............  1,000
</TABLE>

Employees

    At December 31, 2002, 3TEC had 75 full-time employees. 3TEC believes that
its relationships with its employees are satisfactory. None of 3TEC's employees
are covered by a collective bargaining agreement. From time to time, 3TEC uses
the services of independent consultants and contractors to perform various
professional services, particularly in the areas of construction, design,
well-site surveillance, permitting and environmental assessment.

3TEC's Executive Offices

    3TEC's principal executive offices are located at 700 Milam Street, Suite
1100, Houston, Texas 77002, and its telephone number is (713) 821-7100. 3TEC's
website is www.3TECenergy.com.

                                      144

<PAGE>

                 SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS

    The following table sets forth information regarding the beneficial
ownership of:

   .  Plains and 3TEC common stock as of February 12, 2003; and

   .  the combined company common stock after the effective time of the merger
      assuming:

     .  that the exchange ratio is 0.85 shares of Plains common stock for each
        share of 3TEC common stock;

     .  exercise of all 3TEC warrants exercisable at $3.00 per share at a price
        of $17.00 per share; and

     .  exercise of all in-the-money 3TEC stock options at $17.00 per share.

    by:

   .  each current director and executive officer of Plains and each current
      director and named executive officer of 3TEC;

   .  all current executive officers and directors as a group; and

   .  each person known by Plains or 3TEC, as applicable, to own beneficially
      more than 5% of the outstanding shares of Plains or 3TEC common stock, as
      applicable.

    Beneficial ownership has been determined in accordance with applicable SEC
rules, under which a person is deemed to be the beneficial owner of securities
if he or she has or shares voting power or investment power with respect to
such securities or has the right to acquire beneficial ownership within 60 days.

    Unless otherwise indicated, to the knowledge of Plains or 3TEC, as
applicable, the persons listed in the table below have sole voting and
investment powers with respect to the shares indicated. The address of the
Plains directors and officers is 500 Dallas Street, Suite 700, Houston, Texas
77002. The address of the 3TEC directors and officers is 700 Milam Street,
Suite 1100, Houston, Texas 77002.

    The percentages are based on (i) 16,780,776 shares of 3TEC common stock
assumed to be issued and outstanding immediately prior to the merger, and (ii)
24,224,757 shares of Plains common stock assumed to be issued and outstanding
immediately prior to the merger. The pro forma percentages are based on
40,451,261 shares of Plains common stock assumed to be issued and outstanding
immediately after the merger.

                                      145

<PAGE>

                                    Plains

<TABLE>
<CAPTION>
                                                              Amount
                                                               and
                                                            Nature of
                                                            Beneficial  Percent
           Name and Address of Beneficial Owner             Ownership   of Class
           ------------------------------------            ----------   --------
<S>                                                        <C>          <C>
Jerry L. Dees.............................................     2,297        *
Tom H. Delimitros.........................................     5,492(1)     *
Cynthia A. Feeback........................................         0        *
James C. Flores........................................... 1,082,607(2)   4.5%
Thomas M. Gladney.........................................       600        *
John H. Lollar............................................    13,226        *
John T. Raymond...........................................    70,000        *
Timothy T. Stephens.......................................    35,500        *
Stephen A. Thorington.....................................    45,000        *
Directors and Executive Officers as a group (9 persons)... 1,254,722      5.2%
Advisory Research, Inc.................................... 1,340,413(3)   5.5%
  Two Prudential Plaza
  180 N. Stetson, Suite 5780
  Chicago, Illinois 60601
EnCap Investments L.L.C................................... 1,848,728(4)   7.6%
  1100 Louisiana, Suite 3150
  Houston, Texas 77002
Kayne Anderson Capital Advisors, L.P. and Richard A. Kayne 1,906,916(5)   7.9%
  1800 Avenue of the Stars, Second Floor
  Los Angeles, CA 90067
State Street Research & Management Company................ 2,274,574(6)   9.4%
  One Financial Center, 30th Floor
  Boston, MA 02111-2690
</TABLE>
--------
 *  Represents less than 1%.
(1) These shares include 38 shares that are owned by Mr. Delimitros' spouse.
(2) All of these shares are held directly by Sable Management, L.P., the
    general partner of which is Sable Management, LLC, of which Mr. Flores is
    the sole member.
(3) Based on the Schedule 13G filed by Advisory Research, Inc. with the SEC on
    February 12, 2002 with respect to its ownership of Plains Resources common
    stock. As a result of the spin-off, holders of Plains Resources common
    stock received one share of Plains common stock for each share of Plains
    Resources common stocks owned on the spin-off record date.
(4) Based on the Schedule 13D filed by EnCap with the SEC on February 12, 2003,
    as the general partner or controlling person of each entity EnCap
    Investments may be deemed to share the voting and dispositive power with
    respect to 785,455 shares of common stock beneficially owned by EnCap
    Energy Capital Fund III, L.P., 593,964 shares of common stock beneficially
    owned by EnCap Energy Capital Fund III-B, L.P., 192,134 shares of common
    stock beneficially owned by BOCP Energy Partners, L.P., and 277,275 shares
    of common stock beneficially owned by Energy Capital Investment Company
    PLC. The sole member of EnCap Investments is El Paso Merchant Energy North
    America Company. The controlling person of El Paso Merchant Energy North
    America Company is El Paso Corporation. The address of El Paso Merchant
    Energy North America Company and El Paso Corporation is 1001 Louisiana,
    Houston, Texas 77002. El Paso Merchant Energy North America Company and El
    Paso Corporation disclaim beneficial ownership of the shares of our common
    stock beneficially owned or deemed beneficially owned by EnCap.
(5) Based on Amendment No. 13 to Schedule 13D filed by Kayne Anderson and
    Richard A. Kayne with the SEC on December 12, 2001 with respect to its
    ownership of Plains Resources common stock, Kayne Anderson and Mr. Kayne
    have shared voting and investment power over 1,816,300 shares held by
    investment partnerships and management accounts and Mr. Kayne has sole
    voting and investment power over 90,616 shares. As a result of the
    spin-off, holders of Plains Resources common stock received one share of
    Plains common stock for each share of Plains Resources common stocks owned
    on the spin-off record date.
(6) Based on the Schedule 13G filed by State Street Research & Management
    Company with the SEC on February 15, 2002 with respect to its ownership of
    Plains Resources common stock, State Street has sole investment power over
    2,274,574 shares and sole voting power over 1,600,966 shares. State Street
    advised that all such shares are owned by various clients of State Street.
    As a result of the spin-off, holders of Plains Resources common stock
    received one share of Plains common stock for each share of Plains
    Resources common stocks owned on the spin-off record date.

                                      146

<PAGE>

                                     3TEC

<TABLE>
<CAPTION>
                                                                  Amount and
                                                                  Nature of
                                                                  Beneficial    Percent
              Name and Address of Beneficial Owner               Ownership(1)   of Class
              ------------------------------------               ------------   --------
<S>                                                              <C>            <C>
Shane M. Bayless................................................    152,500(2)       *
Larry J. Bump...................................................     25,000          *
C. E. Hackstedt.................................................     60,834(3)       *
Larry L. Helm...................................................     55,000          *
James L. Irish III..............................................     26,799          *
David B. Miller.................................................          0          *
D. Martin Phillips..............................................          0          *
Richard K. Stoneburner..........................................    130,334(4)       *
R. A. Walker....................................................    727,001        4.2%
Floyd C. Wilson.................................................  1,495,959(5)     8.5%
Directors and executive officers of 3TEC as a group (13 persons)  3,015,113       18.0%
Artisan Partners Limited Partnership............................  1,449,808(6)     8.6%
 1000 N. Water Street, Suite 1770
 Milwaukee, WI 53202
EnCap Energy Acquisition III-B, Inc. (7)........................  1,445,537(8)     8.4%
EnCap Energy Capital Fund III, L.P. (7).........................  2,021,322(9)    11.5%
EnCap Energy Capital Fund III-B, L.P. (7).......................  1,445,537(10)    8.4%
EnCap Investments L.L.C. (7)....................................  4,609,452(11)   25.0%
Kaiser-Francis Oil Company......................................  1,112,578(12)    6.6%
 6733 South Yale
 Tulsa, OK 74136
Royce & Associates, Inc.........................................  1,731,075(13)   10.3%
 1414 Avenue of the Americas
 New York, NY 10019
T. Rowe Price Associates, Inc...................................  1,198,500(14)    7.1%
 100 E. Pratt Street
 Baltimore, MD 21202
Wentworth, Hauser & Violich.....................................  1,430,621(16)    8.5%
 353 Sacramento Street, Suite 600
 San Francisco, CA 94111
</TABLE>
--------
 *   Represents less than 1%.
(1)  Includes both outstanding shares of 3TEC common stock and shares of 3TEC
     common stock such person has the right to acquire within 60 days of
     February 12, 2003 by the exercise of outstanding stock options. Shares
     subject to stock options exercisable within 60 days of February 12, 2003
     include: 150,000 shares for Mr. Bayless; 25,000 shares for Mr. Bump;
     58,334 shares for Mr. Hackstedt; 55,000 shares for Mr. Helm; 25,000 shares
     for Mr. Irish; 127,834 shares for Mr. Stoneburner; 725,001 shares for Mr.
     Walker; and 633,335 shares for Mr. Wilson.
(2)  Includes 2,500 shares of restricted stock.
(3)  Includes 2,500 shares of restricted stock.
(4)  Includes 2,500 shares of restricted stock.
(5)  Includes 5,000 shares of common stock owned by Wilvest Limited Partnership
     of which Mr. Wilson is the general partner; and warrants to purchase
     290,014 shares of common stock granted to Mr. Wilson. Mr. Wilson disclaims
     beneficial ownership of the shares owned by Wilvest Limited Partnership
     except to the extent of his pecuniary interest therein.

                                      147

<PAGE>

(6)  As disclosed in a joint filing with Artisan Investment Corporation, Andrew
     A. Ziegler and Carlene Murphy Ziegler on Schedule 13 G/A filed with the
     SEC on January 31, 2003.
(7)  The address for EnCap Energy Acquisition III-B, Inc., EnCap Energy Capital
     Fund III, L.P., EnCap Energy Capital Fund III-B, L.P. and EnCap
     Investments L.L.C. is 1100 Louisiana, Suite 3150, Houston, TX 77002.
(8)  As disclosed in a joint filing on Schedule 13D/A filed with the SEC on
     February 12, 2003. This figure includes 957,587 shares of common stock,
     145,850 shares of Series D Preferred Stock convertible into 145,850 shares
     of common stock, and warrants to purchase 342,100 shares of common stock.
(9)  As disclosed in a joint filing on Schedule 13D/A filed with the SEC on
     February 12, 2003. This figure includes 1,266,144 shares of common stock,
     192,846 shares of Series D Preferred Stock convertible into 192,846 shares
     of common stock, warrants to purchase 452,332 shares of common stock, and
     110,000 shares issuable upon exercise of stock options.
(10) As disclosed in a joint filing on Schedule 13D/A filed with the SEC on
     February 12, 2003. Includes 1,445,537 shares owned by EnCap Acquisition
     described in footnote 8 above. As the controlling person of EnCap
     Acquisition, EnCap III-B may be deemed to share voting and dispositive
     power with respect to the shares of common stock owned by EnCap
     Acquisition; however, EnCap III-B disclaims any beneficial ownership of
     these shares.
(11) As disclosed in a joint filing on Schedule 13 D/A filed with the SEC on
     February 12, 2003. As the general partner or controlling person of each
     entity, Encap Investments L.L.C. ("EnCap") may be deemed to have the power
     to vote and direct the vote or to dispose or direct the disposition of
     4,609,452 shares of common stock beneficially owned by EnCap Energy
     Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc. ("EnCap
     Acquisition"), ECIC Corporation, and BOCP Energy Partners, L.P. ("BOCP").
     This figure includes the shares described in footnotes 8 and 9 above, as
     well as 447,095 shares of common stock, 68,097 shares of Series D
     Preferred Stock convertible into 68,097 shares of common stock, and
     warrants to purchase 159,725 shares of common stock beneficially owned by
     ECIC Corporation, and 309,809 shares of common stock, 47,187 shares of
     Series D Preferred Stock convertible into 47,187 shares of common stock,
     and warrants to purchase 110,680 shares of common stock beneficially owned
     by BOCP. The controlling person of EnCap is El Paso Merchant Energy North
     America Company ("El Paso Merchant Energy"). The controlling person of El
     Paso Merchant Energy is El Paso Corporation. El Paso Merchant Energy and
     El Paso Corporation may be deemed to have the power to vote and direct the
     vote or to dispose or direct the disposition of the shares. El Paso
     Merchant Energy and El Paso Corporation disclaim any beneficial ownership
     of these shares.
(12) Kaiser-Francis Oil Company is a wholly owned subsidiary of GBK
     Corporation, which is owned 78.22% directly by George B. Kaiser and 21.78%
     indirectly by Mr. Kaiser through affiliates.
(13) As disclosed in a filing on Schedule 13 G/A filed with the SEC on February
     5, 2003.
(14) As disclosed in a filing on Schedule 13 G/A filed with the SEC on February
     5, 2003.
(15) As disclosed in a filing on Schedule 13 G/A filed with the SEC on February
     13, 2002.

                                      148

<PAGE>

                             The Combined Company

<TABLE>
<CAPTION>
                                                          Amount and
                                                          Nature of
                                                          Beneficial   Percent
          Name and Address of Beneficial Owner           Ownership(1)  of Class
          ------------------------------------           ------------  --------
 <S>                                                     <C>           <C>
 Jerry L. Dees..........................................      2,297         *
 Tom H. Delimitros......................................      5,492(1)      *
 Cynthia A. Feeback.....................................          0         *
 James C. Flores........................................  1,082,607(2)    2.7%
 Thomas M. Gladney......................................        600         *
 John H. Lollar.........................................     13,226         *
 John T. Raymond........................................     70,000         *
 Timothy T. Stephens....................................     35,500         *
 Stephen A. Thorington..................................     45,000         *
 Directors and Executive Officers as a group (9 persons)  1,254,722       3.1%
 EnCap Energy Capital Fund III, L.P. (3)................  2,217,836(4)    5.5%
 EnCap Investments L.L.C. (3)...........................  5,199,653(5)   12.8%
 State Street Research & Management Company.............  2,274,574(6)    5.6%
  One Financial Center, 30th Floor
  Boston, MA 02111-2690
</TABLE>
--------
 *   Represents less than 1%.
(1)  These shares include 38 shares that are owned by Mr. Delimitros' spouse.
(2)  All of these shares are held directly by Sable Management, L.P., the
     general partner of which is Sable Management, LLC, of which Mr. Flores is
     the sole member.
(3)  The address for EnCap Energy Capital Fund III, L.P. and EnCap Investments
     L.L.C. is 1100 Louisiana, Suite 3150, Houston, TX 77002.
(4)  Represents 85% of the 3TEC common stock, the exercise of the warrants into
     260,675 shares of Plains common stock and the exercise of the options into
     18,288 shares of 3TEC common stock before the effective time of the merger
     disclosed in a joint filing on Schedule 13D/A filed with the SEC on
     February 12, 2003.
(5)  Represents 100% of the pro forma amounts disclosed in footnote 4 above, as
     well as 1,071,556 shares of Plains common stock pro forma beneficially
     owned by EnCap Energy Acquisition III-B, Inc., 500,306 shares of Plains
     common stock pro forma beneficially owned by ECIC Corporation, and 346,681
     shares of Plains common stock pro forma beneficially owned by BOCP Energy
     Partners, L.P. Based on the Schedule 13D/A filed by EnCap with the SEC on
     February 12, 2003, it also represents EnCap's historic shared voting and
     investment power over 1,848,728 shares of Plains stock.
(6)  Based on the Schedule 13G filed by State Street Research & Management
     Company with the SEC on February 15, 2002, State Street has sole
     investment power over 2,274,574 shares and sole voting power over
     1,600,966 shares. State Street advised that all such shares are owned by
     various clients of State Street.

                                      149

<PAGE>

                       COMPARISON OF STOCKHOLDER RIGHTS

    The rights of 3TEC stockholders are governed by 3TEC's certificate of
incorporation and bylaws, each as amended, restated, supplemented or otherwise
modified from time to time, and the laws of the State of Delaware, and the
rights of Plains stockholders are governed by Plains' certificate of
incorporation and bylaws, each as amended, restated, supplemented or otherwise
modified from time to time, and the laws of the State of Delaware. After the
merger, the 3TEC stockholders will become stockholders of Plains and
accordingly their rights will be governed by Plains' certificate of
incorporation and bylaws, each as amended, restated, supplemented or otherwise
modified from time to time, and the laws of the State of Delaware. While the
rights and privileges of 3TEC stockholders are, in many instances, comparable
to those of the stockholders of Plains, there are some differences. The
following is a summary of the material differences as of the date of this
document between the rights of the 3TEC stockholders and the rights of Plains
stockholders. These differences arise from differences between the respective
charters and bylaws of 3TEC and Plains.

    The following discussion of these differences is only a summary of the
material differences and does not purport to be a complete description of all
the differences. Please consult the following references to the DGCL and the
respective certificates of incorporation and bylaws, each as amended, restated,
supplemented or otherwise modified from time to time, of 3TEC and Plains for a
more complete understanding of these differences.

<TABLE>
<CAPTION>
                         Plains                                                      3TEC
                         ------                                                      ----
<S>                                                        <C>
                                                   Capital Stock:
Pre-Merger:                                                Pre-Merger:
-----------                                                -----------
Plains is authorized to issue:                             3TEC is authorized to issue:
.. 100,000,000 shares of common stock, of which               . 60,000,000 shares of common stock, of which
  24,224,757 are issued and outstanding                        16,780,776 are issued and outstanding.
.. 5,000,000 shares of preferred stock, of which none         . 20,000,000 shares of preferred stock, of which
  are issued and outstanding.                                  613,919 shares of Series D preferred stock are
                                                             issued and outstanding.
Post-Merger:
------------
Plains is authorized to issue:
.. 100,000,000 shares of common stock.
.. 5,000,000 shares of preferred stock.

                                            Number and Term of Directors:
Pre-Merger:                                                Pre-Merger:
-----------                                                -----------
.. The board must consist of at least three directors.        . The board must consist of at least five directors
  Currently, there are four directors on the board.            divided into three classes for three year terms.
                                                             Currently, there are seven directors on the board.
Post-Merger:
------------
.. Same as pre-merger, but there will be six directors
  on the board.

                                                Stockholder Consents:
Pre-Merger and Post-Merger:                                Pre-Merger:
---------------------------                                -----------
.. Unless authorized in advance by the board, Plains          . 3TEC stockholders may not act by written consent.
  stockholders may not act by written consent.

                                                Removal of Directors:
.. Upon proper notice, any director may be removed,           . Any director may be removed only for cause by the
  with or without cause, by a majority stockholder vote.       affirmative vote of the holders of at least two-thirds
                                                             of the shares of 3TEC issued, outstanding and
                                                             entitled to vote.
</TABLE>

                                      150

<PAGE>

<TABLE>
<CAPTION>
                          Plains                                                       3TEC
                          ------                                                       ----
<S>                                                         <C>

                                                   Votes Per Share:
Pre-Merger and Post-Merger:                                 Pre-Merger:
---------------------------                                 -----------
.. Each stockholder is entitled to one vote per share.         . Each share is entitled to one vote and each
                                                              fractional share is entitled to a corresponding
                                                              fractional vote.

                                         Adjournment of Stockholder Meetings:
Pre-Merger and Post Merger:                                 Pre-Merger:
---------------------------                                 -----------
.. If a quorum is not represented at a stockholder             . A stockholder meeting may be adjourned at any
  meeting, a majority of stockholders has the power to          time by the meeting chairman or the vote of a
  adjourn the meeting until a quorum is represented.            majority of shares of 3TEC common stock
                                                              represented at the meeting.

                                                       Proxies:
Pre-Merger and Post-Merger:                                 Pre-Merger:
---------------------------                                 -----------
.. No such requirement exists in Plains' bylaws.               . Proxies must be filed with the Secretary of 3TEC
                                                              before or at the time of the stockholder meeting.

                                                Director Nominations:
Pre-Merger and Post-Merger:                                 Pre-Merger:
---------------------------                                 -----------
.. Neither the Plains certificate of incorporation nor its     . Subject to the rights of 3TEC preferred
  bylaws have any provisions dealing with this issue.           stockholders, nominations for the election of
                                                              directors may be made by the 3TEC board or any
                                                              3TEC stockholder entitled to vote for the election of
                                                              directors. Any such stockholder may so nominate by
                                                              giving written notice of the intent to make such
                                                              nomination. 3TEC's bylaws set forth the
                                                              requirements for such notice. The meeting chairman
                                                              may refuse any nomination of any person not made
                                                              in compliance with the 3TEC bylaws.

                                           Special Meeting of Stockholders:
Pre-Merger and Post-Merger:                                 Pre-Merger:
---------------------------                                 -----------
.. May be called by chairman of the board or the chief         . May be called by the president or the directors
  executive officer of Plains and must be called by chief       either by written instrument signed by resolution
  executive officer or secretary of Plains at the written       adopted by a vote of the majority of the directors.
  request of a majority of the board.
                                                 Charter Amendments:
Pre-Merger and Post-Merger:                                 Pre-Merger:
---------------------------                                 -----------
.. The Plains certificate of incorporation may be              . The 3TEC certificate of incorporation may be
  amended as provided under the DGCL.                           amended as provided under the DGCL. Also, an
                                                              affirmative vote of 80% of the 3TEC shares entitled
                                                              to vote is required to amend, repeal or adopt
                                                              provisions inconsistent with Article Fifth of 3TEC's
                                                              certificate of incorporation (dealing with the number,
                                                              classes, elections, terms and removal of directors).
                                                              In addition, an affirmative vote of a majority of the
                                                              shares of 3TEC preferred stock issued and
                                                              outstanding is required to amend, repeal or modify
                                                              any provision of the certificate of incorporation or
                                                              certificate of designation for the 3TEC preferred
                                                              stock in a manner that adversely affects the powers,
                                                              preference or rights of the 3TEC preferred stock.
</TABLE>

                                      151

<PAGE>

<TABLE>
<CAPTION>
                        Plains                                                  3TEC
                        ------                                                  ----
<S>                                                     <C>

                                         Redemption of Common Stock:
Pre-Merger and Post-Merger:                             Pre-Merger:
---------------------------                             -----------
.. The Plains certificate of incorporation and bylaws do   . So long as any 3TEC preferred stock is outstanding,
  not contain such a provision.                             no share of common stock may be purchased or
                                                          retired by 3TEC.
</TABLE>

                                      152

<PAGE>

                      DESCRIPTION OF PLAINS CAPITAL STOCK

    Pursuant to its certificate of incorporation, Plains has the authority to
issue an aggregate of 105,000,000 shares of capital stock, consisting of
100,000,000 shares of common stock, par value $0.01 per share, and 5,000,000
shares of preferred stock, par value $0.01 per share. On February 12, 2003
Plains had 24,224,448 shares of common stock outstanding and no shares of
preferred stock outstanding.

    Selected provisions of Plains' organizational documents are summarized
below, however, you should read the organizational documents, which are filed
as exhibits to the registration statement, for other provisions that may be
important to you. In addition, you should be aware that the summary below does
not give full effect to the terms of the provisions of statutory or common law
which may affect your rights as a stockholder.

Common Stock

    Voting rights.  Each share of common stock is entitled to one vote in the
election of directors and on all other matters submitted to a vote of Plains'
stockholders. Plains' stockholders do not have the right to cumulate their
votes in the election of directors.

    Dividends, distributions and stock splits.  Holders of Plains common stock
are entitled to receive dividends if, as and when such dividends are declared
by Plains' board out of assets legally available therefor after payment of
dividends required to be paid on shares of preferred stock, if any. Plains'
credit facility and the indenture relating to its 8.75% senior subordinated
notes restrict its ability to pay cash dividends.

    Liquidation.  In the event of any dissolution, liquidation, or winding up
of Plains' affairs, whether voluntary or involuntary, after payment of its
debts and other liabilities and making provision for any holders of its
preferred stock who have a liquidation preference, Plains' remaining assets
will be distributed ratably among the holders of common stock.

    Fully paid.  All shares of common stock outstanding are fully paid and
nonassessable.

    Other rights.  Holders of Plains common stock have no redemption or
conversion rights and no preemptive or other rights to subscribe for its
securities.

Preferred Stock

    Plains' board of directors has the authority to issue up to 5,000,000
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rates, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of that series, which may be
superior to those of the common stock, without further vote or action by the
stockholders. There will be no shares of preferred stock outstanding at the
effective time of the merger and Plains has no present plans to issue any
preferred stock.

    One of the effects of undesignated preferred stock may be to enable Plains'
board of directors to render more difficult or to discourage an attempt to
obtain control of Plains by means of a tender offer, proxy contest, merger or
otherwise, and as a result to protect the continuity of its management. The
issuance of shares of the preferred stock by Plains' board of directors as
described above may adversely affect the rights of the holders of common stock.
For example, preferred stock issued by Plains may rank superior to the common
stock as to dividend rights, liquidation preference or both,

                                      153

<PAGE>

may have full or limited voting rights and may be convertible into shares of
common stock. Accordingly, the issuance of shares of preferred stock may
discourage bids for Plains common stock or may otherwise adversely affect the
market price of Plains common stock.

Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions

    Plains' certificate of incorporation, bylaws and the DGCL contain certain
provisions that could discourage potential takeover attempts and make it more
difficult for Plains stockholders to change management or receive a premium for
their shares.

    Delaware law.  Plains is subject to Section 203 of the DGCL, an
anti-takeover law. In general, the statute prohibits a publicly-held Delaware
corporation from engaging in a business combination with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder. A "business combination"
includes a merger, sale of 10% or more of Plains' assets and certain other
transactions resulting in a financial benefit to the stockholder. For purposes
of Section 203, an "interested stockholder" is defined to include any person
that is:

   .  the owner of 15% or more of the outstanding voting stock of the
      corporation;

   .  an affiliate or associate of the corporation and was the owner of 15% or
      more of the voting stock outstanding of the corporation, at any time
      within three years immediately prior to the relevant date; and

   .  an affiliate or associate of the persons described in the foregoing
      bullet points.

    However, the above provisions of Section 203 do not apply if:

   .  Plains' board approves the transaction that made the stockholder an
      interested stockholder prior to the date of that transaction;

   .  after the completion of the transaction that resulted in the stockholder
      becoming an interested stockholder, that stockholder owned at least 85%
      of Plains' voting stock outstanding at the time the transaction
      commenced, excluding shares owned by Plains' officers and directors; or

   .  on or subsequent to the date of the transaction, the business combination
      is approved by Plains' board and authorized at a meeting of its
      stockholders by an affirmative vote of at least two-thirds of the
      outstanding voting stock not owned by the interested stockholder.

    Stockholders may, by adopting an amendment to the corporation's certificate
of incorporation or bylaws, elect for the corporation not to be governed by
Section 203, effective 12 months after adoption. Neither Plains' certificate of
incorporation nor its bylaws exempt it from the restrictions imposed under
Section 203. It is anticipated that the provisions of Section 203 may encourage
companies interested in acquiring Plains to negotiate in advance with Plains'
board.

    Charter and bylaw provisions.  Plains' certificate of incorporation and
bylaws provide that any action required or permitted to be taken by its
stockholders may only be effected at a duly called annual or special meeting of
the stockholders, and may not be taken by written consent of the stockholders
unless Plains' board of directors approves the taking of the action by written
consent. If the board of directors authorizes Plains' stockholders to take
action by written consent, then the stockholders may take action by written
consent if the consent is signed by stockholders having not less than the
minimum number of votes necessary to take the action. Special meetings of
stockholders may be called by Plains' chairman, chief executive officer or by a
majority of the board.

    Directors may be removed with the approval of the holders of a majority of
the shares then entitled to vote at an election of directors. Directors may be
removed by stockholders with or without

                                      154

<PAGE>

cause. Vacancies and newly-created directorships resulting from any increase in
the number of directors may be filled by a majority of the directors then in
office, though less than a quorum. If there are no directors in office, then an
election of directors may be held in the manner provided by law.

Limitation of Liability; Indemnification

    Plains' certificate of incorporation contains certain provisions permitted
under the DGCL relating to the liability of directors. These provisions
eliminate a director's personal liability for monetary damages resulting from a
breach of fiduciary duty, except that a director will be personally liable:

   .  for any breach of the director's duty of loyalty to Plains or Plains'
      stockholders;

   .  for acts or omissions not in good faith or which involve intentional
      misconduct or a knowing violation of law;

   .  under Section 174 of the DGCL relating to unlawful stock repurchases or
      dividends; and

   .  for any transaction from which the director derives an improper personal
      benefit.

    These provisions do not limit or eliminate Plains' rights or those of any
stockholder to seek non-monetary relief, such as an injunction or rescission,
in the event of a breach of a director's fiduciary duty. These provisions will
not alter a director's liability under federal securities laws.

    Plains' certificate of incorporation and bylaws also provide that Plains
must indemnify its directors and officers to the fullest extent permitted by
Delaware law and also provide that it must advance expenses, as incurred, to
its directors and officers in connection with a legal proceeding to the fullest
extent permitted by Delaware law, subject to very limited exceptions.

    Plains plans to enter into separate indemnification agreements with its
directors and officers that may, in some cases, be broader than the specific
indemnification provisions contained in its certificate of incorporation,
bylaws or the DGCL. The indemnification agreements may require Plains, among
other things, to indemnify the officers and directors against certain
liabilities, other than liabilities arising from willful misconduct, that may
arise by reason of their status or service as directors or officers. Plains
believes that these indemnification arrangements are necessary to attract and
retain qualified individuals to serve as directors and officers.

Stock Exchange

    Plains common stock is listed on the New York Stock Exchange under the
symbol "PXP."

Transfer Agent and Registrar

    The Transfer Agent and Registrar for the Plains common stock is American
Stock Transfer and Trust Company. Its phone number is 1-800-937-5449.

                                      155

<PAGE>

               ADOPTION OF THE PLAINS 2002 STOCK INCENTIVE PLAN

2002 Stock Incentive Plan

    Plains adopted its 2002 Stock Incentive Plan, or 2002 plan, on September
18, 2002 and amended it effective November 20, 2002 to divide it into three
plans: the 2002 Stock Incentive Plan; the Rollover Stock Incentive Plan; and
the Transition Stock Incentive Plan. The 2002 plan provides for the grant of
stock options (including incentive stock options, as defined in Section 422 of
the Internal Revenue Code of 1986, as amended, and non-qualified stock options)
and other awards (including performance units, performance shares, share
awards, restricted stock, restricted stock units, and stock appreciation
rights, or SARs) to Plains' directors, officers and employees, individuals to
whom Plains has extended written offers of employment, and Plains' consultants
and advisors. Plains' compensation committee, which is comprised of
"non-employee directors" within the meaning of Rule 16b-3 of the Exchange Act,
administers the 2002 plan. 500,000 shares of Plains common stock are subject to
issuance under the 2002 plan. Plains' compensation committee may grant options
and SARs on such terms, including vesting and payment forms, as it deems
appropriate in its discretion, however, no option or SAR may be exercised more
than 10 years after its grant, and the purchase price for incentive stock
options and non-qualified stock options may not be less than 100% of the fair
market value of Plains common stock on the date of grant. Plains' compensation
committee may grant restricted stock awards, restricted stock units, share
awards, performance units and performance shares on such terms and conditions
as it may in its discretion decide. Unless terminated earlier by Plains' board
of directors, the 2002 plan will terminate on September 18, 2012. For a
discussion of the Rollover Stock Incentive Plan and the Transition Stock
Incentive Plan, please see pages [      ] through [      ].

    Upon an event constituting a "change in control" (as defined in the 2002
plan) of Plains, all options and SARs will become immediately exercisable in
full. In addition, in such an event, unless otherwise determined by Plains'
compensation committee, performance units will become immediately vested and
restrictions on stock granted pursuant to restricted stock awards and
restricted stock units will lapse. The spin-off did not constitute a change of
control under the 2002 plan.

    Plains' board does not intend to make any grants under the 2002 plan unless
it is approved by its stockholders. The grants described elsewhere herein were
made under the rollover plan and the transition plan and were not made under
the 2002 plan.

<TABLE>
<CAPTION>
                                                                                  Number of securities
                                                                                  remaining available
                                          Number of securities Weighted-average     future issuance
                                           to be issued upon   exercise price of      under equity
                                              exercise of         outstanding      compensation plans
                                          outstanding options, options, warrants (excluding securities
              Plan category               warrants and rights     and rights     reflected in column(a)
              -------------               -------------------- ----------------- ----------------------
<S>                                       <C>                  <C>               <C>
Equity compensation plans approved by
  security holders.......................          $0                 n/a               $      0
Equity compensation plans not approved by
  security holders.......................          $0                 n/a                500,000(1)
                                                   --                 ---               --------
   Total.................................          $0                 n/a               $500,000(1)
                                                   ==                 ===               ========
</TABLE>
--------
(1) If the amendment to the 2002 Plan is approved, then the number of shares of
    common stock authorized and reserved for issuance under the 2002 Plan will
    increase by [    ] shares.

                                      156

<PAGE>

    In addition to the 2002 Plan to be approved by Plains' stockholders, the
Rollover Stock Incentive Plan and the Transition Stock Incentive Plan have been
adopted by Plains, but have not been approved by Plains' stockholders. For more
information regarding these plans, please see "Adoption of the Plains 2002
Stock Incentive Plan" on page [  ], "Amendment to the Plains' 2002 Stock
Incentive Plan" on page [  ] and "Election of Directors" on page [  ].

    Amount of Shares Available.  The maximum number of shares that may be made
the subject of options and awards granted under the 2002 plan is 500,000, all
of which may be made the subject of either restricted stock awards or
restricted stock units or may be issued upon the exercise of incentive stock
options. In addition, the maximum number of shares that may be the subject of
options and awards granted to a participant in any one year is 300,000.

    Administration.  The plan is administered by a committee appointed by the
board of directors of Plains, constituted so as to comply with Rule 16b-3 under
the Exchange Act, and comprised of two or more "outside directors" (within the
meaning of Section 162(m) of the Internal Revenue Code).

    The committee has the power to make regulations and guidelines for and to
interpret the 2002 plan and to determine who is to receive options and awards
under the 2002 plan. No member of the committee will be liable for any actions
made in good faith with respect to this plan. Plains has agreed to indemnify
each member of the committee administering the 2002 plan for all costs and
expenses.

    Eligibility.  All directors, officers, employees and consultants of Plains,
its subsidiaries and affiliates, and any individual to whom Plains, its
subsidiaries or its affiliates have extended a formal written offer of
employment, are eligible for the 2002 plan.

  SARs

    General.  Each stock appreciation right, or SAR, is evidenced by a SAR
agreement between Plains and the grantee. The compensation committee specifies
in each SAR agreement the number of covered shares, the exercise price and the
vesting schedule. Upon exercise of a vested SAR, the grantee receives cash.
Options may be granted in combination with SARs, or SARs may be added to
outstanding options at any time after the grant. SARs may also be granted
independently of options. A SAR permits the grantee to receive the appreciation
in the value of the optioned stock directly from Plains in cash. The amount
payable upon exercise of a SAR is measured by the difference between the fair
market value of the common stock at exercise and the exercise price under the
SAR. Generally, SARs coupled with options may be exercised at any time after
the underlying options vest. Upon exercise of a SAR coupled with an option, the
corresponding portion of the related option will be surrendered and cannot
thereafter be exercised. Conversely, upon exercise of an option to which a SAR
is attached, the SAR may no longer be exercised to the extent that the
corresponding option has been exercised.

    Exercise of SAR.  Each SAR will become exercisable in such installments
(which need not be equal) and at such times as the committee may designate and
set forth in the agreement. To the extent not exercised, installments will
accumulate and be exercisable, in whole or in part, at any time after becoming
exercisable, but not later than the date the SAR expires. The committee may
accelerate the exercisability of any SAR.

    Term of SAR.  The committee will determine the term of SARs.

    Transferability.  Rights under any award may not be transferred except by
will or the laws of descent and distribution. The committee, however, may
provide that the SARs may be transferred to members of the grantee's immediate
family, or to trusts solely for the benefit of such immediate family members.

                                      157

<PAGE>

  Stock Options

    Exercise Price.  The purchase price or the manner in which the exercise
price is to be determined for shares under each option will be determined by
the committee and set forth in the agreement. However, the exercise price per
share under each option may not be less than 100% of the fair market value of a
share on the date the option is granted (110% in the case of an incentive stock
option granted to an eligible individual who possesses more than 10% of the
total combined voting power of all classes of stock of Plains, its subsidiaries
or affiliates).

    Exercise of option.  Each option will become exercisable in such
installments (which need not be equal) and at such times as the committee
designates and sets forth in the agreement. To the extent not exercised,
installments will accumulate and be exercisable, in whole or in part, at any
time after becoming exercisable, but no later than the date the option expires.
The committee may accelerate the exercisability of any option.

    Term of option.  The committee will determine the term of the options,
provided that an incentive stock option will not be exercised after the
expiration of ten years from the date it was granted (five years in the case of
an incentive stock option granted to an individual who possesses more than 10%
of the total combined voting power of all classes of stock of Plains, its
subsidiaries or affiliates).

    Transferability.  Rights under any option may not be transferred except by
will or the laws of descent and distribution. The committee, however, may
provide that the option may be transferred to members of the optionee's
immediate family or to trusts solely for the benefit of such immediate family
members.

  Restricted Stock

    Grant.  The committee may grant awards of restricted stock to eligible
individuals, which will be evidenced by an agreement between Plains and the
grantee setting out the applicable restrictions on, and terms and conditions
of, the restricted stock.

    Treatment of Dividends.  At the time of grant, the committee may determine
that the payment to the grantee of dividends declared or paid on such shares by
Plains will be (a) deferred until the lapsing of the restrictions and (b) held
by Plains for the account of the grantee until such time.

    Lapse of Restrictions.  Restrictions on shares of restricted stock will
lapse at such times and on such terms as the committee determines. Unless the
committee determines otherwise at the time of the grant of an award of
restricted stock, the restrictions upon shares of restricted stock will lapse
upon a change in control of Plains.

    Transferability.  Until all restrictions upon the shares of restricted
stock awarded to a grantee will have lapsed, such shares and retained dividends
may not be sold, pledged, transferred or otherwise disposed of.

  Restricted Stock Units

    Grant.  The committee may grant awards of restricted stock units to the
eligible individuals, which will be evidenced by an agreement between Plains
and the grantee. Each agreement will contain such restrictions, terms and
conditions as the committee in its discretion determines.

    Rights of grantees.  Until all restrictions upon the restricted stock units
have lapsed, the grantee will not be a stockholder of Plains, nor have any of
the rights or privileges of a stockholder of Plains, including voting rights
and rights to receive dividends.

                                      158

<PAGE>

    Vesting.  Restricted stock units and any related securities, cash dividends
or other property credited to the restricted stock unit account will vest at
the time and on the terms as the committee determines. Unless the committee
determines otherwise at the time of the grant, the restricted stock units will
vest upon a change in control of Plains.

    Transferability.  Until all restrictions upon the restricted stock units
awarded to a grantee have lapsed, the restricted stock units and any related
securities, cash dividends or other property credited to a restricted stock
unit account may not be sold, pledged, transferred or otherwise disposed of.

  Performance Awards

    General.  The committee may grant awards of performance units and/or awards
of performance shares. Performance units may be denominated in shares or a
specific dollar amount and, contingent upon the attainment of specified
performance objectives within the performance cycle, represent the right to
receive specified payments. The maximum dollar amount of cash or the fair
market value of the shares that any participant may receive in any calendar
year in respect of performance units denominated in dollars is $1,000,000. A
grantee becomes vested with respect to the performance units to the extent that
the performance objectives set forth in the agreement are satisfied for the
performance cycle. Regarding performance shares, the committee will provide the
time(s) at which the actual shares represented by such award will be issued in
the name of the grantee; provided, however, that no performance shares will be
issued until the grantee has executed an agreement evidencing the award, the
appropriate blank stock powers and, if required, an escrow agreement and any
other documents.

    Transferability.  Until all restrictions upon the performance shares
awarded to a grantee have lapsed, the performance shares may not be sold,
pledged, transferred or otherwise disposed of, nor will they be delivered to
the grantee. The committee may impose such other restrictions and conditions on
the performance shares, if any, it deems appropriate.

    Capital changes.  If Plains common stock changes because of any stock
split, reverse stock split, stock dividend, combination, reclassification or
other similar change in capital structure, appropriate adjustments will be made
in the number of shares remaining available for future grant under the 2002
plan, the maximum number of options and SARs that may be granted to an
individual in a fiscal year, the number of shares covered by each option and
SAR and the exercise price under each option and SAR.

    Liquidation, dissolution or reorganization.  If Plains is party to a merger
or other reorganization or is liquidated or dissolved, awards under the 2002
plan will be subject to the agreement of merger or reorganization or plan of
liquidation or dissolution. The agreement may provide for continuation of the
awards by the surviving company, the assumption or substitution of the
outstanding awards by the surviving company, full exercisability or vesting and
accelerated expiration of the outstanding awards, or settlement of the full
value of awards in cash or cash equivalents followed by cancellation.

    Amendment and termination of the plan.  The Plains' board of directors may
amend, alter, suspend or terminate the 2002 plan. However, Plains will obtain
stockholder approval for any amendment to the 2002 stock plan to the extent
necessary and desirable to comply with any applicable law. No action by the
Plains' board or stockholders may alter or impair any award previously granted
under the 2002 plan without the written consent of the grantee. Unless
terminated earlier, the 2002 plan automatically terminates ten years from its
date of adoption.

                                      159

<PAGE>

Certain Federal Income Tax Consequences

    The following discussion is a general summary of the principal federal
income tax consequences under current law relating to awards granted to
employees under the 2002 plan. The summary is not intended to be exhaustive
and, among other things, does not describe state, local or foreign income and
other tax consequences.

    Stock Options.   An optionee will not recognize any taxable income upon the
grant of a nonqualified stock option or an incentive stock option and Plains
will not be entitled to a tax deduction with respect to such grant. Generally,
upon exercise of a nonqualified stock option, the excess of the fair market
value of common stock on the date of exercise over the exercise price will be
taxable as ordinary income to the optionee. If Plains complies with applicable
income reporting requirements, Plains will be entitled to a federal income tax
deduction in the same amount and at the same time as the optionee recognizes
ordinary income, subject to any deduction limitation under Section 162(m) of
the Internal Revenue Code (which is discussed below). The subsequent
disposition of shares acquired upon the exercise of a nonqualified option will
ordinarily result in capital gain or loss.

    On exercise of an incentive stock option, the holder will not recognize any
income and Plains will not be entitled to a deduction. However, for purposes of
the alternative minimum tax, the exercise of an incentive stock option will be
treated as an exercise of a nonqualified stock option. Accordingly, the
exercise of an incentive stock option may result in an alternative minimum tax
liability.

    The disposition of shares acquired upon exercise of an incentive stock
option will ordinarily result in capital gain or loss. However, if the holder
disposes of shares acquired upon exercise of an incentive stock option within
two years after the date of grant or one year after the date of exercise (a
"disqualifying disposition"), the holder will recognize ordinary income in the
amount of the excess of the fair market value of the shares on the date the
option was exercised over the option exercise price (or, in certain
circumstances, the gain on sale, if less). Any excess of the amount realized by
the holder on the disqualifying disposition over the fair market value of the
shares on the date of exercise of the option will generally be capital gain.
Subject to any deduction limitation under Section 162(m) of the Internal
Revenue Code, Plains will be entitled to a deduction equal to the amount of
ordinary income recognized by a holder.

    If an option is exercised through the use of shares previously owned by the
holder, such exercise generally will not be considered a taxable disposition of
the previously owned shares and thus no gain or loss will be recognized with
respect to such shares upon such exercise. However, if the option is an
incentive stock option, and the previously owned shares were acquired on the
exercise of an incentive stock option or other tax-qualified stock option, and
the holding period requirement for those shares is not satisfied at the time
they are used to exercise the option, such use will constitute a disqualifying
disposition of the previously owned shares resulting in the recognition of
ordinary income in the amount described above.

    Special rules may apply in the case of an optionee who is subject to
Section 16 of the Exchange Act.

    Restricted Stock.   A grantee generally will not recognize taxable income
upon the grant of restricted stock, and the recognition of any income will be
postponed until such shares are no longer subject to the restriction or the
risk of forfeiture. When either the restrictions or the risk of forfeiture
lapses, the grantee will recognize ordinary income equal to the fair market
value of the restricted stock at the time that such restrictions lapse and,
subject to satisfying applicable income reporting requirements and any
deduction limitation under Section 162(m) of the Internal Revenue Code, Plains
will be entitled to a federal income tax deduction in the same amount and at
the same time as the

                                      160

<PAGE>

grantee recognizes ordinary income. A grantee may elect to be taxed at the time
of the grant of restricted stock and, if this election is made, the grantee
will recognize ordinary income equal to the excess of the fair market value of
the restricted stock at the time of grant (determined without regard to any of
the restrictions thereon) over the amount paid, if any, by the grantee for such
shares. Plains will be entitled to a federal income tax deduction in the same
amount and at the same time as the grantee recognizes ordinary income.

    Performance Shares and Performance Units.  Generally, a grantee will not
recognize any taxable income and Plains will not be entitled to a deduction
upon the award of Performance shares or performance units. At the time
Performance shares vest or the grantee receives a distribution with respect to
performance units, the fair market value of the vested shares or the amount of
any cash or shares received in payment for such awards generally is taxable to
the grantee as ordinary income. Subject to satisfying applicable income
reporting requirements and any deduction limitation under Section 162(m) of the
Internal Revenue Code, Plains will be entitled to a federal income tax
deduction equal to the amount of ordinary income recognized by the grantee.

    Section 162(m) of the Internal Revenue Code.  Section 162(m) of the
Internal Revenue Code generally disallows a federal income tax deduction to any
publicly held corporation for compensation paid in excess of $1 million in any
taxable year to the chief executive officer or any of the four other most
highly compensated executive officers who are employed by the corporation on
the last day of the taxable year, but does allow a deduction for
"performance-based compensation," the material terms of which are disclosed to
and approved by the stockholders. Plains has structured and intends to
implement and administer the 2002 plan so that compensation resulting from
options and performance awards can qualify as "performance-based compensation."
Plains' compensation committee, however, has the discretion to grant awards
with terms that will result in the awards not constituting performance-based
compensation. To allow Plains to qualify such options and performance awards as
"performance- based compensation," Plains is seeking stockholder approval of
the 2002 plan and the material terms of the performance goals applicable to
performance awards under the 2002 plan.

    Section 280G of the Internal Revenue Code.  Under certain circumstances,
the accelerated vesting or exercise of options or the accelerated lapse of
restrictions with respect to other awards in connection with a change in
control might be deemed an "excess parachute payment" for purposes of the
golden parachute tax provisions of Section 280G of the Internal Revenue Code.
To the extent it is so considered, the grantee may be subject to a 20% excise
tax and Plains may be denied a federal income tax deduction.

    The Plains board of directors proposes and recommends that you vote "FOR"
the proposal to approve the amendment to Plains' 2002 Stock Incentive Plan.

                                      161

<PAGE>

                AMENDMENT TO PLAINS' 2002 STOCK INCENTIVE PLAN

    The total number of shares currently reserved for issuance under the 2002
plan is 500,000. In [      ] 2003, the Plains board approved an amendment to
increase the total number of shares of common stock authorized and reserved for
issuance under the 2002 plan to 1.5 million shares. The purpose of the proposed
amendment is to increase the size of the 2002 plan commensurate with the
increase in the size of Plains as a result of the merger and to allow Plains to
issue incentive awards to the employees it is obtaining as a result of the
merger.

    If the merger is not approved the number of shares reserved for issuance
under the 2002 plan will not be increased.

    On the record date of the merger, Plains estimates that approximately
       officers, employees and directors were eligible to participate in the
2002 plan. As of the record date, no awards were outstanding under the 2002
plan.

    The Plains board of directors proposes and recommends that you vote "FOR"
the proposal to approve the amendment to Plains' 2002 Stock Incentive Plan.

                                      162

<PAGE>

                             ELECTION OF DIRECTORS

    At the Plains annual meeting, Plains stockholders will elect four
individuals to serve as directors. The bylaws of Plains authorize a board of
directors consisting of at least three members, with the exact number of
directors being a number (not less than three) that may be determined from time
to time by Plains' board of directors. Plains' current board of directors
consists of Messrs. Flores, Dees, Delimitros and Lollar. Each of the nominees
is currently a member of Plains' board of directors. The directors are elected
to hold office until the next annual stockholder meeting in 2004 and until his
successor is duly elected and qualified, or until his earlier death,
resignation or removal.

    The nominees have consented to be nominated and have expressed their intent
to serve if elected. The Plains board has no reason to believe that any of the
nominees will be unable to serve if elected to office and, to the knowledge of
the Plains board, the nominees intend to serve the entire term for which
election is sought. Only the nominees or substitute nominees designated by the
board of directors will be eligible to stand for election as directors at the
annual meeting. See "Plains Stockholder Proposals."

    The individuals named as proxies will vote the enclosed proxy for the
election of all nominees, unless you direct them to withhold your votes.
Although Plains knows of no reason for this, if any nominee becomes unable to
serve as a director before the annual meeting, the persons named as proxies
have the discretionary authority to vote for substitute nominees proposed by
the Plains board. The Plains board of directors recommends a vote "FOR" all
nominees.

    The following table sets forth certain information as of the date of this
document regarding Plains' present executive officers and directors. They hold
office until their successors are duly elected and qualified, or until their
earlier death, removal or resignation from office.

<TABLE>
<CAPTION>
             Name          Age                    Title
             ----          ---                    -----
     <S>                   <C> <C>
     James C. Flores...... 43  Chairman of the Board, Chief Executive
                               Officer and a Director
     John T. Raymond...... 32  President and Chief Operating Officer
     Stephen A. Thorington 47  Executive Vice President and Chief Financial
                               Officer
     Timothy T. Stephens.. 50  Executive Vice President--Administration,
                               Secretary and General Counsel
     Thomas M. Gladney.... 50  Senior Vice President of Operations
     Cynthia A. Feeback... 45  Senior Vice President--Accounting and
                               Treasurer
     Jerry L. Dees........ 62  Director
     Tom H. Delimitros.... 62  Director
     John H. Lollar....... 64  Director
</TABLE>

    The following biographies describe the business experience of Plains'
executive officers and directors:

    James C. Flores, Chairman of the Board, Chief Executive Officer and a
Director since September 2002.  He also has been Plains Resources' Chairman of
the Board since May 2001. He was Chief Executive Officer from May 2001 to
December 2002. He was President and Chief Executive Officer of Ocean Energy,
Inc., an oil and gas company, from July 1995 until March 1999, and a director
of Ocean Energy, Inc. from 1992 until March 1999. In March 1999 Ocean Energy,
Inc. was merged into Seagull Energy Corporation, which was the surviving
corporation of the merger, and which was renamed Ocean Energy, Inc. Mr. Flores
served as Chairman of the Board of the new Ocean Energy,

                                      163

<PAGE>

Inc. from March 1999 until January 2000, and as Vice Chairman from January 2000
until January 2001. From January 2001 to May 2001 Mr. Flores managed various
private investments.

    John T. Raymond, President and Chief Operating Officer since September
2002.  He also has been Plains Resources' Chief Executive Officer since
December 2002. He was Plains Resources' President and Chief Operating Officer
from November 2001 to December 2002. Previously, he was its Executive Vice
President and Chief Operating Officer from May 2001 to November 2001. In
addition, Mr. Raymond served as Director of Corporate Development of Kinder
Morgan, Inc. from January 2000 to May 2001, and as Vice President of Corporate
Development of Ocean Energy, Inc. from April 1998 to January 2000. Mr. Raymond
also served as Vice President of Howard Weil Labouisse Friedrichs, Inc., an
energy investment company, from 1992 to April 1998. In addition, Mr. Raymond is
a director of Plains All American GP LLC, which is the general partner of PAA.

    Stephen A. Thorington, Executive Vice President and Chief Financial Officer
since September 2002.  Previously, he was Senior Vice President--Finance and
Corporate Development of Ocean Energy, Inc. from July 2001 to September 2002
and Senior Vice President--Finance, Treasury and Corporate Development of Ocean
Energy, Inc. from March 1999 to July 2001. He also served as Vice President,
Finance and Treasurer of Seagull Energy Corporation from May 1996 to March
1999. Mr. Thorington served as a Managing Director of Chase Securities, Inc.
from April 1994 to May 1996.

    Timothy T. Stephens, Executive Vice President--Administration, Secretary
and General Counsel since September 2002.  He also was Plains Resources'
Executive Vice President--Administration, Secretary and General Counsel from
May 2001 to December 2002. From March 2000 to May 2001 Mr. Stephens practiced
as a private business consultant to various clients. In February 1998 Mr.
Stephens was hired by the board of directors of Abacan Resources Corporation,
an oil and gas company, to help the company overcome significant financial
difficulties. He served as Chairman, President and Chief Executive Officer of
Abacan until March 2000 when the company, after a two-year restructuring, was
placed into statutory receivership with the agreement of its senior creditor.
Previously, Mr. Stephens was President of Seven Seas Petroleum from February
1995 to May 1997, and Vice President of Enron Capital & Trade Resources Corp.
from July 1991 to February 1995.

    Thomas M. Gladney, Senior Vice President of Operations since September
2002.  He also was Plains Resources' Senior Vice President of Operations from
November 2001 to December 2002. He was President of Arguello, Inc., a
subsidiary of Plains, from December 1999 to November 2001. From July 1999 to
December 1999 he served as a Project Manager for Torch Energy Services, a
contract operating services company. From January 1999 to June 1999 he served
as a Project Manager for Venoco Inc., an oil and gas company. From September
1998 to January 1999 he was a self-employed engineering services consultant.
From 1992 to September 1998 he was Offshore Operations Manager for Oryx Energy
Company. Previously, he served as Gulf Coast Reserve Development Manager of
Oryx Energy/Sun E&P from 1988 to 1992.

    Cynthia A. Feeback, Senior Vice President--Accounting and Treasurer since
September 2002.  She also was Plains Resources' Senior Vice
President--Accounting and Treasurer from July 2001 to December 2002. She was
its Vice President--Accounting and Assistant Treasurer from May 1999 to July
2001, and its Assistant Treasurer, Controller and Principal Accounting Officer
from May 1998 to May 1999. Previously, Ms. Feeback served as its Controller and
Principal Accounting Officer from 1993 to 1998, Controller from 1990 to 1993,
and Accounting Manager from 1988 to 1990.

    Jerry L. Dees, Director since September 2002.  He also was a director of
Plains Resources from 1997 to December 2002. He retired in 1996 as Senior Vice
President, Exploration and Land, for Vastar Resources, Inc. (previously ARCO
Oil and Gas Company), a position he had held since 1991.

                                      164

<PAGE>

From 1987 to 1991 he was Vice President of Exploration and Land for ARCO
Alaska, Inc., and from 1985 to 1987 he held various positions as Exploration
Manager of ARCO. From 1980 to 1985 Mr. Dees was Manager of Exploration
Geophysics for Cox Oil and Gas Producers.

    Tom H. Delimitros, Director since September 2002. He also was a director of
Plains Resources from 1998 to December 2002. He has been a General Partner of
AMT Venture Funds, a venture capital firm, since 1989. He is also a director of
Tetra Technologies, Inc., a publicly-traded energy services company. He
currently serves as Chairman for two privately-owned companies--ImageLinks,
Inc., and InterCorp International Inc.--both of which sell products and
services to energy companies. Previously, he has served as President and CEO
for Magna Corporation, (now Baker Petrolite, a unit of Baker Hughes). From 1983
to 1988, Mr. Delimitros was a General Partner of Sunwestern Investment Funds
and Senior Vice President of Sunwestern Management, Inc.

    John H. Lollar, Director since September 2002. He also was a director of
Plains Resources from 1995 to December 2002. He has been the Managing Partner
of Newgulf Exploration L.P. since December 1996. He is also a director of
Lufkin Industries, Inc., a manufacturing firm. Mr. Lollar was Chairman of the
Board, President and Chief Executive Officer of Cabot Oil & Gas Corporation
from 1992 to 1995, and President and Chief Operating Officer of Transco
Exploration Company from 1982 to 1992.

                     Committees of the Board of Directors

    Plains' board has established Corporate Governance Principles, a copy of
which is attached as Annex G to this document and which is incorporated by
reference into this document.

    Plains' board has established an audit committee, a compensation committee
and a nominating and corporate governance committee. Plains' board may
establish other committees from time to time to facilitate Plains' management.
The composition of the committees following the merger will be determined by
the board of directors in its sole discretion. During 2002 Plains' board held
two meetings. No director attended fewer than 75% of the total number of
meetings of the meetings of Plains' board and committees on which he served.

    Plains' audit committee currently consists of Messrs. Dees, Delimitros and
Lollar, with Mr. Delimitros acting as chairman. Plains' audit committee selects
Plains' independent auditors to be engaged by Plains, reviews the plan, scope
and results of Plains' annual audit, and reviews Plains' internal controls and
financial management policies with Plains' independent auditors. Plains' audit
committee has adopted a written audit committee charter, a copy of which is
attached as Annex F to this document and which is incorporated by reference
into this document. All of the members of Plains' audit committee are
non-employee directors. Plains' board of directors, in its business judgment,
has determined that all current members of Plains' audit committee are
"independent" as defined in Sections 303.01(B)(2)(a) and (3) of the NYSE
listing standards. During 2002 the audit committee held one meeting.

    Plains' compensation committee currently consists of Messrs. Dees,
Delimitros and Lollar, with Mr. Lollar acting as chairman. Plains' compensation
committee establishes guidelines and standards relating to the determination of
executive compensation, reviews executive compensation policies and recommends
to Plains' entire board compensation for Plains' executive officers and key
employees. Plains' compensation committee also administers Plains' equity
compensation plan and determines the number of shares covered by, and terms of,
grants to executive officers and key employees. All of the members of Plains'
compensation committee are non-employee directors. During 2002 the compensation
committee held one meeting.

                                      165

<PAGE>

    Plains' nominating and corporate governance committee currently consists of
Messrs. Dees, Delimitros and Lollar, with Mr. Dees acting as chairman. Plains'
nominating and corporate governance committee identifies and evaluates
candidates for election as directors, nominates the slate of directors for
election by Plains' stockholders, and develops and recommends to Plains' board
Plains' corporate governance principles. During 2002 the nominating and
corporate governance committee held one meeting.

                                      166

<PAGE>

                                 COMPENSATION

Compensation of Directors

    Plains pays each non-employee director an annual retainer of $25,000, each
non-employee committee chairperson an annual retainer of $2,000, an attendance
fee of $3,000 for each board meeting attended in person, an attendance fee of
$1,000 for each committee meeting attended in person and an attendance fee of
$500 for each board or committee meeting attended telephonically, and Plains
reimburses all directors for reasonable expenses they incur while attending
board and committee meetings.

    Any non-employee director may elect to receive a grant of shares of Plains
common stock in lieu of the annual retainer fees as a board member and
chairperson and attendance fees for board meetings (except telephonic meetings
or other meetings attended by the director telephonically). The number of
shares is determined by dividing the fee amount by the closing price per share
of Plains common stock on the last trading day before it becomes obligated to
pay the fee.

    In addition, each year on the day after the date of Plains' annual
stockholders meeting, each non-employee director is entitled to receive 10,000
shares of Plains restricted stock.

    None of Plains' officers who serve as directors receive separate
compensation for service on Plains' board of directors.

Executive Compensation

    Plains Resources paid all the compensation of its officers during 2000 and
2001. Under a transition services agreement between Plains Resources and Plains
entered into in 2002, Plains reimbursed Plains Resources for costs incurred to
provide Plains with management services, including general and administrative
expenses and other employee costs.

                                      167

<PAGE>

Summary Compensation Table

    The following table shows certain compensation information for Plains'
chief executive officer and four additional highly compensated executive
officers, or named executive officers, for services rendered in all capacities
during the fiscal years ended December 31, 2002.

<TABLE>
<CAPTION>
                                                                        Long Term Compensation
                                                                 ------------------------------------
                                       Annual Compensation               Awards            Payouts
                                 ------------------------------- ----------------------- ------------
                                                                 Restricted  Securities
                                                    Other Annual   Stock     Underlying   All Other
                                      Salary  Bonus Compensation  Award(s)  Options/SARs Compensation
  Name and Principal Position    Year ($)(1)   ($)      ($)        ($)(2)       (#)          ($)
  ---------------------------    ---- ------- ----- ------------ ---------- ------------ ------------
<S>                              <C>  <C>     <C>   <C>          <C>        <C>          <C>
James C. Flores................. 2002 $16,668   0                 $682,500   1,125,000
  Chairman of the Board
  & Chief Executive Officer

John T. Raymond................. 2002 $14,583   0                 $546,000     475,000
  President and Chief
  Operating Officer

Stephen A. Thorington........... 2002 $12,500   0                 $409,500     300,000
  Executive Vice President
  and Chief Financial Officer

Timothy T. Stephens............. 2002 $11,458   0                 $273,000     310,000
  Executive Vice President of ,
  Administration Secretary and
  General Counsel

Thomas M. Gladney............... 2002 $ 7,292   0                               45,000
  Senior Vice President
  of Operations
</TABLE>
--------
(1) These amounts constitute the individuals' salary from the date of the
    spin-off, December 18, 2002 through December 31, 2002.
(2) These dollar amounts represent the closing price of a share of Plains
    common stock on December 18, 2002 (the date of the spin off and the
    restricted stock grant) at $9.10 times the number of restricted shares
    granted to the individuals as follows: Flores--75,000, Raymond--60,000,
    Thorington--45,000 and Stephens--30,000.

                                      168

<PAGE>

Option/SAR Grants in 2002

    The following table provides information regarding stock appreciation
rights, or SARs, that were granted to the named executive officers during 2002.
No stock options were granted to any other named executive officer during 2002.
The amounts shown as potential realizable values are based on assumed
annualized rates of stock price appreciation of 5% and 10% over the term of the
options as required by SEC rules. No gain to the optionee is possible without
an increase in stock price that will benefit all stockholders proportionately.
For comparative purposes, also shown are the total gains that could be realized
over a five-year period (the term of the options) by our stockholders based on
the same assumptions. There can be no assurance that the potential realizable
values shown in this table will be achieved.

<TABLE>
<CAPTION>
                         Individual Grants
                  -------------------------------
                    Number of                                          Potential Realizable Value At
                    Securities                                         Assumed Annual Rates of
                    Underlying   Percent of Total  Exercise            Stock Price Appreciation
                   Options/SARs    Options/SARs    or Base                For Option Term
                  Granted (#)(1)    Granted to      Price   Expiration -----------------------------
      Name                       Employees in 2002  ($/Sh)     Date        5%             10%
      ----        -------------- ----------------- -------- ----------   ----------    -----------
<S>               <C>            <C>               <C>      <C>        <C>            <C>
James C. Flores..   1,000,000            29%        $9.08     5/2011   $5,710,363     $14,471,182
                      125,000             4%         9.36     2/2007      323,249         714,297
John T. Raymond..     100,000             3%         9.97     5/2011      627,008       1,588,961
                      200,000             6%         9.36     6/2006      517,199       1,142,875
                      175,000             5%         9.36     2/2007      452,549       1,000,015
Stephen A.
 Thorington......     300,000             9%         9.10     9/2007      754,249       1,666,692
Timothy T.
 Stephens........      83,333             2%         9.97     5/2006      229,543         507,230
                      166,667             5%         9.97     6/2006      459,089       1,014,466
                       60,000             2%         9.36     2/2007      155,160         342,862
Thomas M. Gladney      10,000             0%         5.47     7/2005       15,113          33,395
                       10,000             0%         9.37     5/2006       25,888          57,205
                       25,000             1%         9.36     2/2007       64,650         142,859
All Employees....   3,417,257           100%
</TABLE>
--------
(1) Represents SARs received in the spin-off as a result of the split of Plains
    Resources options into Plains Resources options and Plains SARs.


Aggregated SAR Exercises in 2002 and Year-End SAR Values

    The following table sets forth certain information for each of the named
executive officers concerning the exercise of SARs during 2002 and all
unexercised SARs held at December 31, 2002.

<TABLE>
<CAPTION>
                                        Number of Securities
                     Shares            Underlying Unexercised
                    Acquired           Options/SARs At Fiscal   Value of Unexercised In-the-
                       On     Value         Year-End (#)        Money SARs At Year-End ($)(1)
                    Exercise Realized ------------------------- -----------------------------
       Name           (#)      ($)    Exercisable Unexercisable Exercisable   Unexercisable
       ----         -------- -------- ----------- ------------- -----------   -------------
<S>                 <C>      <C>      <C>         <C>           <C>           <C>
James C. Flores....    --       --           --     1,125,000     $    --       $718,750
John T. Raymond....    --       --       66,667       408,333          --         68,250
Stephen A.
  Thorington.......    --       --           --       300,000          --        195,000
Timothy T. Stephens    --       --      310,000            --      23,400             --
Thomas M. Gladney..    --       --       10,000        35,000      33,050         23,300
</TABLE>
--------
(1) Year-end values are determined by aggregating for each SAR outstanding as
    of December 31, 2002 the amount calculated by multiplying the number of
    shares underlying such SAR by the closing price of Plains common stock on
    December 31, 2002, which was $9.75, less the exercise price of such SAR.

                                      169

<PAGE>

2002 Stock Incentive Plan

    Plains adopted its 2002 Stock Incentive Plan on September 18, 2002 and
amended it effective November 20, 2002 to "divide it" into three plans: the
2002 Stock Incentive Plan; the rollover stock incentive plan; and the
transition stock incentive plan. For a further discussion of this plan, see
"Adoption of the Plains 2002 Stock Incentive Plan" on page [      ].

Rollover Stock Incentive Plan

    Plains adopted the rollover plan by splitting it off from the 2002 plan.
The purpose of the rollover plan is to govern the SARs issued in the recently
completed spin-off involving Plains pursuant to the terms of an employee
matters agreement between Plains Resources and Plains entered into in 2002 and
the restricted stock award of Plains common stock issued to Mr. Thorington
pursuant to the recently completed spin-off as a result of his restricted stock
award of 45,000 shares of Plains Resources common stock, which is described on
page [      ]. In addition, Mr. Thorington was granted 300,000 SARs under the
plan. If any portion of any of the rollover SARs or Mr. Thorington's restricted
stock award is forfeited, the shares with respect to which they were granted
will not be available for further grants under the plan.

    Upon the occurrence of an event constituting a "change in control," all
rollover SARs will become immediately exercisable in full. In addition, the
restrictions on Mr. Thorington's restricted stock award will lapse. The
spin-off did not constitute a change in control under the rollover plan.

Transition Stock Incentive Plan

    Plains adopted the transition plan by splitting it off from the 2002 plan.
The purpose of the transition plan was to make one-time grants of 75,000 shares
of restricted stock to Mr. Flores, 60,000 shares of restricted stock to Mr.
Raymond, and 30,000 shares of restricted stock to Mr. Stephens and a grant of
300,000 SARs to Mr. Thorington in accordance with their respective employment
agreements with Plains (which are discussed below). No other grants will be
made under the transition plan.

    Upon the occurrence of an event constituting a "change in control," unless
the compensation committee determines otherwise, the restrictions governing the
grants of restricted stock will lapse, and any unvested SARs will become
immediately exercisable in full. The spin-off discussed in the first question
in the section "Question and Answers About the Merger" did not constitute a
change in control under the transition plan.

Employment Agreements and Change-in-Control Arrangements

    James C. Flores.  On September 19, 2002 Plains entered into an employment
agreement with Mr. Flores as its Chairman of the Board and Chief Executive
Officer, which became effective on December 18, 2002. The agreement has an
initial term of five years that began on its effective date, although it may be
terminated earlier under certain circumstances. At the end of the initial
five-year term and, if such term is extended, each subsequent term, the
agreement will be subject to a one-year extension if Plains and Mr. Flores
agree to new compensation terms ninety days before the end of the applicable
term.

    Pursuant to the employment agreement, Mr. Flores is entitled to a base
salary of $400,000 and will be eligible for a target bonus of $400,000, subject
to the attainment of performance goals. Also, Mr. Flores has been granted an
award of 75,000 restricted shares of Plains common stock, which will vest over
three equal annual installments beginning on the first anniversary of the date
of grant, which was December 18, 2002.

                                      170

<PAGE>

    As a result of his employment with Plains Resources, Mr. Flores received an
option under the Plains Resources' 2001 stock incentive plan to purchase
1,000,000 shares of Plains Resources common stock at an exercise price of
$23.00 per share. On December 18, 2002, this performance option "split" such
that Mr. Flores received (1) an option to purchase 1,000,000 shares of Plains
Resources common stock and (2) an award of stock appreciation rights, or SARs,
with respect to 1,000,000 shares of Plains common stock. The $23.00 exercise
price of his existing Plains Resources option was also "split" between the
adjusted Plains Resources option and the SARs at $13.92 and $9.08,
respectively. The SARs will become vested and exercisable on the first to occur
of:

   .  May 7, 2006;

   .  with respect to one-half of the shares subject to the SARs, a period of
      10 trading days out of 20 consecutive trading days upon which the closing
      price of Plains common stock equals or exceeds $13.62;

   .  with respect to all shares subject to the SARs, a period of 10 trading
      days out of 20 consecutive trading days upon which the closing price of
      Plains common stock equals or exceeds $18.16;

   .  termination of Mr. Flores' employment by Plains for any reason other than
      cause (as defined in the employment agreement) or because of Mr. Flores'
      death or resignation or by Mr. Flores for good reason (as defined in the
      employment agreement);

   .  a change in control (as defined in the employment agreement) of Plains; or

   .  any such time that Mr. Flores is not a member of Plains' board of
      directors.

    In February 2002, Mr. Flores was granted an option to purchase 125,000
shares of Plains Resources common stock at an exercise price of $23.71 per
share, which vests over three equal annual installments beginning on the first
anniversary of the date of grant. This option was also "split" as discussed
above and the vesting terms remain unchanged. The exercise price of his Plains
Resources option will also "split" between the adjusted Plains Resources option
and an award of SARs at $14.35 and $9.36, respectively.

    Under the employment agreement, Mr. Flores is entitled to all of the
employee benefits, fringe benefits and perquisites Plains provides to other
senior executives and Plains reimburses him for monthly country club fees.

    Mr. Flores' employment agreement provides that if his employment is
terminated by Plains without cause, by Mr. Flores' death or disability, or by
Mr. Flores for good reason, Plains will pay him a lump sum amount equal to
three times the sum of his base salary and last earned annual bonus (or his
target bonus if his termination date occurs before a bonus amount has been
determined for the first calendar year of his employment). Also, Mr. Flores and
his dependents will be entitled to continued health insurance benefits for a
period of three years made "whole" on a net after-tax basis and all of Mr.
Flores' equity-based awards will become immediately exercisable and payable in
full.

    Under the employment agreement, if benefits to which Mr. Flores becomes
entitled are considered "excess parachute payments" under Section 280G of the
Code, then Mr. Flores will be entitled to an additional payment from Plains in
an amount equal to the excise tax imposed by Section 4999 of the Internal
Revenue Code or any interest or penalties with respect to such excise tax
(excluding any income tax or employment tax imposed upon the additional
payment).

    John T. Raymond.  On September 19, 2002 Plains entered into an employment
agreement with Mr. Raymond as its President and Chief Operating Officer, which
became effective on December 18, 2002. The agreement has an initial term of
five years beginning on its effective date, although it may be

                                      171

<PAGE>

terminated earlier under certain circumstances. At the end of the initial
five-year term and, if such term is extended, each subsequent term, the
agreement will be subject to a one-year extension if Plains and Mr. Raymond
agree to new compensation terms ninety days before the end of the applicable
term.

    Pursuant to the employment agreement, beginning on its effective date, Mr.
Raymond is entitled to a base salary of $350,000 and is eligible for a target
bonus of $350,000, subject to the attainment of performance goals. Also, Mr.
Raymond has been granted an award of 60,000 restricted shares of Plains common
stock, which vest over three equal annual installments beginning on the first
anniversary of the date of grant, which was December 18, 2002.

    As a result of his employment with Plains Resources, Mr. Raymond received
an option under the Plains Resources' 2001 stock incentive plan to purchase
100,000 shares of Plains Resources common stock at an exercise price of $25.26
per share. On December 18, 2002, this performance option "split" such that Mr.
Raymond received (1) an adjusted option to purchase 100,000 shares of Plains
Resources common stock and (2) an award of SARs with respect to 100,000 shares
of Plains common stock. The exercise price of his Plains Resources option was
also "split" between the adjusted Plains Resources option and the SARs at
$15.29 and $9.97, respectively. The vesting terms remain unchanged and are
substantially similar to the terms for Mr. Flores' performance SARs.

    As a result of his employment agreement with Plains Resources, Mr. Raymond
also received an option covering 200,000 shares of Plains Resources common
stock with respect to which 66,667 shares have already vested with the
remaining shares vesting in equal portions on each of May 17, 2003 and May 17,
2004. This option was also "split" as discussed above and the vesting terms
remain unchanged. The exercise price of his Plains Resources option was also
"split" between the adjusted Plains Recourses option and an award of SARs at
$14.35 and $9.36, respectively.

    In February 2002, Mr. Raymond was granted an option to purchase 175,000
shares of Plains Resources common stock at an exercise price of $23.71 per
share, which vests over three equal annual installments beginning on the first
anniversary of the date of grant. This option was also "split" and the vesting
terms remain unchanged. The exercise prices of the adjusted Plains Resources
option and the award of SARs are at $14.35 and $9.36, respectively.

    Under this employment agreement, Mr. Raymond is also entitled to all of the
employee benefits, fringe benefits and perquisites provided by Plains to other
senior executives and will be reimbursed by it for monthly country club fees.

    Mr. Raymond's employment agreement provides that if his employment is
terminated by Plains without cause (as defined in the employment agreement), by
Mr. Raymond's death or disability, or by Mr. Raymond for good reason (as
defined in the employment agreement), Plains will pay him a lump sum amount
equal to two times the sum of his base salary and last earned annual bonus (or
his target bonus if the termination date occurs before a bonus amount has been
determined for the first calendar year of his employment). Also, Mr. Raymond
and his dependents will be entitled to continued health insurance benefits for
a period of three years made "whole" on a net after-tax basis and all of Mr.
Raymond's equity-based awards will become immediately exercisable and payable
in full.

    Under the employment agreement, if benefits to which Mr. Raymond becomes
entitled are considered "excess parachute payments" under Section 280G of the
Internal Revenue Code, then Mr. Raymond will be entitled to an additional
payment from Plains in an amount equal to the excise tax imposed by Section
4999 of the Code or any interest or penalties with respect to such excise tax
(excluding any income tax or employment tax imposed upon the additional
payment).

    Stephen A. Thorington.  Plains entered into an employment agreement with
Mr. Thorington on August 20, 2002. Pursuant to this agreement, Mr. Thorington
will serve for an initial term of five years

                                      172

<PAGE>

beginning on September 3, 2002. At the end of the initial five-year term and,
if such term is extended, each subsequent term, the agreement is subject to a
one-year extension if Plains and Mr. Thorington agree to new compensation terms
before the end of the applicable term. Mr. Thorington's employment agreement
provides for a base salary of $300,000 per year and a target annual bonus of
$300,000, subject to the attainment of performance goals. In addition, pursuant
to the employment agreement, Mr. Thorington received a $350,000 signing bonus
and has been granted SARs with respect to 300,000 shares of Plains common stock
at an exercise price of $9.10 which is equal to the closing price (on a
"when-issued" basis) of its common stock on the grant date, December 18, 2002,
as reported on the NYSE. These SARs vest over three equal annual installments
beginning on September 3, 2003. Plains also reimburses Mr. Thorington for
initial and monthly downtown luncheon club fees.

    In addition, Mr. Thorington was granted by Plains Resources an award of
45,000 restricted shares of Plains Resources common stock, which will vest over
three equal annual installments beginning on September 3, 2003. These
restricted shares are issued and outstanding, and Mr. Thorington is entitled to
vote these shares and receive dividends paid on these shares, which dividends
will be held in custody by Plains and paid to Mr. Thorington as the restricted
shares vest. As a result, on December 18, 2002, Mr. Thorington received 45,000
restricted shares of Plains common stock pursuant to the spin-off, but the
shares are still subject to the same vesting terms as his restricted Plains
Resources common stock.

    If Mr. Thorington's employment is terminated by Plains without cause, by
Mr. Thorington's death, or if a change of control (as defined in the 2002 plan)
occurs, Plains will pay him a lump sum amount equal to two times the sum of his
base salary and last earned annual bonus (or his target bonus if the
termination date occurs before the end of the first calendar year of his
employment). Also, Mr. Thorington will be entitled to health insurance benefits
for up to two years after termination, subject to mitigation if he becomes
entitled to health benefits under another plan, and his SARs will automatically
vest.

    Timothy T. Stephens.  On September 19, 2002 Plains entered into an
employment agreement with Mr. Stephens, which became effective on December 18,
2002. The agreement has an initial term of five years that began on December
18, 2002. At the end of the initial five-year term and, if such term is
extended, each subsequent term, the agreement will be subject to a one-year
extension if Plains and Mr. Stephens agree to new compensation terms before the
end of the applicable term. Mr. Stephens is entitled to a base salary of
$275,000 per year and a target annual bonus of $275,000, subject to the
attainment of performance goals. Also, Mr. Stephens has been granted an award
of 30,000 restricted shares of Plains common stock, which will vest over three
equal annual installments beginning on the first anniversary of the date of
grant, which was December 18, 2002. Plains also reimburses Mr. Stephens for
initial and monthly downtown luncheon club fees.

    As a result of Mr. Stephens' employment with Plains Resources, Mr. Stephens
received an option under the Plains Resources 2001 stock incentive plan to
purchase 83,333 shares of Plains Resources common stock at an exercise price of
$25.26 per share. On December 18, 2002, this performance option "split" such
that Mr. Stephens received (1) an adjusted option to purchase 83,333 shares of
Plains Resources common stock and (2) an award of SARs with respect to 83,333
shares of Plains common stock. The exercise prices of the adjusted Plains
Resources option and the SARs are at $15.29 and $9.97, respectively. As a
result of his termination of employment from Plains Resources, the Plains
Resources board accelerated the vesting of this option and all options that
Plains Resources granted to Mr. Stephens, effective immediately before December
18, 2002. Therefore, all of Mr. Stephens' awards of SARs that were "split" off
from the Plains Resources options are also vested.

                                      173

<PAGE>

    As a result of his employment agreement with Plains Resources, Mr. Stephens
also received an option covering 166,667 shares of Plains Resources common
stock. This option was also "split," and the exercise prices of the adjusted
Plains Resources option and the SARs are at $15.29 and $9.97, respectively.

    In February 2002, Mr. Stephens was granted an option to purchase 60,000
shares of Plains Resources common stock at an exercise price of $23.71 per
share. This option was also "split" and the exercise prices of the adjusted
Plains Resources option and the SARs are at $14.35 and $9.36, respectively.

    If Mr. Stephens' employment is terminated by Plains without cause, by Mr.
Stephens' death, or if a change of control (as defined in Plains' 2002 plan)
occurs, Plains will pay him a lump sum amount equal to two times the sum of his
base salary and last earned annual bonus (or his target bonus if the
termination date occurs before the end of the first calendar year of his
employment). Also, Mr. Stephens will be entitled to health insurance benefits
for up to two years after termination, subject to mitigation if he becomes
entitled to health benefits under another plan, and all of his equity-based
awards will become fully exercisable.

    Thomas M. Gladney.  Since September 2002, Mr. Gladney has been employed
with Plains as Senior Vice President of Operations. He does not have a written
employment agreement with Plains. He is entitled to a base salary of $175,000
per year and a target annual bonus, subject to the attainment of performance
goals. As a result of Mr. Gladney's employment with Plains Resources, Mr.
Gladney received three options under the Plains Resources 2001 stock incentive
plan to purchase in the aggregate 45,000 shares of Plains Resources common
stock. On December 18, 2002, these options "split" such that Mr. Gladney
received (i) an adjusted option to purchase 10,000 shares of Plains Resources
common stock and an award of SARs with respect to 10,000 shares of Plains
common stock, exercise prices of $8.40 and $5.47, respectively; (ii) an
adjusted option to purchase 10,000 shares of Plains Resources common stock and
an award of SARs with respect to 10,000 shares of Plains common stock, exercise
prices of $14.37 and $9.37, respectively; and (iii) an adjusted option to
purchase 25,000 shares of Plains Resources common stock and an award of SARs
with respect to shares of Plains common stock, exercise prices of $14.35 and
$9.36, respectively.

    Other.  In the event of certain corporate transactions, changes in control
of Plains, or changes in the composition of Plains' board of directors under
certain circumstances, all options, SARs, and restricted stock awards granted
to Plains' executive officers will become exercisable on an accelerated
schedule pursuant to its 2002 plan, rollover plan and transition plan. To the
extent not already exercisable, these options, SARs, and restricted stock
awards generally will become fully exercisable upon a change of control of
Plains resulting from:

   .  a change in the composition of its board of directors pursuant to which
      incumbent directors or their designated successors cease to constitute at
      least two-thirds of its board;

   .  subject to certain exceptions, the acquisition of securities by a person
      after which that person beneficially owns 50% or more of the voting power
      of its outstanding stock; or

   .  subject to certain exceptions, approval by its stockholders of a merger,
      consolidation or reorganization involving it, a complete liquidation or
      dissolution of it, or an agreement for the sale of all or substantially
      all of its assets.

    The recently completed spin-off was not a change of control under the 2002
plan, rollover plan or transition plan.

                                      174

<PAGE>

Indemnification of Directors and Officers

    Plains' certificate of incorporation provides that Plains must indemnify to
the full extent authorized or permitted by law any person made, or threatened
to be made, a party to any action, suit or proceeding (whether civil, criminal
or otherwise) because he, his testator or intestate, is or was one of its
directors or officers or because such director or officer, at its request, is
or was serving any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, in any capacity. The rights to
indemnification set forth above are not exclusive of any other rights to which
such person may be entitled under any statute, provision of its certificate of
incorporation or bylaws, agreements, vote of stockholders or disinterested
directors or otherwise.

    Additionally, Plains' bylaws provide for mandatory indemnification to at
least the extent specifically allowed by Section 145 of the DGCL. Plains'
bylaws generally follow the language of Section 145 of the DGCL, but in
addition specify that any director, officer, employee or agent may apply to any
court of competent jurisdiction in the State of Delaware for indemnification to
the extent otherwise permissible under the bylaws, notwithstanding any contrary
determination denying indemnification made by the board, by independent legal
counsel, or by the stockholders, and notwithstanding the absence of any
determination with respect to indemnification. The bylaws also specify certain
circumstances in which a finding is required that the person seeking
indemnification acted in good faith, for purposes of determining whether
indemnification is available. Under the bylaws, a person is deemed to have
acted in good faith and in a manner he reasonably believed to be in or not
opposed to Plains' best interests, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was
unlawful, if his action is based on Plains' records or books of account or
those of another enterprise, or on information supplied to him by Plains'
officers or the officers of another enterprise in the course of their duties,
or on the advice of Plains' legal counsel or the legal counsel of another
enterprise or on information or records given or reports made to Plains or to
another enterprise by an independent certified public accountant or by an
appraiser or other expert selected with reasonable care by Plains or another
enterprise.

    Pursuant to Section 145 of the DGCL, Plains generally has the power to
indemnify its current and former directors, officers, employees and agents
against expenses and liabilities that they incur in connection with any suit to
which they are, or are threatened to be made, a party by reason of their
serving in such positions so long as they acted in good faith and in a manner
they reasonably believed to be in, or not opposed to, Plains' best interests,
and with respect to any criminal action, they had no reasonable cause to
believe their conduct was unlawful. With respect to suits by or in Plains'
right, however, indemnification is generally limited to attorneys' fees and
other expenses and is not available if such person is adjudged to be liable to
Plains unless the court determines that indemnification is appropriate. The
statute expressly provides that the power to indemnify authorized thereby is
not exclusive of any rights granted under any bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise. Plains also has the
power to purchase and maintain insurance for such persons.

    Although the above discussion summarizes the material provisions of Plains'
certificate of incorporation and bylaws and Section 145 of the DGCL, it is not
intended to be exhaustive and is qualified in its entirety by each of those
documents and that statute.

                                      175

<PAGE>

                   PLAINS TRANSACTIONS WITH RELATED PERSONS

    Plains Resources owns approximately 25% of Plains All American Pipeline,
L.P., or PAA, including 44% of the general partner of PAA. Plains is party to
the following agreements with PAA and Plains Resources:

   .  a marketing agreement that provides that PAA will purchase all of Plains'
      equity oil production at market prices for a fee of $0.20 per Bbl. For
      the purchase of oil under the agreement, including the royalty share of
      production, in 2001, 2000 and 1999, PAA paid $202.1 million, $222.7
      million and $114.6 million, respectively; and

   .  a letter agreement that provides that, if Plains' marketing agreement
      with PAA terminates before the termination of PAA's oil sales agreement
      with Tosco Refining Co. pursuant to which PAA sells to Tosco all of the
      oil from Plains' Arroyo Grande property it purchases from Plains, PAA
      will continue to purchase Plains' equity production from Plains' Arroyo
      Grande property under the same terms as Plains' marketing agreement with
      PAA until the Tosco agreement terminates.

    Prior to the reorganization, Plains used a centralized cash management
system under which Plains' cash receipts were remitted to Plains Resources and
Plains' cash disbursements were funded by Plains Resources. Plains' was charged
interest on any amounts, other than income taxes payable, due to Plains
Resources at the average effective interest rate of Plains Resources long-term
debt. For the nine months ended September 30, 2002 and 2001 Plains was charged
$10.1 million and $12.8 million, respectively, of interest on amounts payable
to Plains Resources. Of such amounts, $8.7 million and $10.5 million was
included in interest expense in 2002 and 2001, respectively, and $1.4 million
and $2.3 million was capitalized in oil and gas properties in 2002 and 2001,
respectively. To compensate Plains Resources for services rendered under a
services agreement, Plains was allocated direct and indirect corporate and
administrative costs of Plains Resources. Such costs for the nine months ended
September 30, 2002 and 2001 totaled $7.1 million and $5.4 million,
respectively. Of such amounts, $5.0 million and $4.3 million was included in
general and administrative expense in 2002 and 2001, respectively, and $2.1
million and $1.1 million was capitalized in oil and gas properties in 2002 and
2001, respectively. In addition, prior to the reorganization discussed in the
section "Questions and Answers About the Merger," Plains Resources entered into
various derivative instruments to reduce Plains' exposure to decreases in the
market price of crude oil. At the time of the reorganization, all open
derivative instruments held by Plains Resources on Plains' behalf were assigned
to Plains.

Spin-off Agreements

  Master Separation Agreement

    Overview.  To effect Plains' separation from Plains Resources, Plains
entered into a master separation agreement on July 3, 2002 with Plains
Resources. The master separation agreement provides for the separation of
substantially all of the upstream assets and liabilities of Plains Resources,
other than its Florida operations. The master separation agreement provides
for, among other things:

   .  the separation;

   .  the spin-off;

   .  cross-indemnification provisions;

   .  allocation of fees related to these transactions between Plains and
      Plains Resources;

   .  other provisions governing Plains' relationship with Plains Resources,
      including mandatory dispute arbitration, sharing information,
      confidentiality and other covenants;

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   .  a noncompetition provision; and

   .  Plains entering into the ancillary agreements discussed below with Plains
      Resources.

    Separation.  To effect the separation, on July 3, 2002, Plains Resources
transferred to Plains assets and liabilities related to Plains Resources'
upstream business (other than its Florida operations), including the capital
stock of Arguello Inc., Plains Illinois Inc., PMCT, Inc. and Plains Resources
International Inc., miscellaneous upstream assets and related hedging
agreements. Plains assumed the liabilities associated with the transferred
assets and businesses. Except as set forth in the master separation agreement,
no party made any representation or warranty as to the assets or liabilities
transferred as a part of the separation, and all assets were transferred on an
"as is, where is" basis.

    Reorganization.  The master separation agreement provides for an internal
reorganization within Plains Resources, including:

   .  Plains' conversion into a Delaware corporation; and

   .  before the spin-off, the merger of Stocker Resources, Inc. (Plains'
      general partner before Plains converted from a limited partnership to a
      corporation) into Plains Resources.

    Indemnification.  The master separation agreement provides for
cross-indemnities intended to place sole financial responsibility on Plains for
all liabilities associated with the current and historical businesses and
operations Plains conduct after giving effect to the separation, regardless of
the time those liabilities arose, and to place sole financial responsibility
for liabilities associated with Plains Resources' other businesses with Plains
Resources and its other subsidiaries. The master separation agreement also
contains indemnification provisions under which Plains and Plains Resources
each indemnify the other with respect to breaches by the indemnifying party of
the master separation agreement or any of the ancillary agreements described
below. Plains agreed to indemnify Plains Resources and its other subsidiaries
against liabilities arising from misstatements or omissions in the various
offering documents for the exchange offer related to Plains' 8.75% senior
subordinated notes or the spin-off including related prospecti or in documents
to be filed with the SEC in connection therewith, except for information
regarding Plains Resources provided by Plains Resources for inclusion in such
documents. Plains Resources agreed to indemnify Plains against liabilities
arising from misstatements or omissions in the various offering documents for
the exchange offer related to Plains' 8.75% senior subordinated notes or the
spin-off, including related prospecti or in documents to be filed with the SEC
in connection therewith if such information was provided by Plains Resources.

    The master separation agreement contains a general release under which
Plains released Plains Resources and its subsidiaries, affiliates, successors
and assigns, and Plains Resources released Plains from any liabilities arising
from events between Plains on the one hand, and Plains Resources or its
subsidiaries on the other hand, occurring on or before the separation,
including events in connection with activities to implement the separation,
this offering and the spin-off. The general release does not apply to
obligations under the master separation agreement or any ancillary agreement,
to liabilities transferred to Plains, to future transactions between Plains and
Plains Resources, or to specified contractual arrangements.

    Other provisions.  The master separation agreement also provides for: (1)
mandatory arbitration to settle disputes between Plains and Plains Resources;
(2) exchange of information between Plains Resources and Plains for purposes of
conducting Plains' operations, meeting regulatory requirements, responding to
regulatory or judicial proceedings, meeting SEC filing requirements, and other
reasons; (3) preservation of legal privileges and (4) maintaining
confidentiality of each other's information.

    In addition, Plains and Plains Resources agreed to enter into a new oil
marketing agreement with PAA so that the agreement only applies to Plains and
to add a definite term to the agreement.

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    Non-competition.  The master separation agreement provides that for three
years, (1) Plains Resources and its subsidiaries will be prohibited from
engaging in or acquiring any business engaged in any of the "upstream"
activities of acquiring, exploiting, developing, exploring for and producing
oil and gas in any state in the United States (except Florida), and (2) Plains
will be prohibited from engaging in any of the "midstream" activities of
marketing, gathering, transporting, terminalling and storing oil and gas
(except to the extent any such activities are ancillary to, or in support of,
any of Plains' upstream activities.)

  Employee Matters Agreement

    Plains also entered into the employee matters agreement with Plains
Resources. The employee matters agreement does not address the treatment of
Messrs. Flores, Raymond and Stephens, or the executives, except with respect to
the treatment of their existing options to acquire Plains Resources common
stock.

    Stock options and restricted stock awards.  Under the employee matters
agreement, as a result of the spin-off, all outstanding options to acquire
Plains Resources common stock at the time of the spin-off were "split" into (1)
an equal number of options to acquire Plains Resources common stock and (2) an
equal number of stock appreciation rights, or SARs, with respect to Plains
common stock. The exercise price for the original Plains Resources stock
options were also "split" between the new Plains Resources stock options and
the SARs based on the following relative amounts: 39.5% (Plains) and 60.5%
(Plains Resources).

    Also, unless otherwise provided for in the agreement governing the
restricted stock award, at the time of the spin-off all restricted stock awards
for Plains Resources common stock were also "split" into (1) restricted stock
awards for an equal number of shares of Plains Resources common stock and (2)
restricted stock awards for an equal number of shares of Plains common stock.

    All recipients of Plains' SARs and restricted stock awards have received
the benefit of prior service credit at Plains Resources and would have the same
amount of vesting as they had under their related Plains Resources stock
options and restricted stock awards, and vesting terms would remain unchanged.
Likewise, with respect to employees and directors who stay with Plains
Resources, their service at Plains Resources will count towards the vesting of
their SARs even though they are not employed by Plains or do not serve on
Plains' board of directors.

    Unless a person is employed by or serves as a director for both Plains
Resources and Plains, termination of employment or service as a director for
any reason at either company will count as termination for the same reason at
the other company for purposes of vesting and termination of options, SARs, and
restricted stock awards. If a person is employed by or serves as a director for
both Plains Resources and Plains, termination for any reason at one company
will not count as termination at the other company.

    Other plans.  The employee matters agreement provided that (1) before the
spin-off, Plains would establish a nonqualified deferred compensation plan for
certain executive officers and, to the extent that any of the executives are
participants in the Plains Resources deferred compensation plan, the related
assets and liabilities under the Plains Resources plan would be transferred to
Plains' plan, (2) on or before the spin-off, Plains Resources would transfer
its 401(k) plan and welfare benefit plans to Plains and would form a similar
401(k) plan and similar welfare benefit plans, and (3) at the time of the
spin-off, Plains would establish plans that mirror the fringe benefits and
company policies of Plains Resources.

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    Other.  Under the employee matters agreement, Plains Resources retains
liability for all incurred but not reported claims occurring before the
spin-off, and Plains is liable for all claims incurred on or after the spin-off
related to Plains' employees.

  Tax Allocation Agreement

    On July 3, 2002, Plains entered into the tax allocation agreement, which
Plains and Plains Resources amended and restated on November 20, 2002. This
agreement provides that, until the spin-off, Plains continued to be included in
Plains Resources' consolidated federal income tax group, and Plains' federal
income tax liability will be included in the consolidated federal income tax
liability of Plains Resources. The amount of taxes that Plains will pay or
receive with respect to consolidated or combined returns of Plains Resources in
which Plains are included generally will be determined by multiplying Plains'
net taxable income included in the Plains Resources consolidated tax return by
the highest marginal tax rate applicable to the income. Plains Resources will
not be required to pay Plains for the use of Plains' tax attributes that come
into existence before the spin-off until such time as Plains would otherwise be
able to utilize such attributes.

    If Plains Resources decides not to contest a proposed adjustment relating
to Plains' activities, Plains may at Plains' expense contest the adjustment,
but Plains may not settle or compromise any issues related to the tax
liabilities of Plains Resources.

    In general, the agreement provides that Plains will be included in Plains
Resources' consolidated group for federal income tax purposes until the time of
the spin-off. Each member of a consolidated group is jointly and severally
liable for the federal income tax liability of each other member of the
consolidated group. Accordingly, although this agreement allocates tax
liabilities between Plains and Plains Resources during the period in which
Plains was included in Plains Resources' consolidated group, Plains could be
liable if any federal tax liability is incurred, but not discharged, by any
other member of Plains Resources' consolidated group. In addition, to the
extent Plains Resources' net operating losses are used in the consolidated
return to offset Plains' taxable income from operations during the period
January 1, 2002 through the spin-off, Plains will reimburse Plains Resources
for the reduction in Plains' federal income tax liability resulting from the
utilization of such net operating losses, but such reimbursement shall not
exceed $3 million exclusive of any interest accruing under the agreement.

    Under the terms of this agreement, Plains agreed to indemnify Plains
Resources if the spin-off is not tax-free to Plains Resources as a result of
various actions taken by Plains or with respect to Plains' failure to take
various actions.

    In addition, Plains agreed that, during the three-year period following the
spin-off, without the prior written consent of Plains Resources, Plains would
not engage in transactions that could adversely affect the tax treatment of the
spin-off unless Plains obtained a supplemental tax ruling from the IRS or a tax
opinion acceptable to Plains Resources of nationally recognized tax counsel to
the effect that the proposed transaction would not adversely affect the tax
treatment of the spin-off or provide adequate economic security to Plains
Resources to ensure Plains would be able to comply with Plains' obligation
under this agreement. Plains may not be able to control some of these events
that could trigger this indemnification obligation.

    Plains also agreed to be liable for transfer taxes associated with the
transfer of assets and liabilities in connection with the separation and the
spin-off.

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  Intellectual Property Agreement

    On July 3, 2002 Plains entered into the intellectual property agreement,
which provides that Plains Resources will transfer to Plains ownership and all
rights associated with certain trade names, trademarks, service marks and
associated goodwill, including Arguello, Plains, Plains Energy, Plains E&P,
Plains Exploration & Production, Plains Illinois, Plains Petroleum, Plains
Resources, Plains Resources International, PLX, PMCT, Stocker Resources and the
Plains logo. In addition, Plains will grant to Plains Resources a full license
to use certain trade names including Plains Energy and Plains Resources,
referred to as the Plains Marks, subject to certain limitations. These licenses
are not transferable or assignable without Plains' written consent, except that
Plains Resources may grant its subsidiaries sublicenses to use the Plains Marks.

    Plains Resources will not attempt to register a trade name or trademark
that incorporates or is confusingly similar to the Plains Marks. Also, if
Plains Resources develops new trademarks using the name "Plains," it must first
obtain Plains' written approval. Plains will own such new trademarks and they
will be considered subject to the terms of this agreement.

    The intellectual property agreement provides that Plains Resources will
conform the nature and quality of its products and services offered in
connection with the Plains Marks to Plains' reasonable design and quality
standards. Further, Plains Resources will use the Plains Marks only in
connection with its business.

  Plains Exploration & Production Transition Services Agreement

    On July 3, 2002 Plains entered into the Plains Exploration & Production
transition services agreement, under which Plains Resources provided Plains the
following services, on an interim basis:

   .  management services, including managing Plains' operations, evaluating
      investment opportunities for us, overseeing Plains' upstream activities,
      and staffing;

   .  tax services, including preparing tax returns and preparing financial
      statement disclosures;

   .  accounting services, including maintaining general ledgers, preparing
      financial statements and working with Plains' auditors;

   .  payroll services, including payment processing and complying with
      regulations relating to payroll services;

   .  insurance services, including maintaining for the interim period the
      existing insurance that Plains Resources provides for us;

   .  employee benefits services, including administering and maintaining the
      employee benefit plans that cover Plains' employees;

   .  legal services, including typical and customary legal services; and

   .  financial services, including helping Plains raise capital, preparing
      budgets and executing hedges.

    Plains Resources has charged Plains approximately $10.8 million as
reimbursement of its costs of providing such services through December 31, 2002.

    This transition services agreement provides that Plains Resources will not
be liable to Plains with respect to the performance of the services, except in
the case of gross negligence or willful misconduct in providing the services.
Plains Resources will indemnify Plains for any liabilities arising from such
gross negligence or misconduct. Plains will indemnify Plains Resources for any
liabilities arising directly from the performance of the services by Plains
Resources, except for liabilities caused by

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gross negligence or willful misconduct of Plains Resources. Plains Resources
will disclaim all warranties and makes no representations as to the quality,
suitability or adequacy of the services provided.

Plains Resources Transition Services Agreement

    On July 3, 2002 Plains entered into the Plains Resources transition
services agreement, under which Plains will provide Plains Resources the
following services on an interim basis beginning on a date to be determined by
both Plains and Plains Resources upon the transfer by Plains Resources of
substantially all of its employees to Plains:

   .  tax services, including preparing tax returns and preparing financial
      statement disclosures;

   .  accounting services, including maintaining general ledgers, preparing
      financial statements and working with Plains Resources auditors;

   .  payroll services, including payment processing and complying with
      regulations relating to payroll services;

   .  employee benefits services, including administering and maintaining the
      employee benefit plans that cover Plains Resources' employees;

   .  legal services, including typical and customary legal services; and

   .  financial services, including helping Plains Resources raise capital,
      preparing budgets and executing hedges.

    The services provided by Plains under the Plains Resources transition
services agreement and the services provided by Plains Resources under the
Plains Exploration & Production transition services agreement are substantially
similar, except that:

   .  the Plains Resources transition services agreement did not become
      effective until the spin-off occurred;

   .  the Plains Resources transition services agreement does not cover
      management services, insurance services or operational services;

   .  the tax services provided under the Plains Resources transition services
      agreement are not subject to the tax allocation agreement discussed on
      pages              ; and

   .  the legal services provided under the Plains Exploration & Production
      transition services agreement include legal services that have been
      historically provided for it and its subsidiaries by Plains Resources.
      Plains will charge Plains Resources on a monthly basis Plains' costs of
      providing such services.

    In addition, Plains and Plains Resources may identify additional services
that Plains will provide to Plains Resources under this agreement in the
future. The terms and costs of these additional services will be mutually
agreed d upon by Plains and Plains Resources. Plains may allow one of Plains'
subsidiaries or a qualified third party to provide the services under this
agreement, but Plains will be responsible for the performance of the services.

    Plains will be obligated to provide the services with substantially the
same degree of care as Plains employ for Plains' own operations. Plains may
change the manner in which Plains provide the services so long as Plains deem
such change to be necessary or desirable for Plains' own operations.

    This transition services agreement provides that Plains will not be liable
to Plains Resources with respect to the performance of the services, except in
the case of gross negligence or willful misconduct

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in providing the services. Plains will indemnify Plains Resources for any
liabilities arising from such gross negligence or misconduct. Plains Resources
will indemnify Plains for any liabilities arising directly from Plains'
performance of the services, except for liabilities caused by Plains' gross
negligence or willful misconduct. Plains will disclaim all warranties and make
no representations as to the quality, suitability or adequacy of the services
provided.

    Plains will provide the services for 180 days, unless Plains and Plains
Resources decide to terminate the agreement earlier. Plains and Plains
Resources may agree to extend this agreement beyond the 180 day period if
necessary or desirable.

Technical Services Agreement

    On July 3, 2002 Plains entered into the technical services agreement, which
provides that, beginning on a date to be determined by Plains and Plains
Resources, Plains will provide Calumet Florida certain engineering and
technical support services required to support operation and maintenance of the
oil and gas properties owned by Calumet, including geological, geophysical,
surveying, drilling and operations services, environmental and other
governmental or regulatory compliance related to oil and gas activities and
other oil and gas engineering services as requested, and accounting services.

    Plains Resources will reimburse Plains for Plains' costs to produce these
services.

    In addition, Plains and Plains Resources may identify additional services
that Plains will provide to Plains Resources under this agreement in the
future. The terms and costs of these additional services will be mutually
agreed d upon by Plains and Plains Resources. Plains may allow one of Plains'
subsidiaries or a qualified third party to provide the services under this
agreement, but Plains will be responsible for the performance of the services.

    Plains and Plains Resources may agree to specific performance metrics that
Plains must meet. Where no parameters are provided, Plains will (1) perform the
services in accordance with the policies and procedures in effect before this
agreement, (2) exercise the same care and skill as Plains exercise in
performing similar services for Plains' subsidiaries, and (3) in cases where
there is common personnel, equipment or facilities for services provided to
Plains' subsidiaries and Plains Resources, not favor Plains Resources or
Plains' subsidiaries over the other. Plains may change the manner in which
Plains provide the services so long as Plains are making similar changes to the
services Plains are providing to Plains' subsidiaries. Plains are not obligated
to provide any service to the extent it is impracticable as a result of causes
outside of Plains' control.

    The technical services agreement provides that Plains will not be liable to
Plains Resources or Calumet with respect to the performance of the services,
except in the case of gross negligence or willful misconduct in providing the
services. Plains will indemnify Plains Resources and Calumet for any
liabilities arising from such gross negligence or misconduct. Plains Resources
will indemnify Plains for any liabilities arising directly from the performance
of the services, except for liabilities caused by Plains' gross negligence or
willful misconduct. Plains disclaim all warranties and make no representations
as to the quality, suitability or adequacy of the services provided.

    Plains will provide the services until (1) Calumet is no longer a
subsidiary of Plains Resources, (2) Calumet transfers substantially all of its
assets to a person that is not a subsidiary of Plains Resources, (3) July 2005
or (4) when all the services are terminated as provided in the agreement.
Plains Resources may terminate the agreement as to some or all of the services
at any time by giving Plains at least 90 days' written notice.

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             SECURITY OWNERSHIP OF PLAINS' PRINCIPAL STOCKHOLDERS

    Please see "Security Ownership of Principal Stockholders" on page [      ]
for a description of the security ownership of Plains' principal stockholders,
directors, and named executive officers.

            SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

    Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Plains' directors and executive officers, and persons who own more than ten
percent of a registered class of Plains' equity securities, to file with the
SEC and any exchange or other system on which such securities are traded or
quoted, initial reports of ownership and reports of changes in ownership of
Plains common stock and other equity securities. Officers, directors and
greater than ten percent stockholders are required by the SEC's regulations to
furnish Plains and any exchange or other system on which such securities are
traded or quoted with copies of all Section 16(a) forms they filed with the SEC.

    To Plains' knowledge, based solely on a review of the copies of such
reports furnished to Plains and written representations that no other reports
were required, Plains believes that all reporting obligations of Plains'
officers, directors and greater than ten percent stockholders under Section
16(a) were satisfied during the year ended December 31, 2002.

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                     RATIFICATION OF INDEPENDENT AUDITORS

    The Plains board has appointed PricewaterhouseCoopers LLP, certified public
accountants, as auditors to examine the financial statements of Plains for the
fiscal year ending December 31, 2003, and to perform other appropriate
accounting services and is requesting ratification of such appointment by the
stockholders. If the stockholders do not ratify the appointment of
PricewaterhouseCoopers LLP, the adverse vote will be considered as a direction
to the Plains board to select other auditors for the next fiscal year. However,
because of the difficulty and expense of making any substitution of auditors
after the beginning of the current fiscal year, it is contemplated that the
appointment for the fiscal year ending December 31, 2003, will be permitted to
stand unless the Plains board of directors finds other reasons for making a
change. It is understood that even if the selection of PricewaterhouseCoopers
is ratified, the Plains board, in its discretion, may direct the appointment of
a new independent accounting firm at any time during the year if the Plains
board feels that such a change would be in the best interests of Plains and its
stockholders.

    The ratification of PricewaterhouseCoopers requires the affirmative vote of
holders of a majority of the shares of Plains common stock present, in person
or proxy, and entitled to vote at the annual meeting.

    Representatives of PricewaterhouseCoopers are expected to be present at the
annual meeting, will have the opportunity to make a statement if they desire to
do so and are expected to be available to respond to appropriate questions.

    The Plains board of directors recommends that stockholders vote "FOR" the
proposal to approve the appointment of PricewaterhouseCoopers LLP as Plains'
independent auditors for fiscal year 2003.

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                                    EXPERTS

    The combined financial statements of the Upstream Subsidiaries of Plains
Resources Inc. as of December 31, 2001 and 2000 and for each of the three years
in the period ended December 31, 2001 included in this proxy
statement/prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

    Certain information with respect to the oil and gas reserves associated
with Plains' oil and gas properties is derived from the reports of Netherland,
Sewell & Associates, Inc., Ryder Scott Company, L.P., and H.J. Gruy and
Associates, Inc., independent petroleum consulting firms, and has been included
in this proxy statement/prospectus upon the authority of said firms as experts
with respect to the matters covered by such reports and in giving such reports.

    The consolidated financial statements of 3TEC Energy Corporation and
subsidiaries as of December 31, 2001 and 2000, and for the years then ended,
have been included herein in reliance upon the report of KPMG LLP, independent
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The audit report covering the December 31,
2001 consolidated financial statements refers to a change to the method of
accounting for derivative instruments and hedging activities.

    Certain information with respect to the oil and gas reserves associated
with 3TEC's oil and gas properties is derived from the reports of Ryder Scott
Company, L.P., an independent petroleum consulting firm, and has been included
in this proxy statement/prospectus upon the authority of said firms as experts
with respect to the matters covered by such reports and in giving such reports.

                                 LEGAL MATTERS

    The validity of the Plains common stock offered hereby will be passed upon
by Akin Gump Strauss Hauer & Feld LLP. In addition, Akin Gump Strauss Hauer &
Feld LLP and Thompson & Knight LLP have delivered opinions to Plains and 3TEC,
respectively, as to certain tax matters. Fulbright and Jaworski L.L.P., special
tax counsel to Plains, will have delivered its opinion to Plains that the
merger will not adversely affect the tax treatment of the spin-off of Plains
from Plains Resources under Section 355 of the Code as ruled by the Internal
Revenue Service in its private letter rulings dated November 5, 2002 and
May 22, 2002.

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                             STOCKHOLDER PROPOSALS

    Plains' secretary must receive stockholders' proposals of stockholders
intended to be presented at our 2004 annual meeting at our principal executive
office on or before              , 2003 to be considered for inclusion in our
proxy statement and form of proxy for the meeting. Pursuant to Rule 14a-4(c)(1)
under the Exchange Act, if Plains' secretary receives any stockholder proposal
at Plains' principal executive office after [      ], 2003 that is intended to
be presented at our 2004 annual meeting without inclusion in our proxy
statement for the meeting, the proxies designated by Plains' board will have
discretionary authority to vote on such proposal.

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                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

    The SEC allows us to "incorporate by reference" business and financial
information that is not included in or delivered with this document, which
means that we can disclose important information to you by referring to another
document filed separately with the SEC. The information incorporated by
reference is deemed to be part of this document, except for any information
superseded by information in this document.

    This document incorporates by reference the documents set forth below:

   .  3TEC's Annual Report on Form 10-KSB for the fiscal year ended December
      31, 2001;

   .  3TEC's Quarterly Reports on Form 10-Q for the quarters ended March 31,
      2002, June 30, 2002 and September 30, 2002; and

   .  3TEC's Current Report on Form 8-K, filed on February 4, 2003.

    We are also incorporating by reference additional documents that may be
filed with the SEC between the date of the filing of this document and the date
of this document's effectiveness.

    You can obtain any of the documents listed above from 3TEC or the SEC.
Documents listed above are available from 3TEC without charge, excluding all
exhibits unless the exhibits have specifically been incorporated by reference
in this document. Holders of this document may obtain documents listed above by
requesting them upon written or oral request from us at the following address:

                            3TEC Energy Corporation
                         700 Milam Street, Suite 1100
                             Houston, Texas 77002
                         Attention: Investor Relations
                                (713) 821-7100

    If you would like to request documents from 3TEC, please do so by
      , 2003 to receive timely delivery of the documents in advance of the 3TEC
special meeting.

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                      WHERE YOU CAN FIND MORE INFORMATION

    Plains and 3TEC file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information Plains and 3TEC file at the SEC's
public reference room located at 450 Fifth Street, N.W., Washington, D.C.
Please call the SEC at 1-800-SEC-8330 for further information on the public
reference room. These SEC filings are also available to the public at the web
site maintained by the SEC at http://www.sec.gov; by Plains at www.plainsxp.com
and by 3TEC at www.3tecenergy.com.

    Plains filed a registration statement on Form S-4 to register with the SEC
the Plains common stock that Plains will issue to 3TEC stockholders in the
merger. This document is part of that registration statement and constitutes a
prospectus of Plains in addition to being a proxy statement for Plains for the
Plains annual meeting and a proxy statement for 3TEC for 3TEC's special
meeting. As allowed by SEC rules, this document does not contain all of the
information you can find in the registration statement or the exhibits to the
registration statement.

    If you are a stockholder of Plains or 3TEC, you can obtain copies of our
annual and quarterly reports from us or the SEC. These documents are available
from us without charge, excluding all exhibits. Stockholders may obtain reports
of Plains by requesting them in writing from Plains at the following address:

                    Plains Exploration & Production Company
                         500 Dallas Street, Suite 700
                             Houston, Texas 77002
                         Attention: Investor Relations

    Stockholders may obtain reports of 3TEC by requesting them in writing from
3TEC at the following address:

                            3TEC Energy Corporation
                         700 Milam Street, Suite 1100
                             Houston, Texas 77002
                         Attention: Investor Relations

    If you would like to request documents from us, please do so by       ,
2003 so that you may receive them before the Plains annual meeting and 3TEC
special meeting. You should rely only on the information contained in this
document to vote on the proposals submitted by the Plains board. We have not
authorized anyone to provide you with information that is different from what
is contained in this document. This document is dated       , 2003. You should
not assume that the information contained in this document is accurate as of
any date other than such date, and neither the mailing of this document to 3TEC
and Plains stockholders nor the issuance of Plains common stock in the merger
shall create any implication to the contrary.

    Plains has provided all of the information contained in this document with
respect to Plains and 3TEC has provided all of the information contained in
this document with respect to 3TEC.

    If you own Plains common stock, 3TEC common stock or 3TEC preferred stock,
please sign, date and promptly mail the enclosed proxy in the enclosed prepaid
envelope. Prompt return of your proxy will help save additional solicitation
expense.

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                         GLOSSARY OF OIL AND GAS TERMS

    The following are abbreviations and definitions of certain terms commonly
used in the oil and gas industry and this document:

    API gravity.  A system of classifying oil based on its specific gravity,
whereby the greater the gravity, the lighter the oil.

    Bbl.  One stock tank barrel, or 42 U.S. gallons liquid volume, used in
reference to oil or other liquid hydrocarbons.

    Bcfe.  One billion cubic feet of gas equivalent.

    BOE.  One stock tank barrel equivalent of oil, calculated by converting gas
volumes to equivalent oil barrels at a ratio of 6 Mcf to 1 Bbl of oil.

    Developed acreage.  The number of acres which are allocated or assignable
to producing wells or wells capable of production.

    Development well.  A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.

    Differential.  An adjustment to the price of oil from an established spot
market price to reflect differences in the quality and/or location of oil.

    Exploratory well.  A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.

    Farm-in.  An agreement between a participant who brings a property into the
venture and another participant who agrees to spend an agreed amount to explore
and develop the property and has no right of reimbursement but may gain a
vested interest in the venture. A "farm-in" describes the position of the
participant who agrees to spend the agreed-upon sum of money to gain a vested
interest in the venture.

    Gas.  Natural gas.

    Gross acres.  The total acres in which a person or entity has a working
interest.

    Gross oil and gas wells.  The total wells in which a person or entity owns
a working interest.

    Infill drilling.  A drilling operation in which one or more development
wells is drilled within the proven boundaries of a field.

    MBbl.  One thousand barrels of oil or other liquid hydrocarbons.

    MBOE.  One thousand BOE.

    Mcf.  One thousand cubic feet of gas.

    Mcfe.  One thousand cubic feet of gas equivalent.

                                      189

<PAGE>

    Midstream.  The portion of the oil and gas industry focused on marketing,
gathering, transporting and storing oil.

    MMBbl.  One million barrels of oil or other liquid hydrocarbons.

    MMBOE.  One million BOE.

    MMBtu.   One million British Thermal units. One British thermal unit is the
amount of heat required to raise the temperature of one pound of water to one
degree Fahrenheit.

    MMcf.  One million cubic feet of gas.

    MMcfe.  One million cubic feet of gas equivalent.

    Net acres.  Gross acres multiplied by the percentage working interest.

    Net oil and gas wells.  Gross wells multiplied by the percentage working
interest.

    Net production.  Production that is owned, less royalties and production
due others.

    Net revenue interest.  Our share of petroleum after satisfaction of all
royalty and other non-cost-bearing interests.

    NYMEX.  New York Mercantile Exchange.

    Oil.  Crude oil, condensate and natural gas liquids.

    Operator.  The individual or company responsible for the exploration and/or
exploitation and/or production of an oil or gas well or lease.

    PV-10.  The pre-tax present value, discounted at 10% per year, of estimated
future net revenues from the production of proved reserves, computed by
applying sales prices in effect as of the dates of such estimates and held
constant throughout the productive life of the reserves (except for
consideration of price changes to the extent provided by contractual
arrangements), and deducting the estimated future costs to be incurred in
developing, producing and abandoning the proved reserves (computed based on
current costs and assuming continuation of existing economic conditions).

    Proved developed reserves.  Proved developed oil and gas reserves are
reserves that can be expected to be recovered through existing wells with
existing equipment and operating methods. Additional oil and gas expected to be
obtained through the application of fluid injection or other improved recovery
techniques for supplementing the natural forces and mechanisms of primary
recovery should be included as "proved developed reserves" only after testing
by a pilot project or after the operation of an installed program has confirmed
through production response that increased recovery will be achieved.

    Proved reserves.  Per Article 4-10(a)(2) of Regulation S-X, the SEC defines
proved oil and gas reserves as the estimated quantities of oil, gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.

    Reservoirs are considered proved if economic producibility is supported by
either actual production or conclusive formation test. The area of a reservoir
considered proved includes: (i) that portion delineated by drilling and defined
by gas-oil and/or oil-water contacts, if any; and (ii) the

                                      190

<PAGE>

immediately adjoining portions not yet drilled, but which can be reasonably
judged as economically productive on the basis of available geological and
engineering data. In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower proved limit of
the reservoir.

    Reserves which can be produced economically through application of improved
recovery techniques (such as fluid injection) are included in the "proved"
classification when successful testing by a pilot project, or the operation of
an installed program in the reservoir, provides support for the engineering
analysis on which the project or program was based.

    Estimates of proved reserves do not include: (i) oil that may become
available from known reservoirs but is classified separately as "indicated
additional reserves"; (ii) oil, gas, and natural gas liquids, the recovery of
which is subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors; (iii) oil, gas, and natural gas
liquids, that may occur in undrilled prospects; and (iv) oil, gas, and natural
gas liquids, that may be recovered from oil shales, coal, gilsonite and other
such sources.

    Proved reserve additions.  The sum of additions to proved reserves from
extensions, discoveries, improved recovery, acquisitions and revisions of
previous estimates.

    Proved undeveloped reserves.  Proved undeveloped oil and gas reserves are
reserves that are expected to be recovered from new wells on undrilled acreage,
or from existing wells where a relatively major expenditure is required for
recompletion. Reserves on undrilled acreage shall be limited to those drilling
units offsetting productive units that are reasonably certain of production
when drilled. Proved reserves for other undrilled units can be claimed only
where it can be demonstrated with certainty that there is continuity of
production from the existing productive formation. Under no circumstances
should estimates for proved undeveloped reserves be attributable to any acreage
for which an application of fluid injection or other improved recovery
technique is contemplated, unless such techniques have been proved effective by
actual tests in the area and in the same reservoir.

    Reserve life.  A measure of the productive life of an oil and gas property
or a group of properties, expressed in years. Reserve life is calculated by
dividing proved reserve volumes at year-end by production for that year.

    Reserve replacement cost.  The cost per BOE of reserves added during a
period calculated by using a fraction, the numerator of which equals the costs
incurred for the relevant property acquisition, exploration, exploitation and
development and the denominator of which equals changes in proved reserves due
to revisions of previous estimates, extensions, discoveries, improved recovery
and other additions and purchases of reserves in-place.

    Reserve replacement ratio.  The proved reserve additions for the period
divided by the production for the period.

    Royalty.  An interest in an oil and gas lease that gives the owner of the
interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not
require the owner to pay any portion of the costs of drilling or operating the
wells on the leased acreage. Royalties may be either landowner's royalties,
which are reserved by the owner of the leased acreage at the time the lease is
granted, or overriding royalties, which are usually reserved by an owner of the
leasehold in connection with a transfer to a subsequent owner.

    Standardized measure.  The present value, discounted at 10% per year, of
estimated future net revenues from the production of proved reserves, computed
by applying sales prices in effect as of the

                                      191

<PAGE>

dates of such estimates and held constant throughout the productive life of the
reserves (except for consideration of price changes to the extent provided by
contractual arrangements), and deducting the estimated future costs to be
incurred in developing, producing and abandoning the proved reserves (computed
based on current costs and assuming continuation of existing economic
conditions). Future income taxes are calculated by applying the statutory
federal and state income tax rate to pre-tax future net cash flows, net of the
tax basis of the properties involved and utilization of available tax
carryforwards related to oil and gas operations.

    Undeveloped acreage.  Acreage held under lease, permit, contract or option
that is not in a spacing unit for a producing well.

    Upstream.  The portion of the oil and gas industry focused on acquiring,
exploiting, developing, exploring for and producing oil and gas.

    Waterflood.  A secondary recovery operation in which water is injected into
the producing formation to maintain reservoir pressure and force oil toward and
into the producing wells.

    Working interest.  An interest in an oil and gas lease that gives the owner
of the interest the right to drill for and produce oil and gas on the leased
acreage and requires the owner to pay a share of the costs of drilling and
production operations.

                                      192

<PAGE>

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                          Page
<S>                                                                                       <C>
Plains Exploration & Production Company
Unaudited Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001.....  F-2
   Unaudited Consolidated Statements of Income for the nine months ended September 30,
     2002 and 2001.......................................................................  F-3
 Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30,
   2002 and 2001.........................................................................  F-4
 Unaudited Consolidated Statements of Comprehensive Income for the nine months ended
   September 30, 2002 and 2001...........................................................  F-5
 Unaudited Consolidated Statements of Changes in Stockholder's Equity for the nine months
   ended September 30, 2002 and 2001.....................................................  F-6
 Notes to Unaudited Consolidated Financial Statements....................................  F-7
Upstream Subsidiaries of Plains Resources Inc.
 Report of Independent Accountants....................................................... F-23
 Combined Balance Sheets as of December 31, 2001 and 2000................................ F-24
 Combined Statements of Income for the years ended December 31, 2001, 2000 and 1999...... F-25
 Combined Statements of Cash Flows for the years ended December 31, 2001, 2000 and
   1999.................................................................................. F-26
 Combined Statements of Comprehensive Income for the years ended December 31, 2001,
   2000 and 1999......................................................................... F-27
 Combined Statements of Combined Owners' Equity for the years ended December 31, 2001,
   2000 and 1999......................................................................... F-28
 Notes to Combined Financial Statements.................................................. F-29
3TEC Energy Corporation and Subsidiaries
   Consolidated Balance Sheets as of September 30, 2002 (Unaudited) and December 31,
     2001 (Audited)...................................................................... F-52
   Consolidated Statements of Operations (Unaudited) Three and nine months ended
     September 30, 2002 and 2001......................................................... F-53
   Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30,
     2002 and 2001....................................................................... F-54
   Notes to Consolidated Financial Statements (Unaudited)................................ F-55
   Report of Independent Auditors........................................................ F-60
   Consolidated Balance Sheets as of December 31, 2001 and 2000.......................... F-61
   Consolidated Statements of Operations for the years ended December 31, 2001 and
     2000................................................................................ F-62
   Consolidated Statements of Cash Flows for the years ended December 31, 2001 and
     2000................................................................................ F-63
   Consolidated Statements of Changes in Stockholders' Equity for the years ended
     December 31, 2001 and 2000.......................................................... F-64
   Notes to Consolidated Financial Statements............................................ F-65
</TABLE>

                                      F-1

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

                     UNAUDITED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                             September 30, December 31,
                                                                 2002          2001
                                                             ------------- ------------
                                                                   (in thousands)
<S>                                                          <C>           <C>
                                        ASSETS
Current Assets
 Cash and cash equivalents..................................   $     766    $      13
 Accounts receivable--Plains All American Pipeline, L.P.....      22,751       12,331
 Other accounts receivable and current assets...............       4,778        4,051
 Commodity hedging contracts................................         453       21,787
 Inventories................................................       5,643        4,629
                                                               ---------    ---------
                                                                  34,391       42,811
                                                               ---------    ---------
Property and Equipment, at cost
 Oil and natural gas properties--full cost method
   Subject to amortization..................................     612,515      561,034
   Not subject to amortization..............................      35,479       33,371
 Other property and equipment...............................       1,571        1,516
                                                               ---------    ---------
                                                                 649,565      595,921
 Less allowance for depreciation, depletion and amortization    (161,858)    (140,804)
                                                               ---------    ---------
                                                                 487,707      455,117
                                                               ---------    ---------
Other Assets................................................      18,958       18,827
                                                               ---------    ---------
                                                               $ 541,056    $ 516,755
                                                               =========    =========
                         LIABILITIES AND STOCKHOLDER'S EQUITY

Current Liabilities
 Accounts payable and other current liabilities.............   $  56,143    $  41,368
 Commodity hedging contracts................................      24,880           --
 Payable to Plains Resources Inc............................       3,357           --
 Current maturities on long-term debt.......................         511          511
                                                               ---------    ---------
                                                                  84,891       41,879
                                                               ---------    ---------
Payable to Plains Resources Inc.............................          --      235,161
                                                               ---------    ---------
Long-Term Debt..............................................     288,014        1,022
                                                               ---------    ---------
Other Long-Term Liabilities.................................       3,543        1,413
                                                               ---------    ---------
Deferred Income Taxes.......................................      44,481       57,193
                                                               ---------    ---------
Commitments and Contingencies (Note 6)
Stockholder's Equity
 Stockholder's equity.......................................     134,730           --
 Combined owners' equity....................................          --      164,203
 Accumulated other comprehensive income.....................     (14,603)      15,884
                                                               ---------    ---------
                                                                 120,127      180,087
                                                               ---------    ---------
                                                               $ 541,056    $ 516,755
                                                               =========    =========
</TABLE>

                See notes to consolidated financial statements.

                                      F-2

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

                  UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                                                Nine Months Ended
                                                                  September 30,
                                                               ------------------
                                                                 2002      2001
                                                               --------  --------
                                                                 (in thousands)
<S>                                                            <C>       <C>
Revenues
 Crude oil sales to Plains All American Pipeline, L.P......... $129,563  $133,957
 Natural gas sales............................................    7,130    26,870
 Other operating revenues.....................................       27       468
                                                               --------  --------
                                                                136,720   161,295
                                                               --------  --------
Costs and Expenses
 Production expenses..........................................   56,826    47,995
 General and administrative...................................    7,362     7,074
 Depreciation, depletion and amortization.....................   21,262    16,999
                                                               --------  --------
                                                                 85,450    72,068
                                                               --------  --------
Income from Operations........................................   51,270    89,227
Other Income (Expense)
 Expenses of terminated public equity offering................   (1,700)       --
 Interest expense.............................................  (14,427)  (12,942)
 Interest and other income....................................      114       459
                                                               --------  --------
Income Before Income Taxes and Cumulative Effect of Accounting
  Change......................................................   35,257    76,744
 Income tax expense
   Current....................................................   (5,660)   (5,180)
   Deferred...................................................   (8,097)  (24,443)
                                                               --------  --------
Income Before Cumulative Effect of Accounting Change..........   21,500    47,121
 Cumulative effect of accounting change, net of tax benefit...       --    (1,522)
                                                               --------  --------
Net Income.................................................... $ 21,500  $ 45,599
                                                               ========  ========
Basic and Diluted Earnings Per Share..........................
 Income before cumulative effect of accounting change......... $   0.89  $   1.95
 Cumulative effect on accounting change.......................       --     (0.06)
                                                               --------  --------
 Net income................................................... $   0.89  $   1.89
                                                               ========  ========
</TABLE>


                See notes to consolidated financial statements.

                                      F-3

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

                UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                Nine Months
                                                            Ended September 30,
                                                            -------------------
                                                               2002      2001
                                                            ---------  --------
                                                               (in thousands)
<S>                                                         <C>        <C>
Cash Flows From Operating Activities
Net income................................................. $  21,500  $ 45,599
Items not affecting cash flows from operating activities:
 Depreciation, depletion and amortization..................    21,262    16,999
 Deferred income taxes.....................................     8,097    24,443
 Cumulative effect of adoption of accounting change........        --     1,522
 Change in derivative fair value...........................        --     1,055
 Other noncash items.......................................       372       721
Change in assets and liabilities from operating activities:
 Accounts receivable and other assets......................   (11,010)    3,293
 Payable to Plains Resources Inc...........................     3,357        --
 Accounts payable and other liabilities....................    14,775     8,439
                                                            ---------  --------
Net cash provided by operating activities..................    58,353   102,071
                                                            ---------  --------
Cash Flows From Investing Activities
Acquisition, exploration and developments costs............   (53,589)  (99,346)
Additions to other property and equipment..................       (55)     (107)
                                                            ---------  --------
Net cash used in investing activities......................   (53,644)  (99,453)
                                                            ---------  --------
Cash Flows From Financing Activities
Principal payments of long-term debt.......................      (511)     (511)
Change in revolving credit facility........................    90,700        --
Proceeds from debt issuance................................   196,752        --
Debt issuance costs........................................    (5,469)       --
Contribution from Plains Resources Inc.....................     5,000        --
Distribution to Plains Resources Inc.......................  (311,964)       --
Receipts from (payments to) Plains Resources Inc...........    21,536    (2,640)
                                                            ---------  --------
Net cash used in financing activities......................    (3,956)   (3,151)
                                                            ---------  --------
Net increase (decrease) in cash and cash equivalents.......       753      (533)
Cash and cash equivalents, beginning of period.............        13       536
                                                            ---------  --------
Cash and cash equivalents, end of period................... $     766  $      3
                                                            =========  ========
</TABLE>


                See notes to consolidated financial statements.

                                      F-4

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

           UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                             Nine Months
                                                          Ended September 30,
                                                          -----------------
                                                            2002       2001
                                                          --------   -------
                                                            (in thousands)
    <S>                                                   <C>        <C>
    Net Income........................................... $ 21,500   $45,599
    Other Comprehensive Income (Loss):
     Cumulative effect of change in accounting principle.       --     6,967
     Commodity hedging contracts
       Reclassification adjustment for settled contracts.   (4,562)    1,950
       Change in fair value..............................  (34,882)   (2,327)
     Interest rate swap..................................     (167)       --
                                                          --------   -------
                                                           (30,487)    6,590
                                                          --------   -------
    Comprehensive Income (Loss).......................... $ (8,987)  $52,189
                                                          ========   =======
</TABLE>



                See notes to consolidated financial statements.

                                      F-5

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

                  UNAUDITED STATEMENT OF STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
                                                                                   Accumulated
                         Combined  Common Stock  Additional                           Other
                         Owner's   -------------  Paid-in   Contribution Retained Comprehensive
                          Equity   Shares Amount  Capital    Receivable  Earnings    Income       Total
                        ---------  ------ ------ ---------- ------------ -------- ------------- ---------
<S>                     <C>        <C>    <C>    <C>        <C>          <C>      <C>           <C>
Balance at December
 31, 2001.............. $ 164,203      --  $ --   $     --    $    --     $   --    $ 15,884    $ 180,087
Net income.............    14,082      --    --         --         --      7,418          --       21,500
Contribution of amounts
 due to Plains
 Resources Inc.........   255,991      --    --         --         --         --          --      255,991
Distribution to Plains
 Resources Inc.........  (311,964)     --    --         --         --         --          --     (311,964)
Cash contribution by
 Plains Resources
 Inc...................     5,000      --    --         --         --         --          --        5,000
Incorporation and
 capitalization of
 Plains Exploration &
 Production
 Company...............  (127,312) 24,200   242    127,070         --         --          --           --
Note receivable
 contribution by Plains
 Resources Inc.........        --      --    --      7,200     (7,200)        --          --           --
Other comprehensive
 income................        --      --    --         --         --         --     (30,487)     (30,487)
                        ---------  ------  ----   --------    -------     ------    --------    ---------
Balance at September
 30, 2002.............. $      --  24,200  $242   $134,270    $(7,200)    $7,418    $(14,503)   $ 120,127
                        =========  ======  ====   ========    =======     ======    ========    =========
Balance at December
 31, 2000.............. $ 111,032      --  $ --   $     --    $    --     $   --    $     --    $ 111,032
Net income.............    45,999      --    --         --         --         --          --       45,599
Other comprehensive
 income................        --      --    --         --         --         --       6,590        6,590
                        ---------  ------  ----   --------    -------     ------    --------    ---------
Balance at September
 30, 2001.............. $ 156,631      --  $ --   $     --    $    --     $   --    $  6,590    $ 163,221
                        =========  ======  ====   ========    =======     ======    ========    =========
</TABLE>



                See notes to consolidated financial statements.

                                      F-6

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

             NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -- Organization and Significant Accounting Policies

Organization

    The consolidated financial statements of Plains Exploration & Production
Company ("PXP", "us", "our", or "we") include the accounts of its wholly-owned
subsidiaries, Arguello Inc., Plains Illinois, Inc., PMCT Inc. and Plains
Resources International Inc. PXP is a Delaware corporation that was converted
from a limited partnership in September 2002 and is a wholly-owned subsidiary
of Plains Resources Inc. ("Plains Resources"). All significant intercompany
transactions have been eliminated.

    Under the terms of a Master Separation Agreement between Plains Resources
and PXP, on July 3, 2002, Plains Resources contributed to PXP: (i) 100% of the
capital stock of its wholly owned subsidiaries, Arguello Inc., Plains Illinois,
Inc., PMCT Inc. and Plains Resources International Inc.; and (ii) all amounts
payable to it by PXP and its subsidiary companies. These transactions are
referred to as the "reorganization". In addition, in September 2002 Plains
Resources made (i) a $5.0 million cash contribution; and (ii) a $7.2 million
contribution in the form of a promissory note payable, both as part of the
working capital for the upstream assets contributed to us. The promissory note
bears interest at 2.5% and is due December 15, 2002. The contribution of the
amounts payable to Plains Resources, the cash contribution and the contribution
of the promissory note are all reflected in Stockholder's Equity.

    Effective at the time of the reorganization PXP assumed direct ownership
and control of Arguello Inc., Plains Illinois, Inc., PMCT Inc. and Plains
Resources International Inc. Accordingly, for periods subsequent to the
reorganization, the financial information is presented on a consolidated basis.
For periods prior to the reorganization, the historical operations of the
businesses owned by PXP, Arguello Inc., Plains Illinois, Inc., PMCT Inc. and
Plains Resources International Inc., all previously referred to as the Upstream
Subsidiaries of Plains Resources Inc., were presented on a carve-out combined
basis since no direct owner relationship existed among the various operations
comprising these businesses. Accordingly, Plains Resources' net investment in
the businesses (combined owners' equity) was shown in lieu of stockholder's
equity in the combined financial statements.

    PXP has the authority to issue 5.0 million shares of preferred stock, par
value $0.01 per share, and 100.0 million shares of common stock, par value
$0.01 per share. In September 2002 PXP was capitalized with 24.2 million shares
of common stock, all of which are owned by Plains Resources. In accordance with
SEC Staff Accounting Bulletin No. 98, this capitalization has been
retroactively reflected for purposes for calculating earnings per share for all
periods presented in the accompanying combined statements of income. In
computing EPS, no adjustments were made to reported net income, and no
potential common stock exists. The weighted average shares outstanding for
computing both basic and diluted EPS was 24.2 million shares for all periods
presented.

    These consolidated financial statements and related notes present our
financial position as of September 30, 2002 and December 31, 2001 and the
results of our operations, our cash flows, our comprehensive income and the
changes in our stockholder's equity for the nine months ended September 30,
2002 and 2001. The results for the nine months ended September 30, 2002 and
2001, are not necessarily indicative of the final results to be expected for
the full year. All adjustments, consisting only of normal recurring
adjustments, that in the opinion of management were necessary for a fair
statement of the results for the interim periods, have been reflected. These
consolidated financial statements should be read in conjunction with the
audited combined financial statements of the Upstream Subsidiaries of Plains
Resources Inc. for the year ended December 31, 2001.

    We are independent energy companies that are engaged in the "Upstream" oil
and gas business. The Upstream business acquires, exploits, develops, explores
for and produces crude oil and natural gas. Our Upstream activities are all
located in the United States.

                                      F-7

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


    Under the terms of a service agreement (the "Service Agreement"), Plains
provides us with financial intermediary, treasury and other services. Such
services include, but are not limited to: management, tax, accounting, payroll,
insurance, employee benefits, legal and financial.

    These financial statements include allocations of direct and indirect
corporate and administrative costs of Plains Resources. The methods by which
such costs are estimated and allocated to us are deemed reasonable by Plains
Resources' management; however, such allocations and estimates are not
necessarily indicative of the costs and expenses that would have been incurred
had we operated as a separate entity. Allocations of such costs are considered
to be related party transactions and are discussed in Note 5.

Significant Accounting Policies

    Oil and Gas Properties.  We follow the full cost method of accounting
whereby all costs associated with property acquisition, exploration,
exploitation and development activities are capitalized. Such costs include
internal general and administrative costs such as payroll and related benefits
and costs directly attributable to employees engaged in acquisition,
exploration, exploitation and development activities ($4.4 million and $6.2
million in the nine months ended September 30, 2002 and 2001, respectively).
General and administrative costs associated with production, operations,
marketing and general corporate activities are expensed as incurred. These
capitalized costs along with our estimate of future development and abandonment
costs, net of salvage values and other considerations, are amortized to expense
by the unit-of-production method using engineers' estimates of proved oil and
natural gas reserves. The costs of unproved properties are excluded from
amortization until the properties are evaluated. Interest is capitalized on oil
and natural gas properties not subject to amortization and in the process of
development ($1.9 million and $2.4 million in the nine months ended September
30, 2002 and 2001, respectively). Proceeds from the sale of oil and natural gas
properties are accounted for as reductions to capitalized costs unless such
sales involve a significant change in the relationship between costs and the
estimated value of proved reserves, in which case a gain or loss is recognized.
Unamortized costs of proved properties are subject to a ceiling which limits
such costs to the present value of estimated future cash flows from proved oil
and natural gas reserves of such properties (including the effect of any
related hedging activities) reduced by future operating expenses, development
expenditures and abandonment costs (net of salvage values), and estimated
future income taxes thereon.

    Other Property and Equipment.  Other property and equipment is recorded at
cost and consists primarily of office furniture and fixtures and computer
hardware and software. Acquisitions, renewals, and betterments are capitalized;
maintenance and repairs are expensed. Depreciation is provided using the
straight-line method over estimated useful lives of three to seven years. Net
gains or losses on property and equipment disposed of are included in interest
and other income in the period in which the transaction occurs.

    Use of Estimates.  The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates made by management include
(1) crude oil and natural gas reserves, (2) depreciation, depletion and
amortization, including future abandonment costs, (3) income taxes and (4)
accrued liabilities. Although management believes these estimates are
reasonable, actual results could differ from these estimates.

                                      F-8

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


    Cash and Cash Equivalents.  Cash and cash equivalents consist of all demand
deposits and funds invested in highly liquid instruments with original
maturities of three months or less. At September 30, 2002, the majority of cash
and cash equivalents is concentrated in one institution and at times may exceed
federally insured limits. We periodically assess the financial condition of the
institution and believe that any possible credit risk is minimal.

    Inventory.  Crude oil inventories are carried at the lower of the cost to
produce or market value. Materials and supplies inventory is stated at the
lower of cost or market with cost determined on an average cost method.
Inventory consists of the following (in thousands):

<TABLE>
<CAPTION>
                                      September 30, December 31,
                                          2002          2001
                                      ------------- ------------
               <S>                    <C>           <C>
               Crude oil.............    $  855        $  428
               Materials and supplies     4,788         4,201
                                         ------        ------
                                         $5,643        $4,629
                                         ======        ======
</TABLE>

    Federal and State Income Taxes.  Income taxes are accounted for in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes ("SFAS 109"). SFAS 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using tax rates in effect for the year in which the differences are
expected to reverse. A valuation allowance is established to reduce deferred
tax assets if it is more than likely than not that the related tax benefits
will not be realized.

    Under the terms of a tax allocation agreement, our taxable income or loss
is included in the consolidated income tax returns filed by Plains Resources.
Each member of a consolidated group is jointly and severally liable for the
federal income tax liability of each other member of the consolidated group.
Accordingly, although this agreement allocates tax liabilities between us and
Plains Resources during the period in which we are included in Plains
Resources' consolidated group, we could be liable if any federal tax liability
is incurred, but not discharged, by any other member of Plains Resources'
consolidated group. In addition, to the extent Plains Resources' net operating
losses are used in the consolidated return to offset our taxable income from
operations during the period January 1, 2002 through the spin-off, we will
reimburse Plains Resources for the reduction in our federal income tax
liability resulting from the utilization of such net operating losses, but such
reimbursement shall not exceed $3.0 million exclusive of any interest accruing
under the agreement.

    Income tax obligations reflected in these financial statements are
calculated assuming we filed a separate consolidated income tax return. Income
taxes currently payable are included in Payable to Plains Resources in the
consolidated balance sheet at December 31, 2001.

    Revenue Recognition.  Oil and gas revenue from our interests in producing
wells is recognized when the production is delivered and the title transfers.

    Derivative Financial Instruments (Hedging).  We utilize various derivative
instruments to reduce our exposure to fluctuations in the market price of crude
oil. The derivative instruments consist primarily of crude oil swap and option
contracts entered into with financial institutions.

                                      F-9

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


    Recent Accounting Pronouncements.  In June 2001 Statement of Financial
Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement
Obligations was issued. SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated
to expense using a systematic and rational method. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002. We are currently assessing the
impact of SFAS No. 143 and at this time cannot reasonably estimate the effect
of this statement on our consolidated financial statements.

    In April 2002, Statement of Accounting Standards ("SFAS") No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," was issued. SFAS 145 rescinds SFAS 4 and
SFAS 64 related to classification of gains and losses on debt extinguishment
such that most debt extinguishment gains and losses will no longer be
classified as extraordinary. SFAS 145 also amends SFAS 13 with respect to
sales-leaseback transactions. The provisions of SFAS 145 have no effect on our
financials.

    In July 2002, SFAS No. 146, "Accounting For Costs Associated with Exit or
Disposal Activities" was issued. SFAS 146 is effective for exit or disposal
activities initiated after December 31, 2002 and does not require previously
issued financial statements to be restated. We will account for exit or
disposal activities initiated after December 31, 2002 in accordance with the
provisions of SFAS 146.

Note 2 -- Proposed Spin-off and Terminated Public Offering

    Plains Resources has received a favorable private letter ruling from the
Internal Revenue Service (the "IRS"), stating that, for United States federal
income tax purposes, a distribution of our capital stock to the Plains
Resources stockholders would generally be tax-free to both Plains Resources and
its stockholders. We call this proposed distribution the "spin-off."
    On June 21, 2002 we filed a registration statement on Form S-1 with the
Securities and Exchange Commission for the initial public offering (the "IPO"),
of our common stock. We terminated the IPO in October 2002, primarily due to
market conditions. As a result, costs and expenses of $1.7 million incurred in
connection with the IPO were charged to expense during the third quarter of
2002.

Note 3 -- Derivative Instruments and Hedging Activities

    We have entered into various derivative instruments to reduce our exposure
to fluctuations in the market price of crude oil. The derivative instruments
consist primarily of crude oil swap and option contracts entered into with
financial institutions. Derivative instruments are accounted for in accordance
with SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" as amended by SFAS 137 and SFAS 138 ("SFAS 133"). Under SFAS 133,
all derivative instruments are recorded on the balance sheet at fair value. If
the derivative does not qualify as a hedge or is not designated as a hedge, the
gain or loss on the derivative is recognized currently in earnings. If the
derivative qualifies for hedge accounting, the unrealized gain or loss on the
derivative is deferred in accumulated Other Comprehensive Income ("OCI"), a
component of Stockholder's Equity. At September 30, 2002 all open positions
qualified for hedge accounting.

    Gains and losses on crude oil hedging instruments related to OCI and
adjustments to carrying amounts on hedged volumes are included in oil and gas
revenues in the period that the related volumes are delivered. Gains and losses
on crude oil hedging instruments representing hedge

                                     F-10

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

ineffectiveness, which is measured on a quarterly basis, are included in oil
and gas revenues in the period in which they occur. No ineffectiveness was
recognized in 2002 or 2001.

    At December 31, 2001, OCI consisted of $26.6 million ($15.9 million, net of
tax) of unrealized gains on our open crude oil hedging instruments. As oil
prices increased significantly during the first nine months of 2002, the fair
value of our open crude oil hedging positions decreased $58.5 million ($34.9
million after tax). At September 30, 2002, OCI consisted of $24.4 million
($14.4 million after tax) of unrealized losses on our crude oil hedging
instruments and $0.3 million ($0.2 million, net of tax) loss related to our
interest rate swap. At September 30, 2002, the assets and liabilities related
to our open crude oil hedging instruments were included in current assets ($0.2
million), other assets ($2.1 million), current liabilities ($24.9 million),
other long-term liabilities ($1.8 million) and deferred income taxes (a tax
benefit of $10.0 million).

    During the first nine months of 2002, $7.5 million ($4.6 million net of
tax) in losses from the settlement of crude oil hedging instruments were
reclassified from OCI and charged to income as a reduction of oil sales
revenues. Oil sales revenues for the period have also been reduced by a $0.6
million non-cash expense related to the amortization of option premiums. As of
September 30, 2002, $14.6 million of deferred net losses on derivative
instruments recorded in OCI are expected to be reclassified to earnings during
the next twelve-month period.

    We utilize various derivative instruments to hedge our exposure to price
fluctuations on crude oil sales. The derivative instruments consist primarily
of cash-settled crude oil option and swap contracts entered into with financial
institutions. We do not currently have any natural gas hedges. We also utilize
interest rate swaps and collars to manage the interest rate exposure on our
long-term debt. We currently have an interest rate swap agreement that expires
in October 2004, under which we receive LIBOR and pay 3.9% on a notional amount
of $7.5 million. The interest rate swap fixes the interest rate on $7.5 million
of borrowings under our credit facility at 3.9% plus the LIBOR margin set forth
in the credit facility (5.3% at September 30, 2002).

    Our average realized price for crude oil is sensitive to changes in
location and quality differential adjustments as set forth in our crude oil
sales contracts. At September 30, 2002 we had basis risk swap contracts on our
Illinois Basin production through September 30, 2003. The swaps fix the
location differential portion of 2,600 barrels per day at $0.38, $0.43, $0.57
and $0.39 per barrel for the fourth quarter of 2002, and the first, second and
third quarter of 2003, respectively.

    At September 30, 2002 we had the following open crude oil hedge positions:

<TABLE>
<CAPTION>
                                                  Barrels Per Day
                                               ---------------------
                                                2002
                                               -------
                                               4th Qtr  2003   2004
                                               ------- ------ ------
           <S>                                 <C>     <C>    <C>
           Calls
              Average price $35.17/bbl........  9,000      --     --
           Collars
              Average cap price of $27.04/bbl.     --   2,000     --
           Swaps
              Average price $24.22/bbl........ 20,000      --     --
              Average price $24.36/bbl........     --  15,250     --
              Average price $23.53/bbl........     --      -- 12,500
</TABLE>

                                     F-11

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


    Location and quality differentials attributable to our properties and the
cost of the hedges are not included in the foregoing prices. Because of the
quality and location of our crude oil production, these adjustments will reduce
our net price per barrel.

Note 4 -- Long-Term Debt

    On July 3, 2002, PXP and Plains E&P Company, our wholly owned subsidiary
that has no material assets and was formed for the sole purpose of being a
corporate co-issuer of certain notes, issued $200.0 million principal amount of
8.75% Senior Subordinated Notes due 2012 (the "8.75% notes") at an issue price
of 98.376%. The 8.75% notes are our unsecured general obligations, are
subordinated in right of payment to all of our existing and future senior
indebtedness and are jointly and severally guaranteed on a full, unconditional
basis by all of our existing and future domestic restricted subsidiaries. Also
on July 3, 2002 we entered into a $300.0 million credit facility with a $225.0
million borrowing base (the "PXP credit facility"). The proceeds from the 8.75%
notes, $195.3 million after deducting $3.2 million in issue discount and $1.5
million in underwriting fees, and $117.6 million initially borrowed under the
PXP credit facility were used to pay a $312.0 million cash distribution to
Plains Resources and to pay certain expenses related to obtaining the PXP
credit facility.

    As of September 30, 2002 $90.7 million was outstanding under the PXP credit
facility. The PXP credit facility provides for a borrowing base of $225.0
million that will be reviewed every six months, with the lenders and PXP each
having the right to one annual interim unscheduled redetermination, and
adjusted based on our oil and gas properties, reserves, other indebtedness and
other relevant factors, and matures in 2005. Additionally, the PXP credit
facility contains a $30.0 million sub-limit on letters of credit (of which $5.2
million had been issued as of September 30, 2002). To secure borrowings, we
pledged 100% of the shares of stock of our domestic subsidiaries and gave
mortgages covering 80% of the total present value of our domestic oil and gas
properties.

    Amounts borrowed under the PXP credit facility bear an annual interest
rate, at our election, equal to either: (i) the Eurodollar rate, plus from
1.375% to 1.75%; or (ii) the greatest of (1) the prime rate, as determined by
JPMorganChase Bank, (2) the certificate of deposit rate, plus 1.0%, or (3) the
federal funds rate, plus 0.5%; plus an additional 0.125% to 0.5% for each of
(1)-(3). The amount of interest payable on outstanding borrowings is based on
(1) the utilization rate as a percentage of the total amount of funds borrowed
under the credit facility to the borrowing base and (2) our long-term debt
rating. Commitment fees and letter of credit fees under the PXP credit facility
are based on the utilization rate and long-term debt rating. Commitment fees
range from 0.375% to 0.5% of the unused portion of the borrowing base. Letter
of credit fees range from 1.375% to 1.75%. The issuer of any letter of credit
will receive an issuing fee of 0.125% of the undrawn amount.

    The PXP credit facility contains negative covenants that limit our ability,
as well as the ability of our subsidiaries, to make dividends to Plains
Resources or enter into other transactions with Plains Resources and its
subsidiaries (other than us and our subsidiaries). In addition, the PXP credit
facility, among other things, limits our ability to incur additional debt, pay
dividends on stock, make distributions of cash or property, change the nature
of our business or operations, redeem stock or redeem subordinated debt, make
investments, create liens, enter into leases, sell assets, sell capital stock
of subsidiaries, create subsidiaries, guarantee other indebtedness, enter into
agreements that restrict dividends from subsidiaries, enter into certain types
of swap agreements, enter into gas imbalance or take-or-pay arrangements, merge
or consolidate and enter into transactions with affiliates. In addition, the
PXP credit facility requires us to maintain a current ratio, which includes
availability, of at least 1.0 to 1.0 and a ratio of total debt to earnings
before interest, depreciation, depletion, amortization and

                                     F-12

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

income taxes of no more than 4.5 to 1.0. At September 30, 2002, we were in
compliance with the covenants contained in the PXP credit facility and could
have borrowed the full $225.0 million available under the PXP credit facility.

    The 8.75% notes are our unsecured general obligations, are subordinated in
right of payment to all of our existing and future senior indebtedness and are
jointly and severally guaranteed on a full, unconditional basis by all of our
existing and future domestic restricted subsidiaries. The indenture governing
the notes limits our ability to make dividends to Plains Resources or enter
into other transactions with Plains Resources and its subsidiaries (other than
us and our subsidiaries). The indenture also limits our ability, as well as the
ability of our subsidiaries, among other things, to incur additional
indebtedness, make certain investments, make restricted payments, sell assets,
enter into agreements containing dividends and other payment restrictions
affecting subsidiaries, enter into transactions with affiliates, create liens,
merge, consolidate and transfer assets and enter into different lines of
business. In the event of a change of control, as defined in the indenture, we
will be required to make an offer to repurchase the notes at 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of the
repurchase. The indenture governing the 8.75% notes will permit the spin-off
and the spin-off will not, in itself, constitute a change of control for
purposes of the indenture.

    The 8.75% notes are not redeemable until July 1, 2007. On or after that
date they are redeemable, at our option, at 104.375% of the principal amount
for the twelve-month period ending June 30, 2008, at 102.917% of the principal
amount for the twelve-month period ending June 30, 2009, at 101.458% of the
principal amount for the twelve-month period ending June 30, 2010 and at 100%
of the principal amount thereafter. In each case, accrued interest is payable
to the date of redemption.

    We also have a note with an outstanding principal balance of $1.0 million
at September 30, 2002 that was issued in connection with the purchase of a
production payment on certain of our producing properties. The note bears
interest at 8%, payable annually, and requires an annual principal payment of
$511,000 through 2004.

Note 5 -- Related Party Transactions

    Prior to the reorganization, we used a centralized cash management system
under which our cash receipts were remitted to Plains Resources and our cash
disbursements were funded by Plains Resources. We were charged interest on any
amounts, other than income taxes payable, due to Plains Resources at the
average effective interest rate of Plains Resources long-term debt. For the
nine months ended September 30, 2002 and 2001 we were charged $10.1 million and
$12.8 million, respectively, of interest on amounts payable to Plains
Resources. Of such amounts, $8.7 million and $10.5 million was included in
interest expense in 2002 and 2001, respectively, and $1.4 million and $2.3
million was capitalized in oil and gas properties in 2002 and 2001,
respectively.

    To compensate Plains Resources for services rendered under the Services
Agreement, we are allocated direct and indirect corporate and administrative
costs of Plains Resources. Such costs for the nine months ended September 30,
2002 and 2001 totaled $7.1 million and $5.4 million, respectively. Of such
amounts, $5.0 million and $4.3 million was included in general and
administrative expense in 2002 and 2001, respectively, and $2.1 million and
$1.1 million was capitalized in oil and gas properties in 2002 and 2001,
respectively.

    In addition, prior to the reorganization Plains Resources entered into
various derivative instruments to reduce our exposure to decreases in the
market price of crude oil. At the time of the

                                     F-13

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

reorganization, all open derivative instruments held by Plains Resources on our
behalf were assigned to us.

Note 6 -- Commitments, Contingencies and Industry Concentration

Commitments and Contingencies

    Under the amended terms of an asset purchase agreement with respect to
certain of our onshore California properties, commencing with the year
beginning January 1, 2000, and each year thereafter, we are required to plug
and abandon 20% of the then remaining inactive wells, which currently aggregate
approximately 149. To the extent we elect not to plug and abandon the number of
required wells, we are required to escrow an amount equal to the greater of
$25,000 per well or the actual average plugging cost per well in order to
provide for the future plugging and abandonment of such wells. In addition, we
are required to expend a minimum of $600,000 per year in each of the ten years
beginning January 1, 1996, and $300,000 per year in each of the succeeding five
years to remediate oil contaminated soil from existing well sites, provided
there are remaining sites to be remediated. In the event we do not expend the
required amounts during a calendar year, we are required to contribute an
amount equal to 125% of the actual shortfall to an escrow account. We may
withdraw amounts from the escrow account to the extent we expend excess amounts
in a future year. Through September 30, 2002, we have not been required to make
contributions to an escrow account.

    In connection with the acquisitions of our interest in the Point Arguello
field, offshore California, we assumed our 52.6% share of (1) plugging and
abandoning all existing well bores, (2) removing conductors, (3) flushing
hydrocarbons from all lines and vessels and (4) removing/abandoning all
structures, fixtures and conditions created subsequent to closing. The seller
retained the obligation for all other abandonment costs, including but not
limited to (1) removing, dismantling and disposing of the existing offshore
platforms, (2) removing and disposing of all existing pipelines and (3)
removing, dismantling, disposing and remediation of all existing onshore
facilities.

    Although we obtained environmental studies on our properties in California
and Illinois and we believe that such properties have been operated in
accordance with standard oil field practices, certain of the fields have been
in operation for more than 90 years, and current or future local, state and
federal environmental laws and regulations may require substantial expenditures
to comply with such rules and regulations. In connection with the purchase of
certain of our onshore California properties, we received a limited indemnity
for certain conditions if they violate applicable local, state and federal
environmental laws and regulations in effect on the date of such agreement. We
believe that we do not have any material obligations for operations conducted
prior to our acquisition of the properties, other than our obligation to plug
existing wells and those normally associated with customary oil field
operations of similarly situated properties. There can be no assurance that
current or future local, state or federal rules and regulations will not
require us to spend material amounts to comply with such rules and regulations
or that any portion of such amounts will be recoverable under the indemnity.

    Consistent with normal industry practices, substantially all of our crude
oil and natural gas leases require that, upon termination of economic
production, the working interest owners plug and abandon non-producing
wellbores, remove tanks, production equipment and flow lines and restore the
wellsite. We estimate, based on our year-end 2001 reserve report, the cost to
perform these tasks is approximately $19.3 million, net of salvage value and
other considerations.

    As is common within the industry, we have entered into various commitments
and operating agreements related to the exploration and development of and
production from proved crude oil and

                                     F-14

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

natural gas properties and the marketing, transportation, terminalling and
storage of crude oil. It is management's belief that such commitments will be
met without a material adverse effect on our financial position, results of
operations or cash flows.

    On September 18, 2002 Stocker Resources Inc. ("Stocker", a wholly owned
subsidiary of Plains Resources), filed a declaratory judgment action against
Commonwealth Energy Corporation (doing business as electricAmerica), or
Commonwealth, in the Superior Court of Orange County, California relating to
the termination of an electric service contract between Stocker and
Commonwealth. Pursuant to the agreement, Commonwealth had agreed to supply
Stocker with electricity and Stocker had obtained a $1.5 million performance
bond in favor of Commonwealth to secure its payment obligations under the
agreement. Stocker terminated the contract in accordance with its terms and
Commonwealth notified Stocker of its intent to draw upon the performance bond.
Stocker is seeking a declaratory judgment that it was entitled to terminate the
contract and that Commonwealth has no basis for proceeding against Stocker's
related performance bond. Also on September 18, 2002, Stocker was named a
defendant in an action brought by Commonwealth in the Superior Court of Orange
County, California for breach of the electric service contract. Commonwealth
alleges that Stocker breached the terms of the contract by the termination and
its implied covenant of good faith and fair dealing and is seeking unspecified
damages. Under the master separation agreement, we are required to indemnify
Stocker and Plains Resources for damages Plains Resources or Stocker incur as a
result of this action. At this time we are not in a position to express a
judgment concerning the potential exposure or likely outcome of this matter. We
intend to vigorously defend this matter.

    In the ordinary course of our business, we are a claimant and/or defendant
in various other legal proceedings. We do not believe that the outcome of these
legal proceedings, individually or in the aggregate, will have a materially
adverse effect on our financial condition, results of operations or cash flows.

Industry Concentration

    Financial instruments which potentially subject us to concentrations of
credit risk consist principally of accounts receivable with respect to our oil
and gas operations and derivative instruments related to our hedging
activities. Plains All American Pipeline, L.P. ("PAA"), in which Plains
Resources holds a 25% interest, is the exclusive marketer/purchaser for all of
our equity oil production. This concentration has the potential to impact our
overall exposure to credit risk, either positively or negatively, in that PAA
may be affected by changes in economic, industry or other conditions. We do not
believe the loss of PAA as the exclusive purchaser of our equity production
would have a material adverse affect on our results of operations. We believe
PAA could be replaced by other purchasers under contracts with similar terms
and conditions. The contract counterparties for our derivative commodity
contracts are all major financial institutions with Standard & Poor's ratings
of A or better. Three of the financial institutions are participating lenders
in the PXP credit facility, with one such counterparty holding contracts that
represent approximately 32% of the fair value of all of our open positions at
September 30, 2002.

    There are a limited number of alternative methods of transportation for our
production. Substantially all of our oil and gas production is transported by
pipelines, trucks and barges owned by third parties. The inability or
unwillingness of these parties to provide transportation services to us for a
reasonable fee could result in our having to find transportation alternatives,
increased transportation costs or involuntary curtailment of a significant
portion of our oil and gas production which could have a negative impact on
future results of operations or cash flows.

                                     F-15

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


Note 7 -- Consolidating Financial Statements

    PXP and Plains E&P Company are the co-issuers of the 8.75% notes discussed
in Note 3. The 8.75% notes are jointly and severally guaranteed on a full and
unconditional basis by Arguello Inc., Plains Illinois Inc., PMCT Inc. and
Plains Resources International Inc. (referred to as "Guarantor Subsidiaries").

    The following financial information presents consolidating financial
statements, which include:

   .  PXP (the "Issuer");

   .  the guarantor subsidiaries on a combined basis ("Guarantor Subsidiaries");

   .  elimination entries necessary to consolidate the Issuer and Guarantor
      Subsidiaries; and

   .  the company on a consolidated basis.

    Plains E&P Company has no material assets or operations; accordingly,
Plains E&P Company has been omitted from the Issuer financial information.

                                     F-16

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

                          CONSOLIDATING BALANCE SHEET
                              SEPTEMBER 30, 2002

<TABLE>
<CAPTION>
                                                             Guarantor   Intercompany
                                                   Issuer   Subsidiaries Eliminations Consolidated
                                                  --------  ------------ ------------ ------------
                                                                   (in thousands)
                                              ASSETS
<S>                                               <C>       <C>          <C>          <C>
Current Assets
 Cash and cash equivalents....................... $    744    $     22     $    --     $     766
 Accounts receivable and other current assets....   19,693       7,836          --        27,529
 Commodity hedging contracts.....................      203         250          --           453
 Inventories.....................................    4,146       1,497          --         5,643
                                                  --------    --------     -------     ---------
                                                    24,786       9,605          --        34,391
                                                  --------    --------     -------     ---------
Property and Equipment, at cost
 Oil and natural gas properties--full cost method
   Subject to amortization.......................  495,693     116,822          --       612,515
   Not subject to amortization...................   20,941      14,538          --        35,479
 Other property and equipment....................    1,373         198          --         1,571
                                                  --------    --------     -------     ---------
                                                   518,007     131,558          --       649,565
 Less allowance for depreciation, depletion and
   amortization..................................  (71,051)    (90,807)         --      (161,858)
                                                  --------    --------     -------     ---------
                                                   446,956      40,751          --       487,707
                                                  --------    --------     -------     ---------
Investment in and Advances to Subsidiaries.......   34,721     (62,647)     27,926            --
                                                  --------    --------     -------     ---------
Other Assets.....................................   19,718        (760)         --        18,958
                                                  --------    --------     -------     ---------
                                                  $526,181    $(13,051)    $27,926     $ 541,056
                                                  ========    ========     =======     =========

                          LIABILITIES AND COMBINED STOCKHOLDER'S EQUITY
Current Liabilities
 Accounts payable and other current liabilities.. $ 48,229    $  7,914     $    --     $  56,143
 Commodity hedging contracts.....................   15,172       9,708          --        24,880
 Payable to Plains Resources Inc.................    3,357          --                     3,357
 Current maturities on long-term debt............      511          --          --           511
                                                  --------    --------     -------     ---------
                                                    67,269      17,622          --        84,891
                                                  --------    --------     -------     ---------
Payable to Plains Resources Inc..................       --          --          --            --
                                                  --------    --------     -------     ---------
Long-Term Debt...................................  288,014          --          --       288,014
                                                  --------    --------     -------     ---------
Other Long-Term Liabilities......................    1,343       2,200          --         3,543
                                                  --------    --------     -------     ---------
Deferred Income Taxes............................   49,428      (4,947)         --        44,481
                                                  --------    --------     -------     ---------
Stockholder's Equity
 Stockholder's equity............................  134,730     (21,849)     21,849       134,730
 Accumulated other comprehensive income..........  (14,603)     (6,077)      6,077       (14,603)
                                                  --------    --------     -------     ---------
                                                   120,127     (27,926)     27,926       120,127
                                                  --------    --------     -------     ---------
                                                  $526,181    $(13,051)    $27,926     $ 541,056
                                                  ========    ========     =======     =========
</TABLE>

                                     F-17

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

                          CONSOLIDATING BALANCE SHEET
                               December 31, 2001

<TABLE>
<CAPTION>
                                                             Guarantor   Intercompany
                                                   Issuer   Subsidiaries Eliminations  Combined
                                                  --------  ------------ ------------ ---------
                                                                  (in thousands)
                                             ASSETS
<S>                                               <C>       <C>          <C>          <C>
Current Assets
 Cash and cash equivalents....................... $     11    $      2     $    --    $      13
 Accounts receivable and other current assets....   10,703       5,679          --       16,382
 Commodity hedging contracts.....................   13,872       7,915          --       21,787
 Inventories.....................................    3,252       1,377          --        4,629
                                                  --------    --------     -------    ---------
                                                    27,838      14,973          --       42,811
                                                  --------    --------     -------    ---------
Property and Equipment, at cost
 Oil and natural gas properties--full cost method
   Subject to amortization.......................  450,038     110,996          --      561,034
   Not subject to amortization...................   19,676      13,695          --       33,371
 Other property and equipment....................    1,322         194          --        1,516
                                                  --------    --------     -------    ---------
                                                   471,036     124,885          --      595,921
 Less allowance for depreciation, depletion and
   amortization..................................  (56,137)    (84,667)         --     (140,804)
                                                  --------    --------     -------    ---------
                                                   414,899      40,218          --      455,117
                                                  --------    --------     -------    ---------
Investment in and Advances to Subsidiaries.......  (21,496)         --      21,496           --
                                                  --------    --------     -------    ---------
Other Assets.....................................   16,275       2,552          --       18,827
                                                  --------    --------     -------    ---------
                                                  $437,516    $ 57,743     $21,496    $ 516,755
                                                  ========    ========     =======    =========

                          LIABILITIES AND COMBINED STOCKHOLER'S EQUITY
Current Liabilities
 Accounts payable and other current liabilities.. $ 29,822    $ 11,546     $    --    $  41,368
 Current maturities on long-term debt............      511          --          --          511
                                                  --------    --------     -------    ---------
                                                    30,333      11,546          --       41,879
                                                  --------    --------     -------    ---------
Payable to Plains Resources Inc..................  172,603      62,558          --      235,161
                                                  --------    --------     -------    ---------
Long-Term Debt...................................    1,022          --          --        1,022
                                                  --------    --------     -------    ---------
Other Long-Term Liabilities......................       --       1,413          --        1,413
                                                  --------    --------     -------    ---------
Deferred Income Taxes............................   53,471       3,722          --       57,193
                                                  --------    --------     -------    ---------
Stockholder's Equity
 Stockholder's equity............................  164,203     (25,889)     25,889      164,203
 Accumulated other comprehensive income..........   15,884       4,393      (4,393)      15,884
                                                  --------    --------     -------    ---------
                                                   180,087     (21,496)     21,496      180,087
                                                  --------    --------     -------    ---------
                                                  $437,516    $ 57,743     $21,496    $ 516,755
                                                  ========    ========     =======    =========
</TABLE>

                                     F-18

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

                       CONSOLIDATING STATEMENT OF INCOME
                     Nine Months Ended September 30, 2002
<TABLE>
<CAPTION>
                                                         Guarantor   Intercompany
                                                Issuer  Subsidiaries Eliminations Consolidated
                                               -------  ------------ ------------ ------------
                                                               (in thousands)
<S>                                            <C>      <C>          <C>          <C>
Revenues
 Crude oil and liquids........................ $92,692    $36,871      $    --      $129,563
 Natural gas..................................   7,130         --           --         7,130
 Other........................................      --         27           --            27
                                               -------    -------      -------      --------
                                                99,822     36,898           --       136,720
                                               -------    -------      -------      --------
Costs and Expenses
 Production expenses..........................  38,142     18,684           --        56,826
 General and administrative...................   6,281      1,081           --         7,362
 Depreciation, depletion and amortization.....  15,126      6,136           --        21,262
                                               -------    -------      -------      --------
                                                59,549     25,901           --        85,450
                                               -------    -------      -------      --------
Income from Operations........................  40,273     10,997           --        51,270
Other Income (Expense)
 Equity in earnings of subsidiaries...........   4,039         --       (4,039)           --
 Expenses of terminated public equity offering  (1,700)        --                     (1,700)
 Interest expense.............................  (9,600)    (4,827)          --       (14,427)
 Interest and other income....................    (200)       314           --           114
                                               -------    -------      -------      --------
Income Before Income Taxes                      32,812      6,484       (4,039)       35,257
 Income tax (expense) benefit
   Current....................................  (1,711)    (3,949)          --        (5,660)
   Deferred...................................  (9,601)     1,504           --        (8,097)
                                               -------    -------      -------      --------
Net Income.................................... $21,500    $ 4,039      $(4,039)     $ 21,500
                                               =======    =======      =======      ========
</TABLE>

                                     F-19

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

                       CONSOLIDATING STATEMENT OF INCOME
                     Nine Months Ended September 30, 2001

<TABLE>
<CAPTION>
                                                              Guarantor   Intercompany
                                                    Issuer   Subsidiaries Eliminations Consolidated
                                                   --------  ------------ ------------ ------------
                                                                    (in thousands)
<S>                                                <C>       <C>          <C>          <C>
Revenues
 Crude oil and liquids............................ $ 97,090    $36,867      $    --      $133,957
 Natural gas......................................   26,870         --           --        26,870
 Other operating revenues.........................       --        468           --           468
                                                   --------    -------      -------      --------
                                                    123,960     37,335           --       161,295
                                                   --------    -------      -------      --------
Costs and Expenses
 Production expenses..............................   31,072     16,923           --        47,995
 General and administrative.......................    6,031      1,043           --         7,074
 Depreciation, depletion and amortization.........   13,475      3,524           --        16,999
                                                   --------    -------      -------      --------
                                                     50,578     21,490           --        72,068
                                                   --------    -------      -------      --------
Income from Operations............................   73,382     15,845           --        89,227
Other Income (Expense)
 Equity in earnings of subsidiaries...............    8,616         --       (8,616)           --
 Interest expense.................................   (7,853)    (8,089)          --       (12,942)
 Interest and other income........................       90        369           --           459
                                                   --------    -------      -------      --------
Income Before Income Taxes and Cumulative
  Effect of Accounting Change.....................   74,235      8,125       (8,616)       76,744
 Income tax expense
   Current........................................   (2,917)    (2,263)          --        (5,180)
   Deferred.......................................  (23,957)      (486)          --       (24,443)
                                                   --------    -------      -------      --------
Income Before Cumulative Effect of
  Accounting Change...............................   47,361      5,376       (8,616)       47,121
Cumulative effect of accounting change, net of tax
  benefit.........................................   (1,762)       240           --        (1,522)
                                                   --------    -------      -------      --------
Net Income........................................ $ 45,599    $ 5,616      $(8,616)     $ 45,599
                                                   ========    =======      =======      ========
</TABLE>

                                     F-20

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


                     CONSOLIDATING STATEMENT OF CASH FLOWS
                     Nine Months Ended September 30, 2002
<TABLE>
<CAPTION>
                                                            Guarantor   Intercompany
                                                  Issuer   Subsidiaries Eliminations Consolidated
                                                ---------  ------------ ------------ ------------
                                                                 (in thousands)
<S>                                             <C>        <C>          <C>          <C>
Cash Flows From Operating Activities
Net income..................................... $  21,500    $ 4,039      $(4,039)    $  21,500
Items not affecting cash flows from operating
  activities:
 Depreciation, depletion and amortization......    15,126      6,136           --        21,262
 Equity in earnings of subsidiaries............    (4,039)        --        4,039            --
 Deferred income taxes.........................     9,601     (1,504)          --         8,097
 Other noncash items...........................       372         --           --           372
Change in assets and liabilities from operating
  activities:
 Accounts receivable and other assets..........   (12,162)     1,152           --       (11,010)
 Payable to Plains Resources Inc...............     3,357         --           --         3,357
 Accounts payable and other liabilities........    18,407     (3,632)          --        14,775
                                                ---------    -------      -------     ---------
Net cash provided by operating activities......    52,162      6,191           --        58,353
                                                ---------    -------      -------     ---------
Cash Flows From Investing Activities
Acquisition, exploration and developments
  costs........................................   (46,920)    (6,669)          --       (53,589)
Additions to other property and equipment......       (51)        (4)          --           (55)
                                                ---------    -------      -------     ---------
Net cash used in investing activities..........   (46,971)    (6,673)          --       (53,644)
                                                ---------    -------      -------     ---------
Cash Flows From Financing Activities
Principal payments on long-term debt...........      (511)        --           --          (511)
Change in revolving credit facility............    90,700         --           --        90,700
Proceeds from debt issuance....................   196,752         --           --       196,752
Debt issuance costs............................    (5,469)        --           --        (5,469)
Contribution from Plains Resources Inc.........     5,000         --           --         5,000
Distribution to Plains Resources Inc...........  (311,964)        --           --      (311,964)
Receipts from (payments to) Plains Resources
  Inc..........................................    21,034        502           --        21,536
                                                ---------    -------      -------     ---------
Net cash provided by (used in) financing
  activities...................................    (4,458)       502           --        (3,956)
                                                ---------    -------      -------     ---------
Net increase (decrease) in cash and cash
  equivalents..................................       733         20           --           753
Cash and cash equivalents, beginning of
  period.......................................        11          2           --            13
                                                ---------    -------      -------     ---------
Cash and cash equivalents, end of period....... $     744    $    22      $    --     $     766
                                                =========    =======      =======     =========
</TABLE>

                                     F-21

<PAGE>

                    PLAINS EXPLORATION & PRODUCTION COMPANY

      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


                     CONSOLIDATING STATEMENT OF CASH FLOWS
                     Nine Months Ended September 30, 2001

<TABLE>
<CAPTION>
                                                           Guarantor   Intercompany
                                                 Issuer   Subsidiaries Eliminations Consolidated
                                                --------  ------------ ------------ ------------
                                                                 (in thousands)
<S>                                             <C>       <C>          <C>          <C>
Cash Flows From Operating Activities
Net income..................................... $ 45,599    $  8,616     $(8,616)     $ 45,599
Items not affecting cash flows from operating
  activities:..................................
 Depreciation, depletion and amortization......   13,475       3,524          --        16,999
 Equity in earnings of subsidiaries............   (8,616)         --       8,616            --
 Deferred income taxes.........................   23,957         486          --        24,443
 Cumulative effect of adoption of accounting
   change......................................    1,762        (240)         --         1,522
 Change in derivative fair value...............       (7)      1,062          --         1,055
 Other noncash items...........................       (6)        727          --           721
Change in assets and liabilities from operating
  activities:
 Accounts receivable and other assets..........    7,691      (4,398)         --         3,293
 Accounts payable and other liabilities........    9,294        (855)         --         8,439
                                                --------    --------     -------      --------
 Net cash provided by operating activities.....   93,149       8,922          --       102,071
                                                --------    --------     -------      --------
Cash Flows From Investing Activities
Acquisition, exploration and developments costs  (86,346)    (13,000)         --       (99,346)
Additions to other property and equipment......     (107)         --          --          (107)
                                                --------    --------     -------      --------
Net cash used in investing activities..........  (86,453)    (13,000)         --       (99,453)
                                                --------    --------     -------      --------
Cash Flows From Financing Activities
Principal payments on long-term debt...........     (511)         --          --          (511)
Receipts from (payments to) Plains Resources
  Inc..........................................   (6,425)      3,785          --        (2,640)
                                                --------    --------     -------      --------
Net cash provided by (used in) financing
  activities...................................   (6,936)      3,785          --        (3,151)
                                                --------    --------     -------      --------
Net increase (decrease) in cash and cash
  equivalents..................................     (240)       (293)         --          (533)
Cash and cash equivalents, beginning of period.      240         296          --           536
                                                --------    --------     -------      --------
Cash and cash equivalents, end of period....... $     --    $      3     $    --      $     --
                                                ========    ========     =======      ========
</TABLE>

                                     F-22

<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
of Plains Resources Inc.

    In our opinion, the combined financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of the Upstream Subsidiaries of Plains Resources Inc. (collectively,
the "Company") at December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

    As discussed in Note 2 to the combined financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities, effective January 1, 2001.

PricewaterhouseCoopers LLP

Houston, Texas
April 17, 2002, except as to
Note 10 for which the date is September 30, 2002


                                     F-23

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

                            COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                           December 31,
                                                       --------------------
                                                          2001       2000
                                                       ---------  ---------
                                                          (In thousands)
   <S>                                                 <C>        <C>
                                    ASSETS
   Current Assets
    Cash and cash equivalents......................... $      13  $     536
    Accounts receivable and other current assets......    16,382     32,878
    Commodity hedging contracts.......................    21,787         --
    Inventories.......................................     4,629      4,038
                                                       ---------  ---------
                                                          42,811     37,452
                                                       ---------  ---------
   Property and Equipment, at cost
    Oil and natural gas properties -- full cost method
    Subject to amortization...........................   561,034    433,915
    Not subject to amortization.......................    33,371     34,737
    Other property and equipment......................     1,516      1,389
                                                       ---------  ---------
                                                         595,921    470,041
    Less allowance for depreciation, depletion and
        amortization..................................  (140,804)  (116,697)
                                                       ---------  ---------
                                                         455,117    353,344
                                                       ---------  ---------
   Other Assets.......................................    18,827     10,239
                                                       ---------  ---------
                                                       $ 516,755  $ 401,035
                                                       =========  =========
                    LIABILITIES AND COMBINED OWNERS' EQUITY
   Current Liabilities
    Accounts payable and other current liabilities.... $  41,368  $  43,802
    Current maturities on long-term debt..............       511        511
                                                       ---------  ---------
                                                          41,879     44,313
                                                       ---------  ---------
   Payable to Plains Resources Inc....................   235,161    224,996
                                                       ---------  ---------
   Long-Term Debt.....................................     1,022      1,533
                                                       ---------  ---------
   Other Long-Term Liabilities........................     1,413         --
                                                       ---------  ---------
   Deferred Income Taxes..............................    57,193     19,161
                                                       ---------  ---------
   Commitments and Contingencies (Note 6)
   Combined Owners' Equity
    Owners' equity....................................   164,203    111,032
    Accumulated other comprehensive income............    15,884         --
                                                       ---------  ---------
                                                         180,087    111,032
                                                       ---------  ---------
                                                       $ 516,755  $ 401,035
                                                       =========  =========
</TABLE>

                  See notes to combined financial statements.

                                     F-24

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

                         COMBINED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                      ----------------------------
                                                        2001      2000      1999
                                                      --------  --------  --------
                                                             (In thousands)
<S>                                                   <C>       <C>       <C>
Revenues
 Crude oil and liquids............................... $174,895  $126,434  $102,390
 Natural gas.........................................   28,771    16,017     5,095
 Other operating revenues............................      473        --        --
                                                      --------  --------  --------
                                                       204,139   142,451   107,485
                                                      --------  --------  --------
Costs and Expenses
 Production expenses.................................   63,795    56,228    50,527
 General and administrative..........................   10,210     6,308     4,367
 Depreciation, depletion and amortization............   24,105    18,859    13,329
                                                      --------  --------  --------
                                                        98,110    81,395    68,223
                                                      --------  --------  --------
Income from Operations...............................  106,029    61,056    39,262
Other Income (Expense)
 Interest expense....................................  (17,411)  (15,885)  (14,912)
 Interest and other income...........................      463       343        87
                                                      --------  --------  --------
Income Before Income Taxes and Cumulative Effect of
  Accounting Change..................................   89,081    45,514    24,437
 Income tax expense
   Current...........................................   (6,014)   (2,431)     (505)
   Deferred..........................................  (28,374)  (14,334)   (4,827)
                                                      --------  --------  --------
Income Before Cumulative Effect of Accounting Change.   54,693    28,749    19,105
 Cumulative effect of accounting change, net of tax
   benefit...........................................   (1,522)       --        --
                                                      --------  --------  --------
Net Income........................................... $ 53,171  $ 28,749  $ 19,105
                                                      ========  ========  ========
Earnings Per Share Basic and Diluted.................
 Income before cumulative effect of accounting change $   2.26  $   1.19  $   0.79
 Cumulative effect on accounting change..............     (.06)       --        --
                                                      --------  --------  --------
 Net income.......................................... $   2.20  $   1.19  $   0.79
                                                      ========  ========  ========
</TABLE>

                  See notes to combined financial statements.

                                     F-25

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

                       COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                            -----------------------------
                                                               2001      2000      1999
                                                            ---------  --------  --------
                                                                    (In thousands)
<S>                                                         <C>        <C>       <C>
Cash Flows From Operating Activities
Net income................................................. $  53,171  $ 28,749  $ 19,105
Items not affecting cash flows from operating activities:
 Depreciation, depletion and amortization..................    24,105    18,859    13,329
 Deferred income taxes.....................................    28,374    14,334     4,827
 Cumulative effect of adoption of accounting change........     1,522        --        --
 Change in derivative fair value...........................     1,055        --        --
 Other noncash items.......................................       996        --        --
Change in assets and liabilities from operating activities:
 Accounts receivable and other assets......................     9,197     7,597   (31,616)
 Inventories...............................................      (591)     (195)     (586)
 Accounts payable and other liabilities....................    (1,021)   10,120      (450)
                                                            ---------  --------  --------
Net cash provided by operating activities..................   116,808    79,464     4,609
                                                            ---------  --------  --------
Cash Flows From Investing Activities
Acquisition, exploration and developments costs............  (125,753)  (70,505)  (59,167)
Additions to other property and assets.....................      (127)     (366)     (195)
                                                            ---------  --------  --------
Net cash used in investing activities......................  (125,880)  (70,871)  (59,362)
                                                            ---------  --------  --------
Cash Flows From Financing Activities
Principal payments of long-term debt.......................      (511)     (511)     (511)
Receipts from (payments to) Plains Resources Inc...........     9,060   (12,621)   60,201
                                                            ---------  --------  --------
Net cash provided by (used in) financing activities........     8,549   (13,132)   59,690
                                                            ---------  --------  --------
Net increase (decrease) in cash and cash equivalents.......      (523)   (4,539)    4,937
Cash and cash equivalents, beginning of year...............       536     5,075       138
                                                            ---------  --------  --------
Cash and cash equivalents, end of year..................... $      13  $    536  $  5,075
                                                            =========  ========  ========
</TABLE>


                  See notes to combined financial statements.

                                     F-26

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

                  COMBINED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                                      ------------------------
                                                                        2001    2000    1999
                                                                      -------  ------- -------
                                                                           (In thousands)
<S>                                                                   <C>      <C>     <C>
Net Income........................................................... $53,171  $28,749 $19,105
Other Comprehensive Income:
 Unrealized gains on derivatives:
   Cumulative effect of accounting change, net of taxes of $4,454....   6,967       --      --
   Unrealized gains arising during the year, net of taxes of $8,566..  12,518       --      --
   Reclassification adjustment for gains realized in net income, net
      of tax benefit of $2,320.......................................  (3,601)      --      --
                                                                      -------  ------- -------
Other Comprehensive Income...........................................  15,884       --      --
                                                                      -------  ------- -------
Comprehensive Income................................................. $69,055  $28,749 $19,105
                                                                      =======  ======= =======
</TABLE>


                  See notes to combined financial statements.

                                     F-27

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

                COMBINED STATEMENTS OF COMBINED OWNERS' EQUITY

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                               -------------------------
                                                 2001     2000    1999
                                               -------- -------- -------
                                                    (In thousands)
        <S>                                    <C>      <C>      <C>
        Owners' Equity
         Balance, beginning of year........... $111,032 $ 82,283 $63,177
         Net income...........................   53,171   28,749  19,105
         Issuance of common stock.............       --       --       1
                                               -------- -------- -------
         Balance, end of year.................  164,203  111,032  82,283
                                               -------- -------- -------
        Accumulated Other Comprehensive Income
         Balance, beginning of year...........       --       --      --
         Other comprehensive income...........   15,884       --      --
                                               -------- -------- -------
         Balance, end of year.................   15,884       --      --
                                               -------- -------- -------
        Combined Owners' Equity............... $180,087 $111,032 $82,283
                                               ======== ======== =======
</TABLE>


                  See notes to combined financial statements.

                                     F-28

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

                    NOTES TO COMBINED FINANCIAL STATEMENTS

Note 1 -- Organization and significant accounting policies

Organization

    The combined financial statements of the Upstream Subsidiaries of Plains
Resources Inc. (the "Companies", "our", or "we") include the accounts of
Stocker Resources, L.P., Arguello Inc., Plains Illinois, Inc., PMCT, Inc. and
Plains Resources International Inc. Arguello Inc., Plains Illinois, Inc., PMCT
Inc. and Plains Resources International Inc. are wholly-owned subsidiaries of
Plains Resources Inc. ("Plains"). Stocker Resources, L.P. is a limited
partnership of which Stocker Resources, Inc., a wholly owned subsidiary of
Plains, is the general partner (holding a 2.5% interest) and Plains is the
limited partner (holding a 97.5% interest). Stocker Resources, L.P. was renamed
Plains Exploration & Production Company and was subsequently converted to a
Delaware corporation known as Plains Exploration and Production Company. All
significant intercompany transactions have been eliminated.

    The accompanying combined financial statements are presented on a carve-out
combined basis to include the historical operations of the businesses owned by
the Companies. In this context, no direct owner relationship existed among the
various operations comprising the businesses as described above. Accordingly,
Plains' net investment in the businesses (combined owners' equity) is shown in
lieu of stockholders' equity in the combined financial statements.

    We are independent energy companies that are engaged in the "Upstream" oil
and gas business. The Upstream business acquires, exploits, develops, explores
for and produces crude oil and natural gas. Our Upstream activities are all
located in the United States.

    Under the terms of a service agreement (the "Service Agreement"), Plains
provides the Companies with financial intermediary, treasury and other services
as may be required from time to time. Such services include, but are not
limited to: arranging financings and commercial transactions for the
procurement of funds and other commercial accommodations from financial
institutions and other lenders; disbursement of capital and operating funds in
the form of loans or intercompany advances; maintenance of financial records
and books of account; and cash management, including the processing of cash
receipts and disbursements.

    These financial statements include allocations of direct and indirect
corporate and administrative costs of Plains. The methods by which such costs
are estimated and allocated to the Companies are deemed reasonable by Plains'
management; however, such allocations and estimates are not necessarily
indicative of the costs and expenses that would have been incurred had we
operated as a separate entity. Allocations of such costs are considered to be
related party transactions and are discussed in Note 4.

Significant accounting policies

    Oil and Gas Properties.  We follow the full cost method of accounting
whereby all costs associated with property acquisition, exploration,
exploitation and development activities are capitalized. Such costs include
internal general and administrative costs such as payroll and related benefits
and costs directly attributable to employees engaged in acquisition,
exploration, exploitation and development activities. General and
administrative costs associated with production, operations, marketing and
general corporate activities are expensed as incurred. These capitalized costs
along with our estimate of future development and abandonment costs, net of
salvage values and other considerations, are amortized to expense by the
unit-of-production method using engineers' estimates of proved oil and natural
gas reserves. The costs of unproved properties are excluded from

                                     F-29

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

amortization until the properties are evaluated. Interest is capitalized on oil
and natural gas properties not subject to amortization and in the process of
development. Proceeds from the sale of oil and natural gas properties are
accounted for as reductions to capitalized costs unless such sales involve a
significant change in the relationship between costs and the estimated value of
proved reserves, in which case a gain or loss is recognized. Unamortized costs
of proved properties are subject to a ceiling which limits such costs to the
present value of estimated future cash flows from proved oil and natural gas
reserves of such properties (including the effect of any related hedging
activities) reduced by future operating expenses, development expenditures and
abandonment costs (net of salvage values), and estimated future income taxes
thereon.

    Other Property and Equipment.  Other property and equipment is recorded at
cost and consists primarily of office furniture and fixtures and computer
hardware and software. Acquisitions, renewals, and betterments are capitalized;
maintenance and repairs are expensed. Depreciation is provided using the
straight-line method over estimated useful lives of three to seven years. Net
gains or losses on property and equipment disposed of are included in interest
and other income in the period in which the transaction occurs.

    Use of Estimates.  The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates made by management include
(1) crude oil and natural gas reserves, (2) depreciation, depletion and
amortization, including future abandonment costs, (3) income taxes and (4)
accrued liabilities. Although management believes these estimates are
reasonable, actual results could differ from these estimates.

    Cash and Cash Equivalents.  Cash and cash equivalents consist of all demand
deposits and funds invested in highly liquid instruments with original
maturities of three months or less. At December 31, 2001 and 2000, the majority
of cash and cash equivalents is concentrated in one institution and at times
may exceed federally insured limits. We periodically assess the financial
condition of the institution and believe that any possible credit risk is
minimal.

    Inventory.  Crude oil inventories are carried at the lower of cost to
produce or market value. Materials and supplies inventory is stated at the
lower of cost or market with cost determined on an average cost method.
Inventory consists of the following (in thousands):

<TABLE>
<CAPTION>
                                             December 31,
                                             -------------
                                              2001   2000
                                             ------ ------
                      <S>                    <C>    <C>
                      Materials and supplies $4,201 $3,487
                      Crude oil.............    428    551
                                             ------ ------
                                             $4,629 $4,038
                                             ====== ======
</TABLE>

    Other Assets.  Other assets consists of the following (in thousands):

<TABLE>
<CAPTION>
                                               December 31,
                                              ---------------
                                               2001    2000
                                              ------- -------
                  <S>                         <C>     <C>
                  Land....................... $ 8,103 $ 8,103
                  Commodity hedging contracts   5,627      --
                  Other......................   5,097   2,136
                                              ------- -------
                                              $18,827 $10,239
                                              ======= =======
</TABLE>

                                     F-30

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)


    Federal and State Income Taxes.  Income taxes are accounted for in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes ("SFAS 109"). SFAS 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using tax rates in effect for the year in which the differences are
expected to reverse. A valuation allowance is established to reduce deferred
tax assets if it is more than likely than not that the related tax benefits
will not be realized.

    The taxable income or loss of the Companies is included in the consolidated
income tax returns filed by Plains. Income tax obligations reflected in these
financial statements are based on the tax sharing agreement among all the
members of the consolidated group. Such agreement provides that income taxes
are calculated assuming the combined companies filed a separate income tax
return. Income taxes payable are included in Payable to Plains Resources Inc.
in the combined balance sheet.

    Revenue Recognition.  Oil and gas revenue from our interests in producing
wells is recognized when the production is delivered and the title transfers.

    Derivative Financial Instruments (Hedging).  We utilize various derivative
instruments to reduce our exposure to fluctuations in the market price of crude
oil. The derivative instruments consist primarily of crude oil swap and option
contracts entered into with financial institutions.

    Recent Accounting Pronouncements.  The following Statements of Financial
Accounting Standards ("SFAS") were issued in June 2001: SFAS No. 141, Business
Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No.
143, Accounting for Asset Retirement Obligations. In August 2001, SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets was also issued.
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations. It applies to all business combinations initiated after
June 30, 2001 and to all business combinations accounted for by the purchase
method that are completed after June 30, 2001. SFAS No. 142 requires that
goodwill as well as other intangible assets with indefinite lives not be
amortized but be tested annually for impairment and is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets and long-lived
assets to be disposed of. It supersedes, with exceptions, SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of and is effective for fiscal years beginning after December 15,
2001. SFAS No. 141, No. 142 and No. 144 had no effect on our financial
statements. We will account for all future business combinations and any
related goodwill in accordance with the provisions of SFAS No. 141 and SFAS No.
142.

    SFAS No. 143 requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
Subsequently, the asset retirement cost should be allocated to expense using a
systematic and rational method. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Company is currently assessing the impact of
SFAS No. 143 and at this time cannot reasonably estimate the effect of this
statement on its consolidated financial position, results of operations or cash
flows.

                                     F-31

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)


Note 2 -- Derivative instruments and hedging activities

    Plains entered into various derivative instruments on behalf of the
Companies to reduce our exposure to fluctuations in the market price of crude
oil. The derivative instruments consist primarily of crude oil swap and option
contracts entered into with financial institutions. In accordance with the
terms of the Services Agreement, the gains and losses with respect to such
instruments have been allocated to the Companies. Oil revenues for the year
ended December 31, 2001 have been increased by $0.3 million and oil revenues
for the years ended December 31, 2000 and 1999 have been reduced by $72.8
million and $7.5 million, respectively, as a result of such transactions.

    On January 1, 2001, we adopted Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities"
as amended by SFAS 137 and SFAS 138 ("SFAS 133"). Under SFAS 133, all
derivative instruments are recorded on the balance sheet at fair value. If the
derivative does not qualify as a hedge or is not designated as a hedge, the
gain or loss on the derivative is recognized currently in earnings. To qualify
for hedge accounting, the derivative must qualify either as a fair value hedge,
cash flow hedge or foreign currency hedge. Currently, we use only cash flow
hedges and the remaining discussion will relate exclusively to this type of
derivative instrument. If the derivative qualifies for hedge accounting, the
gain or loss on the derivative is deferred in Other Comprehensive Income
("OCI"), a component of Combined Owners' Equity to the extent the hedge is
effective.

    The relationship between the hedging instrument and the hedged item must be
highly effective in achieving the offset of changes in cash flows attributable
to the hedged risk both at the inception of the contract and on an ongoing
basis. Hedge accounting is discontinued prospectively when a hedge instrument
becomes ineffective. Gains and losses deferred in OCI related to cash flow
hedges that become ineffective remain unchanged until the related product is
delivered. If it is determined that it is probable that a hedged forecasted
transaction will not occur, deferred gains or losses on the hedging instrument
are recognized in earnings immediately.

    We formally document all relationships between hedging instruments and
hedged items, as well as our risk management objectives and strategy for
undertaking the hedge. Hedge effectiveness is measured on a quarterly basis.
This process includes specific identification of the hedging instrument and the
hedge transaction, the nature of the risk being hedged and how the hedging
instrument's effectiveness will be assessed. Both at the inception of the hedge
and on an ongoing basis, we assess whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in cash flows
of hedged items. No amounts were excluded from the computation of hedge
effectiveness. At December 31, 2001, all open positions qualified for hedge
accounting.

    Unrealized gains and losses on hedging instruments reflected in OCI and
adjustments to carrying amounts on hedged volumes are included in oil and gas
revenues in the period that the related volumes are delivered. Gains and losses
from hedging instruments, which represent hedge ineffectiveness as well as any
amounts excluded from the assessment of hedge effectiveness, are recognized
currently in oil and gas revenues. Effective October 2001, we implemented
Derivatives Implementation Group ("DIG") Issue G20, "Cash Flow Hedges:
Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash
Flow Hedge", which provides guidance for assessing the effectiveness on total
changes in an option's cash flows rather than only on changes in the option's
intrinsic value. Implementation of this DIG issue will reduce earnings
volatility since it allows us to include changes in the time value of purchased
options and collars in the assessment of hedge effectiveness. Time value
changes were previously recognized in current earnings since we

                                     F-32

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

excluded time value changes from the assessment of hedge effectiveness. Oil and
gas revenues for the year ended December 31, 2001 include a $3.1 million
non-cash loss related to the ineffective portion of the cash flow hedges
representing the fair value change in the time value of options for the nine
months prior to the implementation of DIG Issue G20.

    We utilize various derivative instruments to hedge our exposure to price
fluctuations on crude oil sales. The derivative instruments consist primarily
of cash-settled crude oil option and swap contracts entered into with financial
institutions. We do not currently have any natural gas hedges. At December 31,
2001, we had the following open crude oil hedge positions:

<TABLE>
<CAPTION>
                                               Barrels Per
                                                   Day
                                               ------------
                                                2002  2003
                                               ------ -----
                     <S>                       <C>    <C>
                     Calls
                      Average price $35.17/bbl  9,000    --
                     Swaps
                      Average price $24.00/bbl 17,000    --
                      Average price $23.16/bbl     -- 7,500
</TABLE>

    On January 1, 2001, in accordance with the transition provisions of SFAS
133, we recorded a gain of $7.0 million in OCI, representing the cumulative
effect of an accounting change to recognize at fair value all cash flow
derivatives. We recorded cash flow hedge derivative assets and liabilities of
$9.7 million and $4.2 million, respectively, and a net-of-tax non-cash charge
of $1.5 million was recorded in earnings as a cumulative effect adjustment.

    For the year ended December 31, 2001, net unrealized gains of $8.9 million
were added to OCI, and the fair value of open positions increased $15.2 million.

    At December 31, 2001, net unrealized gains on our option and swap contracts
included in OCI was $15.9 million. The related assets and liabilities were
included in commodity hedging contracts and other derivatives ($21.8 million),
other assets ($5.6 million), and deferred income taxes ($10.7 million). As of
December 31, 2001, $12.5 million of deferred net gains on derivative
instruments recorded in OCI are expected to be reclassified to earnings during
the next twelve-month period.

Note 3 -- Long-term debt

    Long-term debt and the related current maturities represents a note issued
in connection with the purchase of a production payment on certain of our
producing properties. The note bears interest at 8%, payable annually, and
requires an annual principal payment of $511,000 through 2004.

Note 4 -- Related party transactions

    We use a centralized cash management system under which our cash receipts
are remitted to Plains and our cash disbursements are funded by Plains. We are
charged interest on any amounts, other than income taxes payable, due to Plains
at the average effective interest rate of Plains long-term debt. For the years
2001, 2000 and 1999 we were charged $20.4 million, $19.5 million and $18.3
million, respectively, of interest on amounts payable to Plains. Of such
amounts, $17.3 million, $15.7 million and $14.7 million was included in
interest expense in 2001, 2000 and 1999, respectively, and $3.1 million, $3.8
million and $3.6 million was capitalized in oil and gas properties in 2001,
2000 and 1999, respectively.

                                     F-33

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)


    To compensate Plains for services rendered under the Services Agreement, we
are allocated direct and indirect corporate and administrative costs of Plains.
Such costs totaled $8.2 million, $3.9 million and $3.1 million in 2001, 2000
and 1999, respectively. Of such amounts, $6.1 million, $2.8 million and $2.2
million was included in general and administrative expense in 2001, 2000 and
1999, respectively, and $2.1 million, $1.1 million and $0.9 million was
capitalized in oil and gas properties in 2001, 2000 and 1999, respectively.

    In addition, as discussed in Note 2, Plains entered into various derivative
instruments to reduce our exposure to decreases in the market price of crude
oil.

    At December 31, 2001 Plains had $267.5 million principal amount of 10.25%
Senior Subordinated Notes due 2006 outstanding. Such notes are guaranteed by
the Companies on a full, unconditional, joint and several basis.

    Plains All American Pipeline ("PAA"), an affiliate of Plains, is the
exclusive marketer/ purchaser for all of our equity crude oil production. The
marketing agreement provides that PAA will purchase for resale at market prices
all of our equity crude oil production, for which PAA charges a fee of $0.20
per barrel. In 2001, 2000 and 1999, we were paid $202.1 million, $222.7 million
and $114.6 million, respectively, for the purchase of crude oil under the
agreement, including the royalty share of production. Accounts receivable and
other current assets at December 31, 2001 and 2000 include $12.3 million and
$17.6 million, respectively, of amounts receivable from PAA with respect to oil
sales.

Note 5 -- Income taxes

    Our taxable income or loss is included in the consolidated income tax
returns filed by Plains. Income tax obligations reflected in these financial
statements are based on the tax sharing agreement which provides that income
taxes are calculated assuming we filed a separate combined income tax return.
Currently payable income taxes are included in Payable to Plains Resources Inc.
in the combined balance sheet.

    Our deferred income tax assets and liabilities at December 31, 2001 and
2000 consist of the tax effect of income tax carryforwards and differences
related to the timing of recognition of certain types of costs as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                ------------------
                                                                  2001      2000
                                                                --------  --------
<S>                                                             <C>       <C>
U.S. Federal
Deferred tax assets:
 Tax credit carryforwards...................................... $     --  $  1,181
 Other.........................................................      658       646
                                                                --------  --------
                                                                     658     1,827
Deferred tax liabilities:
 Net oil and gas acquisition, exploration and development costs  (36,520)  (15,807)
 Commodity hedging contracts and other.........................  (10,700)       --
                                                                --------  --------
   Net deferred tax liability..................................  (46,562)  (13,980)
States
Deferred tax liability.........................................  (10,631)   (5,181)
                                                                --------  --------
Net deferred tax liability..................................... $(57,193) $(19,161)
                                                                ========  ========
</TABLE>

                                     F-34

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)


    At December 31, 2001, for federal income tax purposes, we have no
carryforwards of regular tax net operating losses, alternative minimum tax
credits or enhanced oil recovery credits.

   Set forth below is a reconciliation between the income tax provision
computed at the United States statutory rate on income before income taxes and
the income tax provision in the accompanying consolidated statements of income
(in thousands):

<TABLE>
<CAPTION>
                                                                        Year Ended
                                                                       December 31,
                                                                -------------------------
                                                                  2001     2000     1999
                                                                -------  -------  -------
<S>                                                             <C>      <C>      <C>
U.S. federal income tax provision at statutory rate............ $31,101  $15,935  $ 8,553
State income taxes, net of federal benefit.....................   4,758    2,232    1,211
Full cost ceiling test limitation..............................      --       --   (3,772)
Other..........................................................  (1,471)  (1,402)    (660)
                                                                -------  -------  -------
Income tax expense on income before effect of accounting change  34,388   16,765    5,332
Income tax benefit allocated to cumulative effect of accounting
  change.......................................................  (1,042)      --       --
                                                                -------  -------  -------
Income tax provision........................................... $33,346  $16,765  $ 5,332
                                                                =======  =======  =======
</TABLE>

Note 6 -- Commitments, contingencies and industry concentration

Commitments and contingencies

    We lease certain real property, equipment and operating facilities under
various operating leases. Future non-cancelable commitments related to these
items at December 31, 2001 total $53,100, all of which relates to 2002. Total
expenses related to such commitments for the years ended December 31, 2001,
2000 and 1999 were $41,000, $45,000 and $61,000, respectively.

    Under the amended terms of an asset purchase agreement with respect to
certain of our onshore California properties, commencing with the year
beginning January 1, 2000, and each year thereafter, we are required to plug
and abandon 20% of the then remaining inactive wells, which currently aggregate
approximately 149. To the extent we elect not to plug and abandon the number of
required wells, we are required to escrow an amount equal to the greater of
$25,000 per well or the actual average plugging cost per well in order to
provide for the future plugging and abandonment of such wells. In addition, we
are required to expend a minimum of $600,000 per year in each of the ten years
beginning January 1, 1996, and $300,000 per year in each of the succeeding five
years to remediate oil contaminated soil from existing well sites, provided
there are remaining sites to be remediated. In the event we do not expend the
required amounts during a calendar year, we are required to contribute an
amount equal to 125% of the actual shortfall to an escrow account. We may
withdraw amounts from the escrow account to the extent we expend excess amounts
in a future year. Through December 31, 2001, we have not been required to make
contributions to an escrow account.

    In connection with the acquisition of our interest in the Point Arguello
field, offshore California, we assumed our 26% share of (1) plugging and
abandoning all existing well bores, (2) removing conductors, (3) flushing
hydrocarbons from all lines and vessels and (4) removing/abandoning all
structures, fixtures and conditions created subsequent to closing. The seller
retained the obligation for all other abandonment costs, including but not
limited to (1) removing, dismantling and disposing of the existing offshore
platforms, (2) removing and disposing of all existing pipelines and (3)
removing, dismantling, disposing and remediation of all existing onshore
facilities.

                                     F-35

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)


    Although we obtained environmental studies on our properties in California
and Illinois and we believe that such properties have been operated in
accordance with standard oil field practices, certain of the fields have been
in operation for more than 90 years, and current or future local, state and
federal environmental laws and regulations may require substantial expenditures
to comply with such rules and regulations. In connection with the purchase of
certain of our onshore California properties, we received a limited indemnity
for certain conditions if they violate applicable local, state and federal
environmental laws and regulations in effect on the date of such agreement. We
believe that we do not have any material obligations for operations conducted
prior to our acquisition of the properties, other than our obligation to plug
existing wells and those normally associated with customary oil field
operations of similarly situated properties. There can be no assurance that
current or future local, state or federal rules and regulations will not
require us to spend material amounts to comply with such rules and regulations
or that any portion of such amounts will be recoverable under the indemnity.

    Consistent with normal industry practices, substantially all of our crude
oil and natural gas leases require that, upon termination of economic
production, the working interest owners plug and abandon non-producing
wellbores, remove tanks, production equipment and flow lines and restore the
wellsite. We have estimated that the costs to perform these tasks is
approximately $12.0 million, net of salvage value and other considerations.
Such estimated costs are amortized to expense through the unit-of-production
method as a component of accumulated depreciation, depletion and amortization.
Results from operations for 2001, 2000 and 1999 include $0.5 million, $0.2
million and $0.2 million, respectively, of expense associated with these
estimated future costs. For valuation and realization purposes of the affected
crude oil and natural gas properties, these estimated future costs are also
deducted from estimated future gross revenues to arrive at the estimated future
net revenues and the Standardized Measure disclosed in Note 8.

    As is common within the industry, we have entered into various commitments
and operating agreements related to the exploration and development of and
production from proved crude oil and natural gas properties and the marketing,
transportation, terminalling and storage of crude oil. It is management's
belief that such commitments will be met without a material adverse effect on
our financial position, results of operations or cash flows.

Industry concentration

    Financial instruments which potentially subject us to concentrations of
credit risk consist principally of accounts receivable with respect to our oil
and gas operations and derivative instruments related to our hedging
activities. PAA is the exclusive marketer/purchaser for all of our equity oil
production. This concentration has the potential to impact our overall exposure
to credit risk, either positively or negatively, in that PAA may be affected by
changes in economic, industry or other conditions. We do not believe the loss
of PAA as the exclusive purchaser of our equity production would have a
material adverse affect on our results of operations. We believe PAA could be
replaced by other purchasers under contracts with similar terms and conditions.
The contract counterparties for our derivative commodity contracts are all
major financial institutions with Standard & Poor's ratings of A or better.
Three of the financial institutions are participating lenders in Plains'
revolving credit facility, with one such counterparty holding contracts that
represent approximately 37% of the fair value of all of Plains' open positions
at December 31, 2001.

    There are a limited number of alternative methods of transportation for our
production. Substantially all of our oil and gas production is transported by
pipelines, trucks and barges owned by third parties. The inability or
unwillingness of these parties to provide transportation services to us for a

                                     F-36

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

reasonable fee could result in our having to find transportation alternatives,
increased transportation costs or involuntary curtailment of a significant
portion of our oil and gas production which could have a negative impact on
future results of operations or cash flows.

    We, in the ordinary course of business, are a claimant and/or defendant in
various other legal proceedings. Management does not believe that the outcome
of these legal proceedings, individually and in the aggregate, will have a
materially adverse effect on our financial condition, results of operations or
cash flows.

Note 7 -- Financial instruments

    The disclosure of the estimated fair value of financial instruments is made
in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, Disclosures About Fair Value of Financial Instruments.
Considerable judgment is required to develop estimates of fair value. The use
of different assumptions or valuation methodologies may have a material effect
on estimated fair value amounts.

    The carrying values of items comprising current assets and current
liabilities approximate fair values due to the short-term maturities of these
instruments. Derivative financial instruments included other assets are stated
at fair value. The carrying value of our payable to Plains approximates its
fair value, as interest rates are variable, based on prevailing market rates.
The fair value of our long-term debt is estimated to equal its carrying value.

Note 8 -- Crude oil and natural gas activities

Costs incurred

   Our oil and natural gas acquisition, exploration, exploitation and
development activities are conducted in the United States. The following table
summarizes the costs incurred during the last three years (in thousands).

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                               ------------------------
                                                 2001    2000    1999
                                               -------- ------- -------
        <S>                                    <C>      <C>     <C>
        Property acquisitions costs:
         Unproved properties.................. $     44 $    73 $   879
         Proved properties....................    1,645   1,953   2,496
        Exploration costs.....................      286     293     796
        Exploitation and development costs (1)  123,778  68,186  54,996
                                               -------- ------- -------
                                               $125,753 $70,505 $59,167
                                               ======== ======= =======
</TABLE>
--------
(1) Includes capitalized general and administrative expense of $6.2 million,
    $5.2 million and $5.1 million in 2001, 2000 and 1999, respectively, and
    capitalized interest expense of $3.1 million, $3.8 million and $3.6 million
    in 2001, 2000 and 1999, respectively.

                                     F-37

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)


Capitalized costs

   The following table presents the aggregate capitalized costs subject to
amortization relating to our crude oil and natural gas acquisition,
exploration, exploitation and development activities, and the aggregate related
accumulated DD&A (in thousands).

<TABLE>
<CAPTION>
                                          December 31,
                                      --------------------
                                         2001       2000
                                      ---------  ---------
                    <S>               <C>        <C>
                    Proved properties $ 561,034  $ 433,915
                    Accumulated DD&A.  (139,797)  (116,066)
                                      ---------  ---------
                                      $ 421,237  $ 317,849
                                      =========  =========
</TABLE>

    The DD&A rate per equivalent unit of production was $2.70, $2.25 and $1.72
in 2001, 2000 and 1999, respectively.

Costs not subject to amortization

   The following table summarizes the categories of costs comprising the amount
of unproved properties not subject to amortization (in thousands).

<TABLE>
<CAPTION>
                                            December 31,
                                       -----------------------
                                        2001    2000    1999
                                       ------- ------- -------
                  <S>                  <C>     <C>     <C>
                  Acquisition costs... $27,523 $31,090 $38,252
                  Exploration costs...      --     425     504
                  Capitalized interest   5,848   3,222   4,443
                                       ------- ------- -------
                                       $33,371 $34,737 $43,199
                                       ======= ======= =======
</TABLE>

    Unproved property costs not subject to amortization consist primarily of
acquisition costs related to unproved areas and capitalized interest. Costs are
transferred into the amortization base on an ongoing basis as the properties
are evaluated and proved reserves established or impairment determined. We will
continue to evaluate these properties and costs will be transferred into the
amortization base as the undeveloped areas are tested. Our onshore properties
and one offshore property consist of mature but underdeveloped crude oil
properties that were acquired from major or large independent oil and gas
companies. These fields were discovered from 1906 to 1981, and have produced
significant volumes since initial discovery, exhibit complex reservoir and
geologic conditions. Due to the nature of the reserves, the ultimate evaluation
of the properties will occur over a period of several years. We expect that 75%
of the costs not subject to amortization will be transferred to the
amortization base over the next three to five years and the remainder over the
next three to ten years. The leases covering the properties are held by
production and will not limit the time period for evaluation. Approximately 9%,
11% and 10% of the balance in unproved properties at December 31, 2001, related
to additions made in 2001, 2000 and 1999, respectively.

    During 2001, 2000 and 1999, we capitalized $3.1 million, $3.8 million and
$3.6 million, respectively, of interest related to the costs of unproved
properties in the process of development.

                                     F-38

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)


Supplemental reserve information (unaudited)

    The following information summarizes our net proved reserves of crude oil
(including condensate and natural gas liquids) and natural gas and the present
values thereof for the three years ended December 31, 2001. The following
reserve information is based upon reports of the independent petroleum
consulting firms of Netherland, Sewell & Associates, Inc., and Ryder Scott
Company, L.P. in 2001, and H.J. Gruy and Associates, Inc., Netherland, Sewell &
Associates, Inc., and Ryder Scott Company, L.P. in 2000 and 1999. The estimates
are in accordance with regulations prescribed by the SEC.

    In management's opinion, the reserve estimates presented herein, in
accordance with generally accepted engineering and evaluation principles
consistently applied, are believed to be reasonable. However, there are
numerous uncertainties inherent in estimating quantities and values of proved
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond our control. Reserve engineering is
a subjective process of estimating the recovery from underground accumulations
of crude oil and natural gas that cannot be measured in an exact manner, and
the accuracy of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. Because all
reserve estimates are to some degree speculative, the quantities of crude oil
and natural gas that are ultimately recovered, production and operating costs,
the amount and timing of future development expenditures and future crude oil
and natural gas sales prices may all differ from those assumed in these
estimates. In addition, different reserve engineers may make different
estimates of reserve quantities and cash flows based upon the same available
data. Therefore, the Standardized Measure shown below represents estimates only
and should not be construed as the current market value of the estimated crude
oil and natural gas reserves attributable to our properties. In this regard,
the information set forth in the following tables includes revisions of reserve
estimates attributable to proved properties included in the preceding year's
estimates. Such revisions reflect additional information from subsequent
exploitation and development activities, production history of the properties
involved and any adjustments in the projected economic life of such properties
resulting from changes in product prices.

    Decreases in the prices of crude oil and natural gas have had, and could
have in the future, an adverse effect on the carrying value of our proved
reserves and our revenues, profitability and cash flow. Almost all of our
reserve base (approximately 93% of year-end 2001 reserve volumes) is comprised
of crude oil properties that are sensitive to crude oil price volatility.

                                     F-39

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)


Estimated quantities of crude oil and natural gas reserves (unaudited)

    The following table sets forth certain data pertaining to our proved and
proved developed reserves for the three years ended December 31, 2001 (in
thousands).

<TABLE>
<CAPTION>
                                        As of or for the Year Ended December 31,
                                   -------------------------------------------------
                                         2001             2000             1999
                                   ---------------  ---------------  ---------------
                                     Oil     Gas      Oil     Gas      Oil     Gas
                                    (MBbl)  (MMcf)   (MBbl)  (MMcf)   (MBbl)  (MMcf)
                                   -------  ------  -------  ------  -------  ------
<S>                                <C>      <C>     <C>      <C>     <C>      <C>
Proved Reserves
 Beginning balance................ 204,387  93,486  195,213  90,873  110,950  86,781
 Revision of previous estimates... (13,093) (5,485)  (5,601) (3,597)  47,510  (8,234)
 Extensions, discoveries, improved
   recovery and other additions...  40,218  11,571   22,429   9,252   37,393  15,488
 Purchase of reserves in-place....      --      --       --      --    6,442      --
 Production.......................  (8,219) (3,355)  (7,654) (3,042)  (7,082) (3,162)
                                   -------  ------  -------  ------  -------  ------
 Ending balance................... 223,293  96,217  204,387  93,486  195,213  90,873
                                   =======  ======  =======  ======  =======  ======
Proved Developed Reserves
 Beginning balance................ 105,679  52,184  100,758  49,255   68,167  58,445
                                   =======  ======  =======  ======  =======  ======
 Ending balance................... 119,248  59,101  105,679  52,184  100,758  49,255
                                   =======  ======  =======  ======  =======  ======
</TABLE>

Standardized measure of discounted future net cash flows (unaudited)

    The Standardized Measure of discounted future net cash flows relating to
proved crude oil and natural gas reserves is presented below (in thousands):

<TABLE>
<CAPTION>
                                                                December 31,
                                                   -------------------------------------
                                                       2001         2000         1999
                                                   -----------  -----------  -----------
<S>                                                <C>          <C>          <C>
Future cash inflows............................... $ 3,662,137  $ 5,850,215  $ 4,389,337
Future development costs..........................    (305,261)    (249,319)    (193,409)
Future production expense.........................  (1,714,132)  (2,748,492)  (1,558,492)
Future income tax expense.........................    (537,252)  (1,030,400)    (881,167)
                                                   -----------  -----------  -----------
Future net cash flows.............................   1,105,492    1,822,004    1,756,269
Discounted at 10% per year........................    (721,025)  (1,032,566)  (1,028,983)
                                                   -----------  -----------  -----------
Standardized measure of discounted future net cash
  flows........................................... $   384,467  $   789,438  $   727,286
                                                   ===========  ===========  ===========
</TABLE>
    The Standardized Measure of discounted future net cash flows (discounted at
10%) from production of proved reserves was developed as follows:

    1. An estimate was made of the quantity of proved reserves and the future
    periods in which they are expected to be produced based on year-end
    economic conditions.

    2. In accordance with SEC guidelines, the engineers' estimates of future
    net revenues from our proved properties and the present value thereof are
    made using crude oil and natural gas sales prices in effect as of the dates
    of such estimates and are held constant throughout the life of the
    properties, except where such guidelines permit alternate treatment,
    including the use of fixed and determinable contractual price escalations.
    We have entered into various arrangements to fix

                                     F-40

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

    or limit the NYMEX crude oil price for a significant portion of our crude
    oil production. Arrangements in effect at December 31, 2001 are discussed
    in Note 2. Such arrangements are not reflected in the reserve reports. The
    overall average year-end prices used in the reserve reports as of December
    31, 2001, were $15.31 per barrel of crude oil and $2.56 per Mcf of natural
    gas. Such prices as of December 31, 2000 were $21.93 per barrel of crude
    oil and $14.63 per Mcf of natural gas.

    3. The future gross revenue streams were reduced by estimated future
    operating costs (including production and ad valorem taxes) and future
    development and abandonment costs, all of which were based on current costs.

    4. The reports reflect the pre-tax Present Value of Proved Reserves to be
    $0.6 billion, $1.3 billion and $1.1 billion at December 31, 2001, 2000 and
    1999, respectively. SFAS No. 69 requires us to further reduce these
    estimates by an amount equal to the present value of estimated income taxes
    which might be payable by us in future years to arrive at the Standardized
    Measure. Future income taxes were calculated by applying the statutory
    federal and state income tax rate to pre-tax future net cash flows, net of
    the tax basis of the properties involved and utilization of available tax
    carryforwards related to oil and gas operations.

    The principal sources of changes in the Standardized Measure of the future
net cash flows for the three years ended December 31, 2001, are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                            -------------------------------
                                                               2001       2000       1999
                                                            ---------  ---------  ---------
<S>                                                         <C>        <C>        <C>
Balance, beginning of year................................. $ 789,438  $ 727,286  $ 183,630
Sales, net of production expenses..........................  (139,827)   (86,237)   (56,958)
Net change in sales and transfer prices, net of production
  expenses.................................................  (664,684)    94,159    623,369
Changes in estimated future development costs..............   (17,535)   (16,097)   (46,542)
Extensions, discoveries and improved recovery, net of costs    89,010    141,641    112,573
Previously estimated development costs incurred during the
  year.....................................................    86,881     27,855     19,676
Purchase of reserves in-place..............................        --         --     53,724
Revision of quantity estimates.............................  (156,402)   (68,163)   159,499
Accretion of discount......................................   141,598    101,667     18,683
Net change in income taxes.................................   255,988   (132,673)  (340,368)
                                                            ---------  ---------  ---------
Balance, end of year....................................... $ 384,467  $ 789,438  $ 727,286
                                                            =========  =========  =========
</TABLE>

                                     F-41

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)


Results of operations for oil and gas producing activities

    The results of operations from oil and gas producing activities below
exclude non-oil and gas revenues, general and administrative expenses, interest
charges, interest income and interest capitalized. Income tax (expense) or
benefit was determined by applying the statutory rates to pretax operating
results (in thousands).

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                                     ----------------------------
                                                                       2001      2000      1999
                                                                     --------  --------  --------
<S>                                                                  <C>       <C>       <C>
Revenues from oil and gas producing activities...................... $204,139  $142,451  $107,485
Production costs....................................................  (63,795)  (56,228)  (50,527)
Depreciation, depletion and amortization............................  (23,707)  (18,395)  (13,101)
Income tax expense..................................................  (45,022)  (24,981)  (16,337)
                                                                     ========  ========  ========
Results of operations from producing activities (excluding corporate
  overhead and interest costs)...................................... $ 71,615  $ 42,847  $ 27,520
                                                                     ========  ========  ========
</TABLE>

Note 9 -- Consolidating Financial Statements

    In conjunction with the anticipated issuance of debt securities, all
subsidiaries of Plains referred to in Note 1 will become 100% owned
subsidiaries of Stocker Resources, L.P. (currently known as Plains Exploration
& Production Company). Stocker Resources, L.P. will be co-issuing the debt
securities along with a 100% owned finance company with no material assets or
operations. The debt securities will be guaranteed on a full and unconditional
and joint and several basis by Arguello Inc. and Plains Illinois Inc., PMCT
Inc. and Plains Resources International Inc. (referred to as "Guarantor
Subsidiaries").

    The following financial information presents consolidating financial
statements, which include:

   .  Issuer

   .  the guarantor subsidiaries on a combined basis ("Guarantor Subsidiaries")

   .  elimination entries necessary to consolidate the Issuer and the Guarantor
      Subsidiaries; and

   .  the Companies on a consolidated basis.

                                     F-42

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

                     CONSOLIDATING COMBINED BALANCE SHEET
                               December 31, 2001

<TABLE>
<CAPTION>
                                                        Guarantor   Intercompany
                                              Issuer   Subsidiaries Eliminations  Combined
                                              ------   ------------ ------------ ---------
                                                             (In thousands)
<S>                                          <C>       <C>          <C>          <C>
                                          ASSETS
Current Assets
Cash and cash equivalents................... $     11    $      2     $    --    $      13
 Accounts receivable and other
   current assets...........................   10,703       5,679          --       16,382
 Commodity hedging contracts................   13,872       7,915          --       21,787
 Inventories................................    3,252       1,377          --        4,629
                                             --------    --------     -------    ---------
                                               27,838      14,973          --       42,811
                                             --------    --------     -------    ---------
Property and Equipment, at cost
 Oil and natural gas properties -- full cost
   method
   Subject to amortization..................  450,038     110,996          --      561,034
   Not subject to amortization..............   19,676      13,695          --       33,371
 Other property and equipment...............    1,322         194          --        1,516
                                             --------    --------     -------    ---------
                                              471,036     124,885          --      595,921
 Less allowance for depreciation,
   depletion and amortization...............  (56,137)    (84,667)         --     (140,804)
                                             --------    --------     -------    ---------
                                              414,899      40,218          --      455,117
                                             --------    --------     -------    ---------
Investment in and Advances to
  Subsidiaries..............................  (21,496)         --      21,496           --
                                             --------    --------     -------    ---------
Other Assets................................   16,275       2,552          --       18,827
                                             --------    --------     -------    ---------
                                             $437,516    $ 57,743     $21,496    $ 516,755
                                             ========    ========     =======    =========

                          LIABILITIES AND COMBINED OWNERS' EQUITY
Current Liabilities
 Accounts payable and other current
   liabilities.............................. $ 29,822    $ 11,546     $    --    $  41,368
 Current maturities on long-term debt.......      511          --          --          511
                                             --------    --------     -------    ---------
                                               30,333      11,546          --       41,879
                                             --------    --------     -------    ---------
Payable to Plains Resources Inc.............  172,603      62,558          --      235,161
                                             --------    --------     -------    ---------
Long-Term Debt..............................    1,022          --          --        1,022
                                             --------    --------     -------    ---------
Other Long-Term Liabilities.................       --       1,413          --        1,413
                                             --------    --------     -------    ---------
Deferred Income Taxes.......................   53,471       3,722          --       57,193
                                             --------    --------     -------    ---------
Combined Owners' Equity
 Owners' equity.............................  164,203     (25,889)     25,889      164,203
 Accumulated other comprehensive
   income...................................   15,884       4,393      (4,393)      15,884
                                             --------    --------     -------    ---------
                                              180,087     (21,496)     21,496      180,087
                                             --------    --------     -------    ---------
                                             $437,516    $ 57,743     $21,496    $ 516,755
                                             ========    ========     =======    =========
</TABLE>


                                     F-43

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

                     CONSOLIDATING COMBINED BALANCE SHEET
                               December 31, 2000

<TABLE>
<CAPTION>
                                                           Guarantor   Intercompany
                                                 Issuer   Subsidiaries Eliminations  Combined
                                                 ------   ------------ ------------ ---------
                                                                (In thousands)
<S>                                             <C>       <C>          <C>          <C>
                                            ASSETS
Current Assets
 Cash and cash equivalents..................... $    240    $    296     $    --    $     536
 Accounts receivable and other
   current assets..............................   24,144       8,734          --       32,878
 Inventories...................................    2,666       1,372          --        4,038
                                                --------    --------     -------    ---------
                                                  27,050      10,402          --       37,452
                                                --------    --------     -------    ---------
Property and Equipment, at cost
 Oil and natural gas
   properties -- full cost method
   Subject to amortization.....................  338,859      95,056          --      433,915
   Not subject to amortization.................   22,278      12,459          --       34,737
 Other property and equipment..................    1,189         200          --        1,389
                                                --------    --------     -------    ---------
                                                 362,326     107,715          --      470,041
 Less allowance for depreciation, depletion and
   amortization................................  (37,721)    (78,976)         --     (116,697)
                                                --------    --------     -------    ---------
                                                 324,605      28,739          --      353,344
                                                --------    --------     -------    ---------
Investment in and Advances to
  Subsidiaries.................................  (37,417)         --      37,417           --
                                                --------    --------     -------    ---------
Other Assets...................................    9,608         631          --       10,239
                                                --------    --------     -------    ---------
                                                $323,846    $ 39,772     $37,417    $ 401,035
                                                ========    ========     =======    =========

                           LIABILITIES AND COMBINED OWNERS' EQUITY
Current Liabilities
 Accounts payable and other current
   liabilities................................. $ 29,665    $ 14,137     $    --    $  43,802
 Current maturities on long-term debt..........      511          --          --          511
                                                --------    --------     -------    ---------
                                                  30,176      14,137          --       44,313
Payable to Plains Resources Inc................  161,789      63,207          --      224,996
Long-Term Debt.................................    1,533          --          --        1,533
Other Long-Term Liabilities....................       --          --          --           --
Deferred Income Taxes..........................   19,316        (155)         --       19,161
Combined Owners' Equity........................  111,032     (37,417)     37,417      111,032
                                                --------    --------     -------    ---------
                                                $323,846    $ 39,772     $37,417    $ 401,035
                                                ========    ========     =======    =========
</TABLE>

                                     F-44

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

                  CONSOLIDATING COMBINED STATEMENT OF INCOME
                         Year Ended December 31, 2001

<TABLE>
<CAPTION>
                                                           Guarantor   Intercompany
                                                 Issuer   Subsidiaries Eliminations Combined
                                                 ------   ------------ ------------ --------
                                                               (In thousands)
<S>                                             <C>       <C>          <C>          <C>
Revenues
 Crude oil and liquids......................... $124,250    $50,645      $     --   $174,895
 Natural gas...................................   28,771         --            --     28,771
 Other operating revenues......................       --        473            --        473
                                                --------    -------      --------   --------
                                                 153,021     51,118            --    204,139
                                                --------    -------      --------   --------
Costs and Expenses
 Production expenses...........................   41,458     22,337            --     63,795
 General and administrative....................    8,708      1,502            --     10,210
 Depreciation, depletion and
   amortization................................   18,413      5,692            --     24,105
                                                --------    -------      --------   --------
                                                  68,579     29,531            --     98,110
                                                --------    -------      --------   --------
Income from Operations.........................   84,442     21,587            --    106,029

Other Income (Expense)
 Equity in earnings of subsidiaries............   11,528         --       (11,528)        --
 Interest expense..............................  (10,679)    (6,732)           --    (17,411)
 Interest and other income.....................       94        369            --        463
                                                --------    -------      --------   --------
Income Before Income Taxes and Cumulative
  Effect of Accounting Change..................   85,385     15,224       (11,528)    89,081
 Income tax expense
   Current.....................................   (2,832)    (3,182)           --     (6,014)
   Deferred....................................  (27,620)      (754)           --    (28,374)
                                                --------    -------      --------   --------
Income Before Cumulative Effect of
  Accounting Change............................   54,933     11,288       (11,528)    54,693
 Cumulative effect of accounting change, net of
   tax benefit.................................   (1,762)       240            --     (1,522)
                                                --------    -------      --------   --------
Net Income..................................... $ 53,171    $11,528      $(11,528)  $ 53,171
                                                ========    =======      ========   ========
</TABLE>

                                     F-45

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

                  CONSOLIDATING COMBINED STATEMENT OF INCOME
                         Year Ended December 31, 2000

<TABLE>
<CAPTION>
                                                      Guarantor   Intercompany
                                            Issuer   Subsidiaries Eliminations Combined
                                            ------   ------------ ------------ --------
                                                          (In thousands)
<S>                                        <C>       <C>          <C>          <C>
Revenues
 Crude oil and liquids.................... $ 85,921    $40,513      $    --    $126,434
 Natural gas..............................   16,017         --           --      16,017
                                           --------    -------      -------    --------
                                            101,938     40,513           --     142,451
                                           --------    -------      -------    --------
Costs and Expenses
  Production expenses.....................   35,278     20,950           --      56,228
  General and administrative..............    5,168      1,140           --       6,308
  Depreciation, depletion and amortization   15,450      3,409           --      18,859
                                           --------    -------      -------    --------
                                             55,896     25,499           --      81,395
                                           --------    -------      -------    --------
Income from Operations....................   46,042     15,014           --      61,056

Other Income (Expense)
 Equity in earnings of subsidiaries.......    6,859         --       (6,859)         --
 Interest expense.........................  (10,212)    (5,673)          --     (15,885)
 Interest and other income................      213        130           --         343
                                           --------    -------      -------    --------
Income Before Income Taxes................   42,902      9,471       (6,859)     45,514
 Income tax expense
   Current................................     (168)    (2,263)          --      (2,431)
   Deferred...............................  (13,985)      (349)          --     (14,334)
                                           --------    -------      -------    --------
Net Income................................ $ 28,749    $ 6,859      $(6,859)   $ 28,749
                                           ========    =======      =======    ========
</TABLE>

                                     F-46

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

                  CONSOLIDATING COMBINED STATEMENT OF INCOME
                         Year Ended December 31, 1999

<TABLE>
<CAPTION>
                                              Guarantor   Intercompany
                                     Issuer  Subsidiaries Eliminations Combined
                                     ------  ------------ ------------ --------
                                                   (In thousands)
<S>                                 <C>      <C>          <C>          <C>
Revenues
 Crude oil and liquids............. $73,073    $29,317      $    --    $102,390
 Natural gas.......................   5,095         --           --       5,095
                                    -------    -------      -------    --------
                                     78,168     29,317           --     107,485
                                    -------    -------      -------    --------
Costs and Expenses
 Production expenses...............  35,526     15,001           --      50,527
 General and administrative........   3,469        898           --       4,367
 Depreciation, depletion and
   amortization....................  11,154      2,175           --      13,329
                                    -------    -------      -------    --------
                                     50,149     18,074           --      68,223
                                    -------    -------      -------    --------
Income from Operations.............  28,019     11,243           --      39,262
Other Income (Expense)
 Equity in earnings of subsidiaries   4,782         --       (4,782)         --
 Interest expense..................  (9,447)    (5,465)          --     (14,912)
 Interest and other income.........      44         43           --          87
                                    -------    -------      -------    --------
Income Before Income Taxes.........  23,398      5,821       (4,782)     24,437
 Income tax (expense) benefit......
   Current.........................   1,038     (1,543)          --        (505)
   Deferred........................  (5,331)       504           --      (4,827)
                                    -------    -------      -------    --------
Net Income......................... $19,105    $ 4,782      $(4,782)   $ 19,105
                                    =======    =======      =======    ========
</TABLE>

                                     F-47

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

                CONSOLIDATING COMBINED STATEMENT OF CASH FLOWS
                         Year Ended December 31, 2001

<TABLE>
<CAPTION>
                                                      Guarantor   Intercompany
                                            Issuer   Subsidiaries Eliminations  Combined
                                            ------   ------------ ------------ ---------
                                                          (In thousands)
<S>                                       <C>        <C>          <C>          <C>
Cash Flows From Operating Activities
Net income............................... $  53,171    $ 11,528     $(11,528)  $  53,171
Items not affecting cash flows from
 operating activities:
 Depreciation, depletion and amortization    18,413       5,692           --      24,105
 Equity in earnings of subsidiaries......   (11,528)                  11,528
 Deferred income taxes...................    27,620         754           --      28,374
 Cumulative effect of adoption of
   accounting change.....................     1,762        (240)          --       1,522
 Change in derivative fair value.........        (7)      1,062           --       1,055
 Other noncash items.....................       263         733           --         996
Change in assets and liabilities from
 operating activities:
 Accounts receivable and other assets....     9,449        (252)          --       9,197
 Inventories.............................      (586)         (5)          --        (591)
 Accounts payable and other liabilities..       157      (1,178)          --      (1,021)
                                          ---------    --------     --------   ---------
Net cash provided by operating
 activities..............................    98,714      18,094           --     116,808
                                          ---------    --------     --------   ---------
Cash Flows From Investing Activities
Acquisition, exploration and
  developments costs.....................  (108,577)    (17,176)          --    (125,753)
Additions to other property and equipment      (127)         --           --        (127)
                                          ---------    --------     --------   ---------
 Net cash used in investing activities...  (108,704)    (17,176)          --    (125,880)
                                          ---------    --------     --------   ---------
Cash Flows From Financing Activities
Principal payments of long-term debt.....      (511)         --           --        (511)
Receipts from (payments to) Plains
 Resources Inc...........................    10,272      (1,212)          --       9,060
                                          ---------    --------     --------   ---------
Net cash provided by (used in)
 financing activities....................     9,761      (1,212)          --       8,549
                                          ---------    --------     --------   ---------
Net increase (decrease) in cash and cash
  equivalents............................      (229)       (294)          --        (523)
Cash and cash equivalents, beginning of
  year...................................       240         296           --         536
                                          ---------    --------     --------   ---------
Cash and cash equivalents, end of year... $      11    $      2     $     --   $      13
                                          =========    ========     ========   =========
</TABLE>


                                     F-48

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

                CONSOLIDATING COMBINED STATEMENT OF CASH FLOWS
                         Year Ended December 31, 2000

<TABLE>
<CAPTION>
                                                        Guarantor   Intercompany
                                              Issuer   Subsidiaries Eliminations Combined
                                              ------   ------------ ------------ --------
                                                            (In thousands)
<S>                                          <C>       <C>          <C>          <C>
Cash Flows From Operating Activities
Net income.................................. $ 28,749    $  6,859     $(6,859)   $ 28,749
Items not affecting cash flows from
  operating activities:
 Depreciation, depletion and amortization...   15,450       3,409          --      18,859
 Equity in earnings of subsidiaries.........   (6,859)                  6,859          --
 Deferred income taxes......................   13,985         349          --      14,334
 Other noncash items........................       --                                  --
Change in assets and liabilities from
  operating activities:
 Accounts receivable and other assets.......    7,192         405          --       7,597
 Inventories................................      228        (423)         --        (195)
 Accounts payable and other liabilities.....    9,745         375          --      10,120
                                             --------    --------     -------    --------
Net cash provided by operating activities...   68,490      10,974          --      79,464
                                             --------    --------     -------    --------
Cash Flows From Investing Activities
Acquisition, exploration and developments
  costs.....................................  (54,782)    (15,723)         --     (70,505)
Additions to other property and equipment...     (359)         (7)         --        (366)
                                             --------    --------     -------    --------
Net cash used in investing activities.......  (55,141)    (15,730)         --     (70,871)
                                             --------    --------     -------    --------
Cash Flows From Financing Activities
Principal payments of long-term debt........     (511)         --          --        (511)
Receipts from (payments to) Plains
  Resources Inc.............................  (12,803)        182          --     (12,621)
                                             --------    --------     -------    --------
Net cash provided by (used in)
  financing activities......................  (13,314)        182          --     (13,132)
                                             --------    --------     -------    --------
Net increase (decrease) in cash and
  cash equivalents..........................       35      (4,574)         --      (4,539)
Cash and cash equivalents, beginning of year      205       4,870          --       5,075
                                             --------    --------     -------    --------
Cash and cash equivalents, end of year...... $    240    $    296     $    --    $    536
                                             ========    ========     =======    ========
</TABLE>

                                     F-49

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

                CONSOLIDATING COMBINED STATEMENT OF CASH FLOWS
                         Year Ended December 31, 1999

<TABLE>
<CAPTION>
                                                     Guarantor   Intercompany
                                           Issuer   Subsidiaries Eliminations Combined
                                           ------   ------------ ------------ --------
                                                         (In thousands)
<S>                                       <C>       <C>          <C>          <C>
Cash Flows From Operating Activities
Net income............................... $ 19,105    $ 4,782      $(4,782)   $ 19,105
Items not affecting cash flows from
  operating activities:
 Depreciation, depletion and amortization   11,154      2,175           --      13,329
 Equity in earnings of subsidiaries......   (4,782)                  4,782          --
 Deferred income taxes...................    5,331       (504)          --       4,827
 Other noncash items.....................
Change in assets and liabilities from
  operating activities:
 Accounts receivable and other assets....  (24,329)    (7,287)          --     (31,616)
 Inventories.............................       38       (624)          --        (586)
 Accounts payable and other liabilities..  (13,669)    13,219           --        (450)
                                          --------    -------      -------    --------
Net cash provided by operating activities   (7,152)    11,761           --       4,609
                                          --------    -------      -------    --------
Cash Flows From Investing Activities
Acquisition, exploration and
  developments costs.....................  (51,348)    (7,819)          --     (59,167)
Additions to other property and equipment     (154)       (41)          --        (195)
                                          --------    -------      -------    --------
Net cash used in investing activities....  (51,502)    (7,860)          --     (59,362)
                                          --------    -------      -------    --------
Cash Flows From Financing Activities
Principal payments of long-term debt.....     (511)        --           --        (511)
Receipts from (payments to) Plains
  Resources Inc..........................   59,232        969           --      60,201
                                          --------    -------      -------    --------
Net cash provided by (used in)
  financing activities...................   58,721        969           --      59,690
                                          --------    -------      -------    --------
Net increase (decrease) in cash and
  cash equivalents.......................       67      4,870           --       4,937
Cash and cash equivalents, beginning
  of year................................      138         --           --         138
                                          --------    -------      -------    --------
Cash and cash equivalents, end of year... $    205    $ 4,870      $    --    $  5,075
                                          ========    =======      =======    ========
</TABLE>

                                     F-50

<PAGE>

                UPSTREAM SUBSIDIARIES OF PLAINS RESOURCES INC.

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)


Note 10 -- Capitalization

    On September 30, 2002, the Companies were capitalized with 24.2 million
shares of common stock, all of which are owned by Plains. In accordance with
SEC Staff Accounting Bulletin No. 98, this capitalization has been
retroactively reflected for purposes of calculating earnings per share for all
periods presented in the accompanying combined statements of income. In
computing EPS, no adjustments were made to reported net income, and no
potential common stock exists. The weighted average shares outstanding for
computing both basic and diluted EPS was 24.2 million shares for all periods
presented.

Note 11 -- Subsequent Event (unaudited)

    On September 18, 2002 Stocker Resources Inc., or Stocker, our general
partner before we converted from a limited partnership to a corporation, filed
a declaratory judgment action against Commonwealth Energy Corporation (doing
business as electricAmerica), or Commonwealth, in the Superior Court of Orange
County, California relating to the termination of an electric service contract
between Stocker and Commonwealth. Pursuant to the agreement, Commonwealth had
agreed to supply Stocker with electricity and Stocker had obtained a $1.5
million performance bond in favor of Commonwealth to secure its payment
obligations under the agreement. Stocker terminated the contract in accordance
with its terms and Commonwealth notified Stocker of its intent to draw upon the
performance bond. Stocker is seeking a declaratory judgment that it was
entitled to terminate the contract and that Commonwealth has no basis for
proceeding against Stocker's related performance bond. Also on September 18,
2002, Stocker was named a defendant in an action brought by Commonwealth in the
Superior Court of Orange County, California for breach of the electric service
contract. Commonwealth alleges that Stocker breached the terms of the contract
by the termination and its implied covenant of good faith and fair dealing and
is seeking unspecified damages. We will be required to indemnify Stocker for
damages, if any, it incurs as a result of this action. We understand that
Stocker intends to defend its rights vigorously in this matter.

    At this time, the Companies are not in a position to express a judgment
concerning the potential exposure or likely outcome of this matter.


                                     F-51

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                              September 30, December 31,
                                                                                  2002          2001
                                                                              ------------- ------------
                                                                               (Unaudited)   (Audited)
                                   ASSETS
<S>                                                                           <C>           <C>
CURRENT ASSETS
    Cash and cash equivalents................................................   $  3,952      $ 17,762
    Accounts receivable......................................................     10,524        16,835
    Income taxes receivable..................................................        164         4,464
    Other current assets.....................................................      1,575         4,473
                                                                                --------      --------
       Total current assets..................................................     16,215        43,534
PROPERTY AND EQUIPMENT (AT COST)
    Oil and gas-successful efforts method....................................    416,632       385,264
    Other property and equipment.............................................      3,908         3,549
                                                                                --------      --------
                                                                                 420,540       388,813
Accumulated depreciation, depletion and amortization.........................    (99,013)      (71,039)
                                                                                --------      --------
Net Property and Equipment...................................................    321,527       317,774
OTHER ASSETS, net............................................................      1,160         1,730
                                                                                --------      --------
TOTAL ASSETS.................................................................   $338,902      $363,038
                                                                                ========      ========
                    LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
    Accounts payable.........................................................   $  9,341      $ 25,052
    Accrued liabilities......................................................        582         1,322
    Series C Preferred stock redemption payable..............................      1,274         1,349
    Derivative fair value liability..........................................      6,233            --
    Other current liabilities................................................      1,163         1,468
                                                                                --------      --------
Total current liabilities....................................................     18,593        29,191
LONG-TERM DEBT...............................................................     97,000       108,000
DEFERRED INCOME TAXES........................................................     42,716        45,135
STOCKHOLDERS' EQUITY
Preferred stock, $0.02 par, 20,000,000 shares authorized, 266,667 designated
 Series B, 2,300,000 shares designated Series C and 725,167 shares
 designated Series D, none other designated..................................         --            --
Convertible preferred stock Series B, $7.50 stated value, 207,905 and 266,667
 shares issued and outstanding at September 30, 2002 and December 31, 2001,
 respectfully. $1,559 aggregate liquidation preference.......................      2,828         3,627
Convertible preferred stock Series D, 5% $24.00 stated value, 613,919 and
 614,776 shares issued and outstanding at September 30, 2002 and
 December 31, 2001, respectively. $14,734 aggregate liquidation preference...      7,475         7,485
Common stock, $.02 par value, 60,000,000 shares authorized, 16,695,932 and
 16,547,595 shares issued at September 30, 2002 and December 31, 2001,
 respectively................................................................        334           331
    Additional paid-in capital...............................................    154,866       151,412
    Retained earnings........................................................     17,261        18,906
    Treasury stock; 69,796 shares at September 30, 2002 and December 31,
     2001, respectively......................................................     (1,049)       (1,049)
    Deferred compensation....................................................     (1,122)           --
Total Stockholders' Equity...................................................    180,593       180,712
                                                                                --------      --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................   $338,902      $363,038
                                                                                ========      ========

</TABLE>

    SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


                                     F-52

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                          Three Months Ended       Nine Months Ended
                                                             September 30,           September 30,
                                                        ----------------------  -----------------------
                                                        (Unaudited) (Unaudited) (Unaudited) (Unaudited)
                                                           2002        2001        2002        2001
                                                        ----------- ----------- ----------- -----------
<S>                                                     <C>         <C>         <C>         <C>
REVENUES
    Oil, natural gas and plant income..................   $25,256     $20,802    $ 70,842    $ 97,690
    Gain (loss) on sale of properties..................        70      (3,417)        (74)      3,419
    Gain (loss) on derivative fair value...............     3,086          --      (9,314)         --
    Loss on derivative settlements.....................    (4,099)         --      (1,931)         --
    Other..............................................        10         145         210         597
                                                          -------     -------    --------    --------
TOTAL REVENUES.........................................    24,323      17,530      59,733     101,706
                                                          -------     -------    --------    --------
EXPENSES
    Production--
       Lease operations................................     3,750       3,758      10,732      12,412
       Production, severance and ad valorem taxes......     2,052       1,364       5,555       6,529
       Gathering, transportation and other.............       758         777       2,415       2,206
    Geological and geophysical.........................       257         176       1,085         545
    Dry hole and impairments...........................     1,069       1,667       2,685       1,667
    Surrendered and expired acreage....................       160          --         749          --
    General and administrative.........................     2,216       1,810       6,928       5,159
    Restricted stock compensation (general and
     administrative)...................................       288          --         720          --
    Interest...........................................     1,000       1,545       3,043       5,619
    Depreciation, depletion and amortization...........     8,853       7,199      27,237      20,544
    Other..............................................       188          --         380          --
                                                          -------     -------    --------    --------
TOTAL EXPENSES.........................................    20,591      18,296      61,529      54,681
INCOME (LOSS) BEFORE INCOME TAX EXPENSE,
 MINORITY INTEREST AND DIVIDENDS TO PREFERRED
 STOCKHOLDERS..........................................     3,732        (766)     (1,796)     47,025
Minority interest......................................        --         148          --         448
Income tax (benefit) expense...........................     1,455           2        (702)     18,105
                                                          -------     -------    --------    --------
NET INCOME (LOSS)......................................     2,277        (916)     (1,094)     28,472
Dividends to preferred stockholders....................       181         187         551         562
                                                          -------     -------    --------    --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
 STOCKHOLDERS..........................................   $ 2,096     $(1,103)   $ (1,645)   $ 27,910
                                                          =======     =======    ========    ========
NET INCOME (LOSS) PER COMMON SHARE.....................
    BASIC..............................................   $  0.13     $  0.07    $ (0.10)    $   1.89
                                                          =======     =======    ========    ========
    DILUTED............................................   $  0.12     $  0.07    $ (0.10)    $   1.52
                                                          =======     =======    ========    ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
    BASIC..............................................    16,541      15,135      16,537      14,791
                                                          =======     =======    ========    ========
    DILUTED............................................    18,892      15,135      16,537      19,072
                                                          =======     =======    ========    ========
</TABLE>

     SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

                                     F-53

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                       Nine Months Ended
                                                                                         September 30
                                                                                    ----------------------
                                                                                    (Unaudited) (Unaudited)
                                                                                       2002        2001
                                                                                    ----------- -----------
<S>                                                                                 <C>         <C>
OPERATING ACTIVITIES
Net income (loss)..................................................................  $ (1,094)   $ 28,472
Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation, depletion and amortization activities:                               26,742      20,001
    Amortization of debt issue costs...............................................       495         543
    Dry hole and impairments.......................................................     2,685       1,667
    Surrendered and expired acreage................................................       749          --
    Loss on derivative fair value..................................................     9.314          --
    (Gain) Loss on sale of properties..............................................        74      (3,419)
    Deferred income taxes..........................................................    (1,913)     10,815
    Restricted stock compensation..................................................       720          --
    Minority interest..............................................................        --         448
    Common stock issued in lieu of directors fees..................................        21          --
    Other..........................................................................                   155
                                                                                     --------    --------
Cash Flow from Operations before changes in current assets and liabilities.........    37,793      58,682
       Changes in current assets and liabilities, net of acquisition effects:
       Accounts receivable and other current assets................................    10,504      14,835
       Accounts payable, accrued liabilities and other current liabilities.........   (16,837)      6,979
                                                                                     --------    --------
NET CASH PROVIDED BY OPERATING ACTIVITIES..........................................    31,460      80,496
INVESTING ACTIVITIES
    Proceeds from sales of properties..............................................     1,082      38,081
    Acquisition of Classic Resources, Inc., net of cash acquired...................        --     (58,670)
    Acquisition of oil and gas properties..........................................        --     (18,511)
    Development of oil and gas properties..........................................   (35,045)    (56,646)
    Additions to other assets......................................................      (366)     (1,978)
                                                                                     --------    --------
NET CASH USED IN INVESTING ACTIVITIES..............................................   (34,329)    (97,724)
FINANCING ACTIVITIES
    Proceeds from long-term debt...................................................    24,500     104,000
    Principal payments on long-term debt...........................................   (35,500)    (72,000)
    Proceeds from exercise of stock options and warrants...........................       610         522
    Preferred stock dividends......................................................      (551)       (188)
                                                                                     --------    --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................   (10,941)     32,334
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................   (13,810)     15,106
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................................    17,762       4,436
                                                                                     --------    --------
CASH AND CASH EQUIVALENTS AT ENDING OF PERIOD......................................  $  3,952    $ 19,542
                                                                                     ========    ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
    Interest.......................................................................  $  3,025    $  5,615
                                                                                     ========    ========
    Income taxes...................................................................  $    963    $ 10,554
                                                                                     ========    ========
Non-cash investing and financing activities:
    Preferred dividends incurred but not paid......................................  $     --    $    374
                                                                                     ========    ========
    Deferred taxes recorded in acquisition of Classic..............................  $    325    $ 27,566
                                                                                     ========    ========
</TABLE>

     SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


                                     F-54

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

(1)  BASIS OF PRESENTATION

    In management's opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting primarily of normal recurring
adjustments) necessary to present fairly the consolidated financial position of
the Company as of September 30, 2002 and December 31, 2001, consolidated
results of operations and consolidated cash flows for the periods ended
September 30, 2002 and 2001.

    These consolidated financial statements should be read in conjunction with
the Company's financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2001. The results
of operations for the nine months ended September 30, 2002, are not necessarily
indicative of the results which may be expected for any other interim period or
for the entire fiscal year ending December 31, 2002.

    The Company restated its financial results for the first two quarters of
2001. The changes reflected adjustments to oil and natural gas production and
revenues as a result of the Company's over accrual of revenue related to these
quarters. The impact of the adjustments decreased the previously reported
amounts as follows for the nine month period ended September 30, 2001:

<TABLE>
<CAPTION>
                                                 Nine Months Ended
                                                 September 30, 2001
                                                 ------------------
            <S>                                  <C>
            Total Revenues......................      $7,839.....
            Costs and operating expenses........       1,654.....
            Operating income....................       6,185.....
            Net Income..........................       3,843.....
            Net Income per share (fully diluted)        0.20.....
</TABLE>

(2) RECLASSIFICATIONS

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

(3) EARNINGS PER SHARE

    Basic earnings and loss per common share are based on the weighted average
shares outstanding without any dilutive effects considered. Diluted earnings
and loss per share reflect dilution from all potential common shares, including
options, warrants and convertible preferred stock and convertible notes.
Diluted loss per share does not include the effect of any potential common
shares if the effect would be anti-dilutive.

    For the nine month period ending September 30, 2002, the Company had a
weighted average of 2,534,394 stock options, warrants and convertible preferred
stock outstanding which were not included in the computation of diluted
earnings per share, because the effect of the assumed exercise of these stock
options, warrants and convertible securities would have an antidilutive effect
on the computation of diluted loss per share.

                                     F-55

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(Continued)

                                  (Unaudited)


    Basic and diluted earnings per share for the three and nine-month periods
ended September 30, 2002 and 2001 was determined as follows (in thousands):

<TABLE>
<CAPTION>
                                                                       Three Months Ended Nine Months Ended
                                                                       September 30,      September 30,
                                                                       -----------------  -----------------
                                                                        2002     2001      2002      2001
                                                                        ------   ------    ------   ------
<S>                                                                    <C>      <C>       <C>       <C>
Basic net income (loss) attributable to common stockholders...........  2,096   (1,103)   (1,645)   27,910
Plus preferred stock dividends........................................    181      187       551       562
Plus interest expense (net of tax) on subordinated convertible notes..     --      310        --       494
                                                                        ------   ------    ------   ------
Fully diluted net income (loss) attributable to common stockholders...  2,277     (606)   (1,094)   28,966
Basic shares outstanding (weighted average shares).................... 16,541   15,135    16,537    14,791
Plus potentially dilutive securities:
    .  Dilutive options and warrants applying treasury stock method...  1,595       --        --     2,215
    .  Shares from conversion of subordinated convertible notes.......     --       --        --     1,314
    .  Shares from conversion of Series B preferred stock.............    120       --        --       131
    .  Shares from conversion of Series D preferred stock.............    614       --        --       621
    .  Non-vested restricted stock....................................     22       --        --        --
                                                                        ------   ------    ------   ------
Fully diluted shares outstanding (weighted average shares)............ 18,892   15,135    16,537    19,072
                                                                        ======   ======    ======   ======
</TABLE>

(4)  ACQUISITIONS

    On January 30, 2001, the Company acquired 100% of the issued and
outstanding stock of Classic Resources Inc. (the "Classic Acquisition") for
cash consideration of approximately $53.5 million plus other acquisition costs.
The operating results of the Classic Acquisition have been included in the
consolidated financial statements since that date. Classic was a privately held
exploration and production company with properties located in East Texas. The
Company's estimate of total net proved reserves at the time of the acquisition
was 47 Bcfe and net daily production of approximately 11 Mmcfe, as of January
31, 2001. The Classic Acquisition was financed under the Company's existing
Credit Facility. The purchase price of the Classic Acquisition was allocated
principally to proved properties, with additional amounts allocated to working
capital related to amounts recorded for production related receivables and
payables in existence and accrued for at January 31, 2001. In connection with
the Classic Acquisition, approximately $29 million in deferred income taxes
were recorded as a result of the difference between the allocated purchase
price and the historical tax basis of the properties.

    The following pro forma data presents the results of the Company for the
nine months ended September 30, 2001, as if the Classic Acquisition had
occurred on January 1, 2001. The pro forma data assumes the acquisition of the
respective properties and the debt financing transactions related to these
acquisitions. The pro forma results are presented for comparative purposes only
and are not necessarily indicative of the results which would have been
obtained had the acquisitions been consummated as presented. (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
                                                                   Pro Forma
                                                               Nine Months Ended
                                                               September 30, 2001
                                                                  (Unaudited)
                                                               ------------------
<S>                                                            <C>
Total revenues................................................      $103,777
Net income attributable to common stockholders................        25,739
Net income per basic share attributable to common stockholders          1.74
</TABLE>

                                     F-56

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(Continued)

                                  (Unaudited)


(5)  STOCKHOLDERS' EQUITY

    During March, 2002, a holder of the Company's Series B Preferred Stock
("Series B") elected to convert 58,762 Series B shares into 34,065 shares of
the Company's Common Stock ("Common"). The conversion ratio was determined
using the convertible shares at December 31, 2001 whereby 266,667 Series B
shares were convertible into 154,591 shares of Common. At September 30, 2002,
207,905 Series B shares were outstanding.

    During May 2002, the Company issued 95,000 shares of restricted stock to
certain members of the Company's management valued at $1.6 million. At
September 30, 2002, the Company has recognized approximately $0.7 million as
restricted stock compensation expense and will recognize the remaining $0.9
million over the remaining service and vesting periods of two years. Of the
95,000 shares that were issued, 10,832 shares have vested and are outstanding
as of September 30, 2002. The remaining shares will vest over a two-year period
or when the Company's stock price meets a certain price target, as defined by
the plan documents.

(6)  DERIVATIVE ACTIVITIES

    During February 2002, the Company unwound the floor portion of the April
through October 2002 collar for net proceeds of approximately $5.8 million
($0.48/Mmbtu), and then re-swapped the 56,000 Mmbtu of daily natural gas
production at $2.56/Mmbtu. Also during February 2002, the Company put in place
a collar on 20,000 Mmbtu of daily gas production from November 2002 to March
2003 with a floor of $3.20/Mmbtu and a weighted average ceiling of $3.53/Mmbtu.

    The following table details the Company's derivative contract positions
which were in place at September 30, 2002.

<TABLE>
<CAPTION>
                                          Mmbtu    Total        NYMEX
          Natural Gas Derivatives Period Per Day   Mmbtu   Type Price
          ------------------------------ ------- --------- ---- -----
          <S>                            <C>     <C>       <C>  <C>
            October 2002................ 56,000  1,736,000 Call $3.50
            October 2002................ 28,000    868,000 Call $3.15
            October 2002................ 56,000  1,736,000 Swap $2.56
            November 2002--March 2003... 20,000  3,020,000  Put $3.20
            November 2002--March 2003... 10,000  1,510,000 Call $3.40
            November 2002--March 2003... 20,000  3,020,000 Call $3.60
</TABLE>

    For October 2002 the Company has notional volumes of 84,000 Mmbtu per day
under written call derivatives in addition to 56,000 Mmbtu related to the swap
contract in place for the same period. These notional volumes exceed actual
production volumes at October 1, 2002 of approximately 70,000 MCF per day. To
the extent that the actual NYMEX price exceeds the written call strike prices
of $3.15/MCF and $3.50/MCF there would be an additional negative impact to the
Company's cash flow and results of operations.

    Through September 30, 2002, the Company has paid net cash settlements of
approximately $7.7 million related to its derivative activities. The $5.8
million gain from the sale of the put floor and the $7.7 million of net cash
paid for settlements on the derivative activities have been included in the
statement of operations as loss on derivative settlements. At October 31, 2002
the fair value of the Company's open derivative positions was a $3.1 million
mark-to-market loss, with the closed contract months for

                                     F-57

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(Continued)

                                  (Unaudited)

October and November having settled for total cash payments of $3.1 million. A
10% increase to the October 31 NYMEX prices would result in settlements of the
open contract months (December 2002 through March 2003) for the Company's
derivatives to increase by $0.7 million while a 10% decrease would result in a
$2.3 million decrease to these contract settlements versus the October 31, 2002
mark-to-market loss.

(7)  ACCOUNTING PRONOUNCEMENTS

    In October, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long Lived Assets to Be Disposed Of, it retains many of the
fundamental provisions of that Statement.

    SFAS 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment
of business. However, it retains the requirement in Opinion 30 to report
separately discontinued operations and extends that reporting to a component of
an entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. By broadening the
presentation of discontinued operations to include more disposal transactions,
the FASB has enhanced management's ability to provide information that helps
financial statement users to assess the effects of a disposal transaction on
the ongoing operations of an entity.

    Statement No. 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. The Company adopted
SFAS 144 effective January 1, 2002. The Company expects that adoption of SFAS
144 will result in increased disclosure of material oil and gas property sales
as discontinued operations.

    In August, 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) normal use of the
asset. SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement.

    Implementation of SFAS 143 is required for fiscal year 2003. To accomplish
this, the Company must identify all legal obligations for asset retirement
obligations, if any, and determine the fair value of these obligations on the
date of adoption. The determination of fair value is complex and will require
the Company to gather market information and develop cash flow models.
Additionally, the Company will be required to develop processes to track and
monitor these obligations. Due to the effort necessary to comply with the
adoption of SFAS 143, it is not practicable for management to estimate

                                     F-58

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(Continued)

                                  (Unaudited)

precisely the impact of adopting SFAS 143 at the date of this report but
adoption is likely to increase the Company's oil and gas assets, liabilities,
depreciation, depletion, and amortization ("DD&A) (hereafter defined) expense
and accretion expense due to the accretion of the associated liability.

    During second quarter 2002 the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and requires that all gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in APB No. 30. Applying APB No. 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual or infrequent or that meet the criteria for classification as an
extraordinary item. Any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB No. 30 for classification as an extraordinary item
must be reclassified. The Company does not expect that there will be any
current impact from SFAS No. 145.

    The FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, in June 2002. This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146 applies to
costs incurred in an "exit activity," which includes, but is not limited to, a
restructuring, or a "disposal activity" covered by SFAS No. 144. SFAS No. 146
will be effective for the Company in January 2003. The Company does not believe
there is any current impact of SFAS No. 146.

(8)  CREDIT FACILITY

    During September, 2002, the Company amended its credit agreement to
increase its borrowing base to $160 million and extend its maturity date to
August 31, 2004. This change was effective September 30, 2002.

                                     F-59

<PAGE>

                        REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
3TEC Energy Corporation

    We have audited the accompanying consolidated balance sheets of 3TEC Energy
Corporation and subsidiaries as of December 31, 2001 and 2000 and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for each of the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of 3TEC Energy
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years then ended in
conformity with accounting principles generally accepted in the United States
of America.

    As explained in Note 1 to the Consolidated Financial Statements, the
Company changed its method of accounting for derivative instruments and hedging
activities in 2001.

KPMG LLP

Houston Texas
March 26, 2002

                                     F-60

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                         December 31, December 31,
                                                                                             2001         2000
                                                                                         ------------ ------------
                                        ASSETS
<S>                                                                                      <C>          <C>
Current Assets:
   Cash and cash equivalents............................................................   $ 17,762     $  4,436
   Accounts receivable..................................................................     16,835       26,138
   Income tax receivable................................................................      4,464           --
   Other................................................................................      4,473        5,390

                                                                                           --------     --------
     Total Current Assets...............................................................     43,534       35,964
Properties and Equipment, at cost:
   Oil and gas properties, successful efforts method....................................    385,264      269,531
   Other property and equipment.........................................................      3,549        2,030

                                                                                           --------     --------
                                                                                            388,813      271,561
Accumulated depletion, depreciation and amortization....................................    (71,039)     (55,064)

                                                                                           --------     --------
Net Properties and Equipment............................................................    317,774      216,497

                                                                                           --------     --------
Other Assets, net.......................................................................      1,730        2,303

                                                                                           --------     --------
TOTAL ASSETS............................................................................   $363,038     $254,764

                                                                                           ========     ========

                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Accounts payable.....................................................................   $ 25,052     $ 10,746
   Accrued liabilities..................................................................      1,322        2,192
   Series C Preferred stock redemption payable..........................................      1,349        2,855
   Income taxes payable.................................................................         --        4,462
   Other current liabilities............................................................      1,468          467

                                                                                           --------     --------
     Total Current Liabilities..........................................................     29,191       20,722
Long-Term Liabilities:
   Bank Debt............................................................................    108,000       63,000
   Senior Subordinated convertible notes................................................         --       13,224
   Other long-term liabilities..........................................................         --           58
   Minority Interest....................................................................         --        1,394

                                                                                           --------     --------
     Total Long-Term Liabilities........................................................    108,000       77,676

                                                                                           --------     --------
Deferred income taxes...................................................................     45,135        6,771

                                                                                           --------     --------
TOTAL LIABILITIES.......................................................................    182,326      105,169

                                                                                           --------     --------
Commitments and Contingencies...........................................................         --           --
STOCKHOLDERS' EQUITY
   Preferred stock, $.02 par value, 20,000,000 shares authorized 266,667 designated
    Series B, 2,300,000 shares designated Series C and 725,167 shares designated
    Series D, none other designated.....................................................         --           --
   Convertible preferred stock Series B, $7.50 stated value, 266,667 shares issued and
    outstanding. $2,000 aggregate liquidation preference................................      3,627        3,627
   Convertible preferred stock Series D, 5% $24.00 stated value, 614,776 shares and
    621,930 issued and outstanding at December 31, 2001 and December 31,2000,
    respectively, $14,755 aggregate liquidation preference at December 31, 2001.........      7,485        7,572
   Common stock, $.02 par value, 60,000,000 shares authorized, 16,547,595 and
    14,687,906 shares issued at December 31, 2001 and December 31, 2000,
    respectively........................................................................        331          294
   Additional paid-in capital...........................................................    151,412      136,383
   Retained earnings....................................................................     18,906        2,768
   Treasury stock; 69,807 shares at December 31, 2001 and December 31, 2000.............     (1,049)      (1,049)

                                                                                           --------     --------
     TOTAL STOCKHOLDERS' EQUITY.........................................................    180,712      149,595

                                                                                           --------     --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..............................................   $363,038     $254,764

                                                                                           ========     ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                     F-61

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                              Year Ended
                                                       -------------------------
                                                       December 31, December 31,
                                                           2001         2000
                                                       ------------ ------------
<S>                                                    <C>          <C>
REVENUES:
   Oil, natural gas and plant income.................. $   116,080  $   102,148
   Gain on sale of properties.........................         815          800
   Gain on derivative fair value......................       3,081           --
   Other..............................................         998          813

                                                       -----------  -----------
       TOTAL REVENUES................................. $   120,974  $   103,761
EXPENSES:
   Production--
       Lease operations............................... $    15,957  $    14,994
       Production, severance and ad valorem tax.......       7,711        6,692
       Gathering, transportation and other............       3,002        1,493
   Geological and geophysical.........................       1,172          666
   Dry hole and impairments...........................      12,261           29
   Surrendered and expired acreage....................       7,875           --
   General and administrative.........................       6,991        6,141
   Interest...........................................       6,773        7,556
   Depreciation, depletion and amortization...........      30,983       19,779
   Other..............................................         250           --

                                                       -----------  -----------
       TOTAL EXPENSES................................. $    92,975  $    57,350
INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND
  DIVIDENDS TO PREFERRED STOCKHOLDERS.................      27,999       46,411
Minority Interest.....................................         511          305
Income Tax Expense....................................      10,640       14,442

                                                       -----------  -----------
NET INCOME............................................      16,848       31,664
Dividends to preferred stockholders...................         710        1,488

                                                       -----------  -----------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS........ $    16,138  $    30,176

                                                       ===========  ===========
EARNINGS PER COMMON SHARE:
   Basic.............................................. $      1.06  $      2.91

                                                       ===========  ===========
   Diluted............................................ $      0.91  $      2.28

                                                       ===========  ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
   Basic..............................................  15,170,116   10,382,836

                                                       ===========  ===========
   Diluted............................................  18,968,973   13,894,961

                                                       ===========  ===========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                     F-62

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
<TABLE>
<CAPTION>
                                                                                       Year Ended
                                                                                  -------------------
                                                                                   December  December
                                                                                   31, 2001  31, 2000
                                                                                  ---------  --------
<S>                                                                               <C>        <C>
OPERATING ACTIVITIES
Net income.......................................................................    16,848    31,664
Adjustments to reconcile net income to net cash provided by operating activities:
   Depreciation, depletion and amortization......................................    30,265    18,713
   Amortization of debt issue costs and other....................................       967     1,066
   Dry hole and impairments......................................................    12,261        29
   Surrendered and expired leases................................................     7,875        --
   Gain on derivative fair value.................................................    (3,081)       --
   Gain on sale of properties....................................................      (815)     (800)
   Deferred income taxes.........................................................     9,017     6,480
   Minority interest.............................................................       511       305
   Other changes.................................................................       166        --
Changes in operating assets and liabilities:
   Accounts receivable and other current assets..................................     9,961   (21,706)
   Account payable and accrued liabilities.......................................     5,805     8,717

                                                                                  ---------  --------
CASH PROVIDED BY OPERATING ACTIVITIES............................................    89,780    44,468
INVESTING ACTIVITIES
   Proceeds from sales of oil and gas properties.................................    36,818     5,840
   Acquisition of Magellan Exploration LLC, net of cash acquired.................        --       418
   Acquisition of Classic Resources, Inc. net of cash acquired...................   (58,670)       --
   Acquisition of Enex Resources Corporation.....................................    (3,803)       --
   Acquisition of oil and gas properties.........................................   (22,380)  (64,612)
   Development of oil and gas properties.........................................   (72,554)  (24,091)
   Additions of other assets.....................................................    (1,930)   (1,326)

                                                                                  ---------  --------
CASH USED BY INVESTING ACTIVITIES................................................  (122,519)  (83,771)
FINANCING ACTIVITIES
   Proceeds from long-term debt..................................................   130,000    66,100
   Proceeds from issuance of common stock........................................        --    68,103
   Proceeds from exercise of stock options and warrants..........................     1,590       705
   Payments on long-term debt....................................................   (85,000)  (90,600)
   Preferred stock dividends.....................................................      (525)   (1,369)
   Treasury stock purchase--Alabama dissenters...................................        --      (981)
   Redemption of Preferred Series C stock........................................        --    (1,433)
   Debt, common stock and preferred stock issue and registration costs...........        --    (2,927)

                                                                                  ---------  --------
CASH PROVIDED BY FINANCING ACTIVITIES............................................    46,065    37,598
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................................    13,326    (1,705)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................................     4,436     6,141

                                                                                  ---------  --------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $  17,762  $  4,436

                                                                                  =========  ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
   Interest...................................................................... $   6,795  $  7,539
   Income Taxes..................................................................    10,571     3,500
Non-cash investing and financing activities:
   Common stock and warrants issued in acquisition of Magellan Exploration LLC...        --    10,573
   Preferred Stock Series D issued in acquisition of Magellan Exploration LLC....        --     7,453
   Preferred Stock Series C conversions to common stock..........................        --       362
   Preferred dividends incurred but not paid.....................................       185        --
   Common stock repurchase contingency accrual--Alabama dissenters...............        --       138
   Conversion of Preferred Series C into Common Stock............................        --       910
   Preferred dividends paid in-kind..............................................        --       118
   Liability for redemption of Preferred Stock Series C..........................        --     2,856
   Deferred taxes recorded in acquisition of Classic Resources, Inc..............    29,347        --
</TABLE>

         See accompanying notes to consolidated financial statements.

                                     F-63

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                    YEARS ENDED DECEMBER 31, 2001 AND 2000
                         (in thousands, except shares)

<TABLE>
<CAPTION>
                                                           Preferred Stock
                                         ---------------------------------------------------
                                            Series B          Series C           Series D       Common Stock
                                         -------------- -------------------  ---------------  ----------------
                                         Shares   Par     Shares      Par     Shares    Par     Shares    Par   Paid-in
                                         ------- ------ ----------  -------  -------  ------  ----------  ---- --------
<S>                                      <C>     <C>    <C>         <C>      <C>      <C>     <C>         <C>  <C>
Balance January 1, 2000................. 266,667 $3,627  1,139,506  $ 5,198       --      --   5,338,771  $107 $ 57,775
Common stock ussued in merger with
 Magellan Exploration LLC...............                                                       1,085,934    22   10,251
Warrants issued in merger with Magellan
 Exploration LLC........................                                                                            300
Preferred Series D issued in merger with
 Magellan Exploration LLC...............                                     617,009   7,453
Stockholder dissenters repurchase
 contingency adjustment.................
Preferred Series C conversions..........                   (72,496)    (362)                      63,465     1      361
Common stock issued.....................                                                       8,050,000   161   67,943
Common stock offering and registration
 costs..................................                                                                         (1,497)
Preferred Series C redemption...........                (1,067,010)  (4,836)                      36,527     1      547
Reverse split fractional shares.........                                                            (314)
Employee stock option exercises.........                                                          95,190     2      648
Warrant exercises.......................                                                          18,333             55
Net Income..............................
Preferred stock dividends...............                                       4,921     119

                                         ------- ------ ----------  -------  -------  ------  ----------  ---- --------
Balance December 31, 2000............... 266,667 $3,627         --       --  621,930  $7,572  14,687,906  $294 $136,383

                                         ======= ====== ==========  =======  =======  ======  ==========  ==== ========
Employee stock option exercises.........                                                          81,682     2      739
Preferred Series D Conversions..........                                      (7,154)    (87)      7,154             85
Warrant exercises.......................                                                         283,047     6      843
Senior subordinated debt conversions....                                                       1,487,806    29   13,362
Net Income..............................
Preferred stock dividends...............
                                         ------- ------ ----------  -------  -------  ------  ----------  ---- --------
Balance December 31, 2001............... 266,667 $3,627         --  $    --  614,776  $7,485  16,547,595  $331 $151,412

                                         ======= ====== ==========  =======  =======  ======  ==========  ==== ========
</TABLE>
<TABLE>
<CAPTION>


                                         Retained  Treasury
                                         Earnings   Stock   Stockholders'
                                         (Deficit)   Par       Equity
                                         --------- -------- -------------
<S>                                      <C>       <C>      <C>
Balance January 1, 2000................. $(27,408) $(1,187)   $ 38,112
Common stock ussued in merger with
 Magellan Exploration LLC...............                        10,273
Warrants issued in merger with Magellan
 Exploration LLC........................                           300
Preferred Series D issued in merger with
 Magellan Exploration LLC...............                         7,453
Stockholder dissenters repurchase
 contingency adjustment.................               138         138
Preferred Series C conversions..........                            --
Common stock issued.....................                        68,104
Common stock offering and registration
 costs..................................                        (1,497)
Preferred Series C redemption...........                        (4,288)
Reverse split fractional shares.........                            --
Employee stock option exercises.........                           650
Warrant exercises.......................                            55
Net Income..............................   31,664               31,664
Preferred stock dividends...............   (1,488)              (1,369)

                                         --------  -------    --------
Balance December 31, 2000............... $  2,768  $(1,049)   $149,595

                                         ========  =======    ========
Employee stock option exercises.........                           741
Preferred Series D Conversions..........                            (2)
Warrant exercises.......................                           849
Senior subordinated debt conversions....                        13,391
Net Income..............................   16,848               16,848
Preferred stock dividends...............     (710)                (710)
                                         --------  -------    --------
Balance December 31, 2001............... $ 18,906  $(1,049)   $180,712

                                         ========  =======    ========
</TABLE>

          See accompanying notes to consolidated financial statements

                                     F-64

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          December 31, 2001 and 2000

(1)  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Organization

    3TEC Energy Corporation, (formerly Middle Bay Oil Company, Inc.), was
incorporated under the laws of the state of Alabama on November 20, 1992. The
Company was reincorporated in Delaware on December 7, 1999 and changed its name
to 3TEC Energy Corporation. The reincorporation and name change were part of a
series of transactions related to a securities purchase agreement that closed
on August 27, 1999 between the Company and W/E Energy Company, LLC ("W/E LLC"),
formerly known as 3TEC Energy Company, LLC, whereby the Company received $21.4
million in cash and oil and natural gas properties for the sale of common
stock, warrants and debt securities (See Note 3).

    3TEC Energy Corporation and its subsidiaries (the "Company") are engaged in
the acquisition, development, production and exploration of oil and natural gas
in the contiguous United States. The Company considers its business to be a
single operating segment. Effective November 23, 1999, the Company acquired oil
and natural gas properties and interests managed by Floyd Oil Company from a
group of private sellers. Effective February 3, 2000, the Company acquired oil
and natural gas properties through a merger with Magellan Exploration, LLC.
Effective May 31, 2000, the Company acquired oil and natural gas properties
from C.W. Resources, Inc. Effective November 15, 2000, the Company acquired oil
and natural gas properties from H.G. Westerman and a group of private sellers.
Effective January 31, 2001, the Company acquired oil and natural gas properties
through the purchase of the stock of Classic Resources, Inc.

  Significant Accounting Policies

    The Company's accounting policies reflect industry standards and conform to
generally accepted accounting principles. The more significant of such policies
are described below.

  Principles of Consolidation

    The consolidated financial statements include the accounts of the Company
and Enex Resources Corporation ("Enex") which prior to December 31, 2001 was an
80% owned subsidiary. The equity of the minority interests in Enex is shown in
the consolidated financial statements as "minority interest". On December 31,
2001, the Company acquired the remaining 20% of Enex pursuant to the merger of
Enex into a wholly-owned subsidiary of the Company for cash consideration of
$14.00 per share. All significant intercompany balances and transactions have
been eliminated in consolidation.

  Reclassifications

    Certain prior-year amounts have been reclassified to conform with current
year presentation.

  Consolidated Statements of Cash Flows

    For the purpose of cash flows, the Company considers all highly liquid
investments with a maturity date of three months or less to be cash
equivalents. Significant transactions may occur which do not directly affect
cash balances and as such will not be disclosed in the Consolidated Statements
of Cash Flows. Certain of such non-cash transactions are disclosed in the
Consolidated Statements of Shareholders' Equity relating to shares issued as
compensation, and shares issued for stock and debt of an acquired company.

  Oil and Gas Properties

    The Company follows the successful efforts method of accounting for oil and
natural gas properties, and accordingly, capitalizes all direct costs incurred
in connection with the acquisition,

                                     F-65

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000


drilling and development of productive oil and natural gas properties. Costs
associated with unsuccessful exploration are charged to expense currently.
Geological and geophysical costs and costs of carrying and retaining
unevaluated properties are charged to expense. Depreciation, depletion and
amortization of capitalized costs are computed separately for each field based
on the unit-of-production method using only proved oil and natural gas
reserves. In arriving at such rates, commercially recoverable reserves have
been estimated by an independent petroleum engineering firm. The Company
reviews its undeveloped properties continually and charges them to expense on a
property-by-property basis when it is determined that they have been condemned
by dry holes, or have otherwise diminished in value. The Company recorded
surrendered and expired acreage expense on its undeveloped properties for the
year ended December 31, 2001 of approximately $7.9 million and no surrendered
and expired acreage expense during 2000. Gains and losses are recorded on sales
of interests in proved properties and on sales of entire interests in unproved
properties. For the years ended December 31, 2001 and 2000, the Company
realized gains on sales of properties of $0.8 million and $0.8 million,
respectively.

    Proved oil and natural gas reserves are the estimated quantities of oil,
natural gas and natural gas liquids which are expected to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Reservoirs are considered proved if economic productability is
supported by either actual production or conclusive formation tests.

    The Company reviews long-lived assets for impairment when events or changes
in circumstances indicate that the carrying value of such an asset may not be
recoverable. This review consists of a comparison of the carrying value of the
asset to the asset's expected future undiscounted cash flows. Estimates of
expected future cash flows represent management's best estimate based on
reasonable and supportable assumptions and projections. If the expected future
cash flows, assuming escalated prices, are less than the carrying value of the
asset, an impairment exists and is measured as the excess of the carrying value
over the estimated fair value of the asset. The Company estimates discounted
future net cash flows to determine fair value. Any impairment provisions
recognized are permanent and may not be restored in the future. For the years
ended December 31, 2001 and 2000, the Company's proved properties were assessed
for impairment on an individual field basis and the Company recorded impairment
provisions on certain producing properties of $3.4 and $-0- million,
respectively.

  Revenue Recognition of Production Imbalances

    Oil and natural gas revenues are recorded using the sales method, whereby
the Company recognizes revenues based on the amount of oil and natural gas sold
to purchasers on its behalf not-withstanding its ownership percentage. At
December 31, 2001 and 2000, the Company's net imbalance position was immaterial.

  Hedging

    In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). In June 2000, the FASB issued
SFAS 138, Accounting for Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133. SFAS 133, as amended, establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair market value. The statement requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge criteria are
met.

                                     F-66

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000


Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The Company
adopted SFAS 133 effective January 1, 2001. Based upon the historical
volatility of oil and gas commodity prices, the Company expects that SFAS 133
could increase volatility in the Company's earnings and other comprehensive
income for periods where hedging activities are present.

    SFAS 133, in part, allows hedge accounting. SFAS 133 provides that the
effective portion of the gain or loss on a derivative instrument designated and
qualifying as a cash flow hedging instrument be reported as a component of
other comprehensive income and be reclassified into earnings in the same period
during which the hedged forecasted transaction affects earnings. The remaining
gain or loss on the derivative instrument, if any, must be recognized currently
in earnings.

    To qualify for cash flow hedge accounting, the cash flows from the hedging
instrument must be highly effective in offsetting changes in cash flows due to
changes in the underlying items being hedged. In addition, all hedging
relationships must be designated, documented, and reassessed periodically. The
Company's natural gas derivative instruments entered into during the period
were not designated as hedges at the time the instruments were executed. In
accordance with provisions of SFAS 133, these instruments have been
marked-to-market through earnings at December 31, 2001, resulting in an
increase to revenues of $3.1 million. There were no derivatives in place at
December 31, 2000.

  Earnings Per Share

    Basic earnings and loss per common share are based on the weighted average
shares outstanding without any dilutive effects considered. Diluted earnings
and loss per share reflect dilution from all potential common shares, including
options, warrants and convertible preferred stock and convertible notes.
Diluted loss per share does not include the effect of any potential common
shares if the effect would be to decrease the loss per share.

    At December 31, 2001, the Company had a weighted average of 3,798,857,
combined stock options, warrants and convertible preferred stock outstanding
included in the Company's fully-diluted per share calculation. At December 31,
2000, the Company had a weighted average of 3,789,456, combined stock options,
warrants and convertible preferred stock and notes outstanding.

    All share and per share amounts have been retroactively adjusted for a
one-for-three reverse split that was approved by the Company's shareholders on
January 14, 2000.

  Income Taxes

    Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

  Concentrations of Market Risk

    The future results of the Company will be affected by the market prices of
oil and natural gas. The availability of a ready market for oil and natural gas
in the future will depend on numerous factors

                                     F-67

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000


beyond the control of the Company, including weather, production of other oil
and natural gas, imports, marketing of competitive fuels, proximity and
capacity of oil and natural gas pipelines and other transportation facilities,
any oversupply or undersupply of oil and natural gas, the regulatory
environment, and other regional and political events, none of which can be
predicted with certainty.

  Concentrations of Credit Risk

    Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and accounts receivable. The Company places its
cash investments with high credit qualified financial institutions. Risk with
respect to receivables is concentrated primarily in the current production
revenue receivable from multiple oil and natural gas purchasers, and is typical
in the industry. For 2001, Calpine Producer Services, L.P. (formerly Highland
Energy Company) and Wagner & Brown, Ltd. accounted for approximately 22% and
19% of total oil and natural gas sales, respectively. No single customer
accounted for greater than 10% of the Company's total oil and natural gas sales
for the year ended December 31, 2000.

  Use of Estimates

    Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare the financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from these estimates.

(2)  ACQUISITIONS AND DIVESTITURES

    On January 30, 2001, the Company acquired 100% of the issued and
outstanding stock of Classic Resources Inc. (the "Classic Acquisition") for
cash consideration of approximately $53.5 million plus other acquisition costs.
The operating results of the Classic Acquisition have been included in the
consolidated financial statements since that date. Classic was a privately-held
exploration and production company with properties located in East Texas. The
Company's estimate of total net proved at the time of the acquisition for
Classic's oil and gas properties was 47 Bcfe and net daily production of
approximately 11 Mmcfe. The Company financed the acquisition under its existing
Credit Facility. The purchase price of the Classic Acquisition was allocated
principally to proved properties, with additional amounts allocated to working
capital related to amounts recorded for production related receivables and
payables in existence and accrued for at January 20, 2001.

    On May 31, 2000, we completed the acquisition of the CWR Properties (the
"CWR Acquisition") located in East Texas for cash consideration of
approximately $51.7 million. The effective date of the acquisition was January
1, 2000, and the operations are included in the Company's consolidated
financial statements beginning June 1, 2000. The CWR Acquisition was financed
under our existing Credit Facility, which we amended prior to closing the
acquisition. The total purchase price was allocated principally to oil and
natural gas properties using the purchase method of accounting.

    On February 3, 2000, we completed the acquisition of Magellan Exploration
LLC (the "Magellan Acquisition"), from certain affiliates of EnCap Investments
L.L.C. ("EnCap"), a Delaware limited liability company and an investor in W/E
LLC, and other third parties for consideration consisting of (a) 1,085,934
shares of common stock, (b) four year warrants to purchase up to 333,333 shares
of common stock at $30.00 per share, (c) 617,009 shares of 5% Series D
Convertible Preferred Stock with a redemption value of $24.00 per share and (d)
the assignment of a performance based "back-in" working interest of 5% of
Magellan's interest in 12 exploration prospects. The total purchase price of
approximately $19 million was allocated principally to proved undeveloped oil
and natural gas properties using the purchase method of accounting.

                                     F-68

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000



    The following pro forma data presents the results of the Company for the
year ended December 31, 2000, as if the Classic Acquisition and the CWR
Acquisition had occurred on January 1, 2000, and the results of the Company for
the year ended December 31, 2001 as if the Classic Acquisition had occurred on
January 1, 2001. The unaudited pro forma data assumes the acquisition of the
respective properties and the debt financing transactions related to these
acquisitions. The unaudited pro forma results are presented for comparative
purposes only and are not necessarily indicative of the results which would
have been obtained had the acquisitions been consummated as presented. (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                Pro Forma   Pro Forma
                                                                  Year        Year
                                                                  Ended       Ended
                                                                December    December
                                                                31, 2001    31, 2000
                                                               ----------- -----------
                                                               (unaudited) (unaudited)
<S>                                                            <C>         <C>
Total revenues................................................  $120,008    $120,662
Net income attributable to common stockholders................    13,958      24,266
Net income per basic share attributable to common stockholders  $   0.92    $   2.34
</TABLE>

    During 2001, the Company completed the sale of certain non-strategic oil
and gas properties for net cash proceeds of approximately $36.7 million. In
order to defer the tax gain on the sales of the properties, the Company
successfully replaced a portion of these properties in accordance with the
Like-Kind Exchange regulations of the Internal Revenue Service. At December 31,
2001, the Company had $13.9 million of cash in like-kind escrow accounts. In
January 2002, the like-kind replacement term expired in accordance with the
Internal Revenue Service regulations and the balance of the escrow accounts
were used to reduce borrowings under the Company's Credit Facility.

(3)  COMMON STOCK, WARRANT AND SENIOR SUBORDINATED CONVERTIBLE NOTE SALE TO W/E
ENERGY COMPANY, L.L.C. ("W/E LLC")

    On August 27, 1999, the Company closed a Securities Purchase Agreement (the
"Agreement") for a total of $21.4 million with W/E LLC. The Securities Purchase
Agreement and contemplated transactions were approved by the stockholders at
the Company's annual meeting on August 10, 1999.

    The controlling person of W/E LLC was EnCap. The sole member of EnCap is El
Paso Field Services Company, a Delaware corporation ("El Paso Field Services").
The controlling person of El Paso Field Services is El Paso Corporation, a
Delaware corporation. The Company received $9.8 million in cash and properties
valued at $875,000 for 1,585,185 shares of common stock and 1,200,000 warrants
(the "Warrants") and $10.7 million for a 5-year senior subordinated convertible
note with a face value of $10.7 million (See Note 6).

    On November 28, 2001, W/E LLC was dissolved and all shares of common stock
and warrants of the Company held by W/E LLC were distributed to its members.

(4)  RELATED PARTY TRANSACTIONS

    David B. Miller and D. Martin Phillips, directors of the Company, are
managing directors of EnCap, which was the controlling person of W/E LLC. Floyd
C. Wilson, Chairman and Chief Executive Officer of the Company, was also a
member of W/E LLC. Gary R. Christopher, a shareholder and director of the
Company until December 31, 2001, is employed by Kaiser-Francis Oil Co., which
owns approximately 7% of the common stock of the Company as of December 31,
2001.

                                     F-69

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000



    In 2000, the Company paid EnCap a fee of $500,000 in connection with a
private equity shelf facility related to the CWR Acquisition. As required by
the Company's Credit Facility, the private equity shelf facility would have
allowed the Company to require EnCap Investments to purchase up to $20 million
of a new class of exchangeable preferred stock from the Company. Upon
completion of the Company's public offering of common stock on June 30, 2000,
the shelf facility expired.

    The Company has a $250 million credit facility (the "Credit Facility") with
Bank One, NA, as administrative agent, Bank of Montreal, as syndication agent,
and Union Bank of California, N.A., Wells Fargo Bank Texas, National
Association, CIBC, Inc., Comerica Bank, Fleet National Bank and The Bank of
Nova Scotia as participating lenders. The borrowing base is redetermined
semi-annually and as of December 31, 2001, was $145 million. In addition, the
Company is a party to certain derivative contracts that Bank One, NA is the
counter-party to. These derivative contracts cover a portion of the Company's
anticipated natural gas production for 2002. Larry L. Helm, a director of the
Company, is responsible for the nationwide Middle Market Banking Group of Bank
One Corporation.

(5)  LONG-TERM DEBT

    Long-term debt at December 31, 2001 and 2000, consisted of the following
(in thousands):

<TABLE>
<CAPTION>
                                                        2001    2000
                                                      -------- -------
          <S>                                         <C>      <C>
          $250 million Credit Facility............... $108,000 $63,000
          Less current maturities....................       --      --
                                                      -------- -------
          Long-term debt excluding current maturities $108,000 $63,000

                                                      ======== =======
</TABLE>

    The Company's Credit Facility with Bank One, NA as agent and seven other
banks. The Credit Facility as amended, matures May 31, 2003. As of December 31,
2001, the borrowing base was set at $145 million. The borrowing base is to be
redetermined semi-annually on May 1 and November 1 and provides for interest as
revised under the Credit Facility to accrue at a rate calculated at the
Company's option as either the bank's prime rate plus a low of zero to a high
of 50 basis points or LIBOR plus basis points increasing from a low of 150 to a
high of 212.5 as loans outstanding increase as a percentage of the borrowing
base. As of December 31, 2001, the Company was paying an average of 3.68% per
annum interest on the principal balance of $108 million under the Credit
Facility. Prior to maturity, no payments of principal are required so long as
the borrowing base exceeds the loan balance. The borrowings under the Credit
Facility are secured by substantially all of the Company's oil and natural gas
properties. At December 31, 2001, the amount available to be borrowed under the
Credit Facility was approximately $37 million. Additionally, at December 31,
2001, the Company had approximately $13.9 million in cash held in like-kind
exchange escrow accounts. The Company used these funds to repay borrowings
under the Credit Facility in January, 2002. At March 7, 2002, borrowings under
the Credit Facility totaled $97 million.

    The Credit Facility is governed by various financial and other covenants,
including requirements to maintain a current ratio of one to (1:1), and an
interest rate coverage ratio. Additionally, limitations on asset dispositions,
declaration and payment of cash dividends and the entering into hedge
transactions without the bank's consent are included. Aggregate amounts of
expected required repayments of long term debt at December 31, 2001 are as
follows (in thousands):

<TABLE>
                              <S>        <C>
                              2002...... $     --
                              2003......  108,000
                              2004......       --
                              Thereafter       --
                                         --------
                              Total..... $108,000

                                         ========
</TABLE>

                                     F-70

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000



(6)  SENIOR SUBORDINATED CONVERTIBLE NOTES

    On August 27, 1999, senior subordinated convertible promissory notes (the
"Senior Subordinated Notes") were sold to W/E LLC and affiliates of Alvin V.
Shoemaker ("Shoemaker"), a former director and significant shareholder, for
$10.7 million and $0.2 million, respectively. On October 19, 1999, $2.4 million
of Senior Subordinated Notes were sold to The Prudential Insurance Company of
America ("Prudential"). The Senior Subordinated Notes bore interest at an
annual rate of 9%. Interest was payable beginning on December 31, 1999, every
March 31, June 30, September 30 and December 31, until maturity on August 27,
2004. The Company may defer payment of fifty percent (50%) of the first eight
quarterly interest payments. The Senior Subordinated Notes could be prepaid,
without premium or penalty, in whole or in part, at any time after August 27,
2001. The holders of the Senior Subordinated Notes could convert all or any
portion of outstanding principal and accrued interest at any time into shares
of Company common stock at a conversion price of $9.00 per common share, a
total of 1,469,316 common shares. The conversion price could be adjusted from
time to time based on the occurrence of certain events. In the event of a
change in control, the entire outstanding principal balance and all accrued but
unpaid interest is immediately due and payable.

    The Senior Subordinated Notes ranked senior in right of payment to all
Company notes and indebtedness other than the Credit Facility.

    During the second quarter of 2001, the Company received notice of an
election by Shoemaker to convert approximately $0.2 million of Senior
Subordinated Notes. The conversion resulted in the retirement of $0.2 million
in senior subordinated debt and the issuance of an additional 16,666 shares of
common stock of the Company.

    During the third quarter of 2001, the Company sent notice of an election to
W/E LLC to prepay the $10.7 million of Senior Subordinated Notes. Pursuant to
the terms of the convertible note agreement, W/E LLC elected instead to
exercise its right to convert the principal and accrued interest outstanding
into common shares of the Company. Under the terms of the convertible note
agreement, the balance of the note plus any accrued interest was to be
converted at $9.00 per share. The conversion by W/E LLC resulted in the
retirement of approximately $10.7 million in senior subordinated debt and the
issuance of an additional 1,206,127 shares of common stock of the Company.

    During the fourth quarter of 2001, the Company received notice of an
election by Prudential to convert approximately $2.4 million of Senior
Subordinated Notes. The conversion resulted in the retirement of $2.4MM in
senior subordinated debt and the issuance of an additional 265,013 shares of
common stock of the Company.

(7)  INCOME TAXES

    The components of income tax expense for the years ended December 31, 2001
and 2000 consisted of the following (in thousands):

<TABLE>
<CAPTION>
                               2001                   2000
                      ---------------------- ----------------------
                      Federal State   Total  Federal State   Total
                      ------- ------ ------- ------- ------ -------
            <S>       <C>     <C>    <C>     <C>     <C>    <C>
            Current.. $1,143  $  479 $ 1,622 $ 6,120 $1,842 $ 7,962
            Deferred.  7,582   1,436   9,018   6,224    256   6,480

                      ------  ------ ------- ------- ------ -------
               Total. $8,725  $1,915 $10,640 $12,344 $2,098 $14,442

                      ======  ====== ======= ======= ====== =======
</TABLE>

                                     F-71

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000



    The reconciliation of income tax computed at the U.S. federal statutory tax
rates to the provision for income taxes is as follows (in thousands):

<TABLE>
<CAPTION>
                                                       December 31,
                                                     ----------------
                                                       2001     2000
                                                     -------  -------
          <S>                                        <C>      <C>
          Income tax provision at statutory rate.... $ 9,800  $16,137
          State income taxes, net of federal benefit   1,224    1,364
          Decrease in valuation allowance...........      --   (2,523)
          Utilization of Sec. 29 tax credits........    (500)    (400)
          Other.....................................     116     (136)

                                                     -------  -------
             Total.................................. $10,640  $14,442

                                                     =======  =======
</TABLE>

    The Company's net deferred tax liability at December 31, 2001 and 2000 is
as follows (in thousands):

<TABLE>
<CAPTION>
                                                   2001     2000
                                                 -------  -------
              <S>                                <C>      <C>
              Deferred tax liability
                 Oil and natural gas properties. $47,563  $ 9,547

                                                 -------  -------
              Deferred tax asset
                 NOL carryforward...............  (5,237)  (5,812)
                 AMT tax credit carryforward....    (327)     (36)
                 Other..........................    (430)    (495)

                                                 -------  -------
                                                  (5,994)  (6,343)
                 Valuation allowance............   3,566    3,566

                                                 -------  -------
              Net deferred tax liability........ $45,135  $ 6,770

                                                 =======  =======
</TABLE>

    In connection with the Classic Acquisition, the Company recorded $29.3
million in deferred taxes for the future tax impact of the difference between
the allocated book basis and the historical tax basis of the Classic Properties.

    In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon projections for future taxable
income over the periods in which the deferred tax assets are deductible and the
Section 382 limitation discussed below, management believes it is more likely
than not that the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 2001 and
2000. The net change in the total valuation allowance for the years ended
December 31, 2001 and 2000 was $-0- and $2.5 million and the amount remaining
at December 31, 2001 is $3.6 million.

    The Enex acquisition caused an ownership change pursuant to Section 382 in
March 1998. As a result of this ownership change, the Company's use of its net
operating loss carryforwards subsequent to that date will be limited. The Floyd
Oil Acquisition in November 1999 also caused an ownership change pursuant to
Section 382. As a result of these changes, the Company's use of its net
operating loss carryforwards subsequent to that date will be limited. In
February 2000, Enex had an ownership change pursuant to Section 382 with
respect to its net operating losses.

                                     F-72

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000



    As of December 31, 2001, the Company had net operating loss carryforwards
of approximately $14.9 million, expiring beginning in 2009 through 2019.

(8)  RETIREMENT PLAN AND EMPLOYEE INCENTIVE PLAN

    All of the employees of the Company are eligible to participate in a
defined contribution plan that provides for maximum employee contributions of
15% of total wages paid to employees for the year and Company contributions.
Company contributions made to the plan for the years ending December 31, 2001
and 2000 were $462,763 and $135,225, respectively.

(9)  STOCK OPTION PLANS

    The Company's stock option plans authorize the granting of options to key
employees and non-employee directors at prices equivalent to the market value
at the date of grant. Options generally become exercisable in the following
manner: 50% upon the date of grant with the remaining 50% exercisable in three
annual installments commencing one year after the date of grant and, if not
exercised, expire 10 years from the date of grant. The Company accounts for
employee stock-based compensation using the intrinsic value method and since
the exercise price of the options granted is equal to the quoted market price
of the Company's stock at the grant date, no compensation costs have been
recognized for its stock option plans. Had compensation cost for the Company's
Plans been determined based on the fair value at the grant date for stock
options granted for the years ending December 31, 2001 and 2000, the Company's
net income and income per share would have been adjusted to the pro forma
amounts listed below (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                   December 31, December 31,
                                                       2001         2000
                                                   ------------ ------------
    <S>                                            <C>          <C>
    Net Income attributable to Common Stockholders
       As Reported................................   $16,137      $30,176
       Pro Forma..................................   $13,446      $21,889
    Net Income per common share, diluted
       As Reported................................   $  0.91      $  2.28
       Pro Forma..................................   $  0.77      $  1.58
</TABLE>

    The fair value of grants was estimated on the date of grant using the Black
Scholes option pricing model with the following weighted-average assumptions
used in 2001 and 2000, respectively: risk free interest rates of 3.96% and
6.48%, expected volatility of 69% and 72%, no dividend yield, and an expected
life of the option of 3 years in 2001 and 2000. The weighted average fair value
of stock options granted in 2001 and 2000 was $7.02 and $5.72 per share,
respectively.

                                     F-73

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000



    A summary of the status of the Company's plans as of December 31, 2001 and
2000, and changes during the years ended on those dates is presented below:

<TABLE>
<CAPTION>
                                                              Average Exercise
                                                     Shares   Price Per Share
                                                   ---------  ----------------
  <S>                                              <C>        <C>
  Options outstanding at January 1, 2000..........   335,922       $15.00
     Granted in 2000.............................. 2,898,500       $11.07
     Exercised in 2000............................   (95,190)      $ 6.83
     Forfeited in 2000............................  (248,160)      $16.39
                                                   ---------       ------
  Options outstanding at December 31, 2000........ 2,891,072       $11.15
     Granted in 2001..............................   502,835       $14.67
     Exercised in 2001............................   (81,682)      $ 9.12
     Forfeited in 2001............................   (36,729)      $18.53
                                                   ---------       ------
  Options outstanding at December 31, 2001........ 3,275,496       $11.66
  Options outstanding at December 31, 2000........ 2,891,072       $11.15
  Options exercisable at December 31, 2001........ 2,058,765        11.45
  Options exercisable at December 31, 2000........ 1,442,995        11.16
  Options available for grant at December 31, 2001 1,012,527
  Options available for grant at December 31, 2000   275,298
</TABLE>
--------
    At December 31, 2001, the range of exercise prices and weighted average
remaining contractual life of options outstanding was $4.50 to $18.56 and 8.78
years, respectively.

    Warrants to purchase 1,216,822 shares and 266,226 shares of common stock at
$3.00 per share were issued on August 27, 1999 and October 19, 1999,
respectively, and warrants to purchase 333,333 shares of common stock at $30.00
per share were issued on February 3, 2000, are excluded from the table above
because the warrants were issued in conjunction with the sales of stock and are
not stock-based compensation. During 2001, warrants to purchase 283,047 shares
of common stock at $3.00 were exercised.

(10)  STOCKHOLDERS' EQUITY

    Preferred Stock--Series B

    In connection with the merger of Shore Oil Company, effective June 30,
1997, the Company issued 266,667 shares of Series B Preferred Stock ("Series
B"). The Series B is nonvoting and pays no dividends. The Series B has a
liquidation value of $7.50 a share. Until December 31, 2002, any holder of the
Series B may convert all or any portion of Series B shares into shares of
Company Common Stock ("Common"). The number of shares of Common into which the
total number of Series B shares may be converted is 88,889 shares plus the
result of multiplying (i) (the value of approximately 40,000 net mineral acres
owned by the Company in South Louisiana (the "Mineral Acres") minus $2,000,000)
divided by $8,000,000 times (ii) 355,555. In no event shall the aggregate total
number of shares of Common into which the Series B are converted exceed 444,444
shares. Unless the Company has given notice to redeem the Series B shares, any
outstanding shares of Series B shall be automatically be converted on December
31, 2002.

    At December 31, 2001, the value of the Mineral Acres had increased to a
level that resulted in the 266,667 shares of Series B being convertible into
154,591 shares of Common. At December 31, 2001, none of the Series B had been
converted.

                                     F-74

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000



  Preferred Stock--Series C

    On August 31, 2000, the Company sent notices to the holders of its Series C
Preferred Stock (the "Series C") advising that the Series C would be redeemed
on September 30, 2000. The Series C had a redemption price of $5.00 per share
and the holders had the right to convert their Series C shares into Company
common stock at a ratio of one share of common for three shares of Series C
prior to September 30, 2000. A total of 2,101,827 shares of the Series C were
outstanding on September 30, 2000 with 1,293,521 (62%) held by the Company's
then 80% owned subsidiary, Enex. 109,580 Series C shares were converted to
36,527 shares of common stock and approximately 1,992,247 Series C shares were
redeemed. On a consolidated basis, the Company's initial liability for the
Series C redemption was approximately $4.8 million. As a result of the Series C
redemption, the Company recognized a charge to dividend expense in 2000 of
$498,706. At December 31, 2001, $1.3 million remained to be funded.

  Preferred Stock--Series D

    On February 3, 2000, we completed the Magellan Acquisition, from certain
affiliates of EnCap and an investor in W/E LLC, and other third parties for
consideration consisting of (a) 1,085,934 shares of common stock, (b) four year
warrants to purchase up to 333,333 shares of common stock at $30.00 per share,
(c) 617,009 shares of 5% Series D Convertible Preferred Stock with a redemption
value of $24.00 per share and (d) the assignment of a performance based
"back-in" working interest of 5% of Magellan's interest in 12 exploration
prospects. The total purchase price of approximately $19 million was allocated
principally to proved undeveloped oil and natural gas properties. During 2001,
7,154 shares of the Series D were converted to common stock.

  Common Stock

    On June 30, 2000, the Company completed its public offering of 8.05 million
shares of the Company's common stock (priced at $9.00 per share). The net
proceeds, approximately $66.6 million, were used primarily to repay a portion
of the outstanding debt under the amended Credit Facility.

    On January 14, 2000, the Company's stockholders voted to affect a
one-for-three reverse split of the Company's common stock for the stockholders
of record on December 9, 1999. The par value of these shares was transferred to
additional paid-in capital. All common share and earnings per common share
amounts have been retroactively restated in the accompanying consolidated
financial statements to reflect the reverse stock split.

    On August 27, 1999, the Company sold to W/E LLC 1,585,185 shares of common
stock and five-year warrants to purchase 1,200,000 shares of common stock for
$9.8 million in cash and oil and natural gas properties valued at $0.9 million.
On the same date, the Company sold 22,222 shares of common stock and five-year
warrants to purchase 16,822 shares of common stock to Shoemaker for $0.2
million (See Notes 3 and 6).

    On October 19, 1999, the Company closed a private placement of securities
to Prudential. The economic terms and conditions of the private placement are
similar to those of the securities purchase agreement with W/E LLC and
Shoemaker entered into on July 1, 1999. The private placement consisted of the
sale of 351,681 shares of common stock and five-year warrants to purchase
266,226 shares at $3.00 per share of common stock for $2.4 million and a
five-year senior subordinated convertible note for $2.4 million (See Note 6).

                                     F-75

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000



    The warrants issued to W/E LLC, Shoemaker and Prudential are exercisable
for $3.00 per share and expire five years from the issue date. Sixty percent of
the warrants were immediately exercisable, in whole or in part at any time
until the expiration date. An additional 10% of the warrants may be exercised
at each anniversary of the grant date until expiration. At December 31, 2001,
1,200,000 warrants were exercisable. As a result of the conversion of the
entire principal balance of the Senior Subordinated Notes during 2001, all of
the warrants became immediately exercisable. During 2001, warrants to purchase
283,047 shares of common stock at $3.00 were exercised.

(11)  COMMITMENTS AND CONTINGENCIES

    On November 18, 1999, the Company's shareholders approved a reincorporation
of the Company from Alabama to Delaware (See Note 1). The Alabama Code has a
shareholder dissent provision that allows a shareholder to dissent from the
reincorporation and demand cash payment equal to the fair value of the common
stock owned at the date of the reincorporation. Before the November 18 meeting,
the Company received shareholder dissents representing ownership of 99,438
shares of common stock. Over the period December 15, 1999 to January 25, 2000,
the Company received formal demands for payment from the dissenting
shareholders (the "dissenters"). At December 31, 1999 the Company had accrued
the estimated cash payment to the dissenters of approximately $1.1 million. The
Company made an offer to the dissenters on March 14, 2000 and the dissenters
made a counteroffer in late March. On May 26, 2000, the Company agreed to a
settlement with the dissenters for them to surrender 62,549 shares of common
stock for a total of $980,800, including interest. The settlement closed on
June 30, 2000 and the shares are held by the Company as treasury stock. A
shareholder holding 36,889 shares of common stock agreed to withdraw his
dissent.

  Commitments and Contingencies

    The Company has commitments for operating leases (primarily for office
space) in Houston, Texas. Rental expense for office space was $670,842 in 2001
and $390,452 in 2000. Future minimum lease commitments at December 31, 2001 are
$1,141,980 in 2002; $1,308,336 in 2003; $1,342,046 in 2004; $889,263 in 2005;
$847,822 in 2006; and $1,769,192 in years thereafter.

    The Company is a defendant in various legal proceedings which are
considered routine litigation incidental to the Company's business, the
disposition of which management believes will not have a material effect on the
financial position or results of operations of the Company.

(12)  ACCOUNTING PRONOUNCEMENTS

    In October, 2001, the FASB issued SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS 144
supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that Statement.

    SFAS 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment
of business. However, it retains the requirement in Opinion 30 to report
separately discontinued operations and extends that reporting to a component of
an entity that either has been

                                     F-76

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000


disposed of (by sale, abandonment, or in a distribution to owners) or is
classified as held for sale. By broadening the presentation of discontinued
operations to include more disposal transactions, the FASB has enhanced
managements ability to provide information that helps financial statement users
to assess the effects of a disposal transaction on the ongoing operations of an
entity.

    Statement No. 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. The Company does not
anticipate the adoption of SFAS 144 to have a material adverse impact on its
financial position or results of operations.

    In August, 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) normal use of the
asset. SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement.

    Implementation of SFAS 143 is required for fiscal year 2003. To accomplish
this, the Company must identify all legal obligations for asset retirement
obligations, if any, and determine the fair value of these obligations on the
date of adoption. The determination of fair value is complex and will require
the Company to gather market information and develop cash flow models.
Additionally, the Company will be required to develop processes to track and
monitor theses obligations. Due to the effort necessary to comply with the
adoption of SFAS 143, it is not practicable for management to estimate the
impact of adopting SFAS 143 at the date of this report.

    In July 2001, the FASB issued SFAS 141, "Business Combinations' and SFAS
142, "Goodwill and Other Intangible Assets". SFAS 141 requires that all
business combinations be accounted for under the purchase method and that
certain intangible assets in a business combination be recognized as assets
apart from goodwill. The company is required to implement SFAS 141 for all
business combinations for which the date of acquisition is July 1, 2001 or
later. SFAS 142 requires that ratable amortization of goodwill be replaced with
periodic tests of the impairment of goodwill and that intangible assets other
than goodwill should be amortized over their useful lives. Implementation of
SFAS 142 is required for fiscal year 2002. The Company does not anticipate the
adoption of SFAS 142 to have a material adverse impact on its financial
position or results of operations.

(13)  FINANCIAL INSTRUMENTS

  Oil and Natural Gas Derivatives

    At December 31, 2001, the Company has a collar on 40,000 Mmbtu of daily
natural gas production for the NYMEX contract period of January through March
of 2002, with a floor of $2.67/Mmbtu and a ceiling of $3.15/Mmbtu.
Additionally, 3TEC has placed 56,000 Mmbtu of daily natural gas production from
April through October of 2002 into a collar with a floor of $2.90/Mmbtu and

                                     F-77

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000


an average ceiling of $3.38/Mmbtu. The fair value of these contracts at
December 31, 2001 was approximately $3.1 million. The Company did not designate
these derivative instruments as hedges as such these contracts have been
marked-to-market through earnings at December 31, 2001 and will be during each
quarter that the contract is outstanding.

    During February 2002, the Company unwound the April through October 2002
collar for net proceeds of approximately $5.8 million ($.48 per Mmbtu), and
then swapped 56,000 Mmbtu of daily natural gas production at $2.56/Mmbtu. Also
during February 2002, the Company put in place a collar on 20,000 Mmbtu of
daily gas production from November 2002 to March 2003 with a floor of
$3.20/Mmbtu and a weighted average ceiling of $3.53/Mmbtu.

    At December 31, 2000, the Company had no open derivative instruments.

    In February 2000, the Company entered into fixed swap agreements covering
2,000 barrels of oil per day for the period March through October 2000 at a
weighted average NYMEX West Texas Intermediate price of $25.96 per barrel.
During the year ended December 31, 2000, the Company's oil revenues were
reduced by the effect of the hedge by $2.1 million.

    Fair value of cash, receivables and payables approximates carrying value.
Fair value of long-term debt also approximates carrying value due to the nature
of the Credit Facility, whereby the interest rates are floating rates which
reflect market rates.

  Counterparty Risk

    The Company's couterparties to the derivative contracts open at December
31, 2001 are Bank One, NA and Bank of Montreal, both commercial banks who are
also participants in the Company's Credit Facility. We feel the
credit-worthiness of our current counterparties is sound and do not anticipate
any non-performance of contractual obligations.

(14)  QUARTERLY FINANCIAL DATA (Unaudited)

    The following unaudited summarized quarterly financial data is presented in
thousands, except per share data.

<TABLE>
<CAPTION>
                                                            2001
                                            -----------------------------------
                                            1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
                                            -------- -------- -------- --------
<S>                                         <C>      <C>      <C>      <C>
Total Revenues............................. $44,296  $39,879  $17,530  $ 19,269
Operating Income (loss)....................  26,294   21,495     (766)  (19,024)
Net Income (loss)..........................  16,177   13,209     (915)  (11,623)
Net Income (loss) per share (fully-diluted) $  0.86  $  0.70  $ (0.07) $  (0.72)
                                                            2000
                                            -----------------------------------
                                            1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
                                            -------- -------- -------- --------
Total Revenues............................. $17,609  $21,986  $26,893  $ 37,273
Operating Income...........................   4,764    7,505   13,852    20,290
Net Income.................................   3,116    4,914    9,085    14,549
Net Income per share (fully-diluted)....... $  0.35  $  0.50  $  0.50  $   0.93
</TABLE>

                                     F-78

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000



    The financial results of the Company have been restated for the first and
second quarters of 2001. The changes reflect adjustments to oil and natural gas
production and revenues as a result of the Company's overaccrual of revenue
related to these quarters. The impact of the adjustments decreased the
previously reported amounts as follows:

<TABLE>
<CAPTION>
                                                        2001
                                                  -----------------
                                                  1st Qtr. 2nd Qtr.
                                                  -------- --------
            <S>                                   <C>      <C>
            Total Revenues.......................  $4,345   $3,494
            Cost and operating expenses..........     693      961
            Operating Income.....................   3,652    2,533
            Net Income...........................   2,272    1,571
            Net Income per share, (fully-diluted)    0.12     0.08
</TABLE>

(15)  SUBSEQUENT EVENTS

    During January 2002, the $13.9 million of cash being held in like-kind
escrow accounts was returned to the Company and used to pay down borrowings
under the Company's Credit Facility.

    During February 2002, the Company unwound the April through October 2002
collar for net proceeds of approximately $5.8 million ($.48 per Mmbtu), and
then swapped 56,000 Mmbtu of daily natural gas production at $2.56/Mmbtu. Also
during February 2002, the Company put in place a collar on 20,000 Mmbtu of
daily gas production from November 2002 to March 2003 with a floor of
$3.20/Mmbtu and a weighted average ceiling of $3.53/Mmbtu.

(16)  SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION (UNAUDITED)

  Capitalized Costs and Costs Incurred

    The following tables present the capitalized costs related to oil and
natural gas producing activities and the related depreciation, depletion,
amortization and impairment as of December 31, 2001 and 2000 and costs incurred
in oil and natural gas property acquisition, exploration and development
activities (in thousands) for the years ended December 31, 2001 and 2000.

<TABLE>
<CAPTION>
                                                                         2001      2000
                                                                       --------  --------
<S>                                                                    <C>       <C>
Capitalized Costs
   Proved properties.................................................. $374,449  $263,801
   Nonproducing leasehold.............................................   10,974     6,477
   Accumulated depreciation, depletion, amortization and impairment...  (70,299)  (54,260)

                                                                       --------  --------
Net capitalized costs................................................. $315,124  $216,018

                                                                       ========  ========
Costs Incurred
   Proved properties.................................................. $ 75,765  $ 79,770
   Unproved properties................................................    8,560        95
   Exploration costs..................................................   19,731       695
   Development costs..................................................   63,358    25,346

                                                                       --------  --------
       Total.......................................................... $167,414  $105,906

                                                                       ========  ========
Depletion, depreciation, amortization and impairment.................. $ 32,982  $ 18,459

                                                                       ========  ========
</TABLE>

                                     F-79

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000



  Estimated Quantities of Reserves

    The Company has interests in oil and natural gas properties that are
located principally in Texas, Louisiana, Oklahoma and New Mexico. The Company
does not own or lease any oil and natural gas properties outside the United
States. There are no quantities of oil and natural gas subject to long-term
supply or similar agreements with any governmental agencies.

    The Company retains independent engineering firms to provide year-end
estimates of the Company's future net recoverable oil, natural gas and natural
gas liquids reserves. In 2001 and 2000, such estimates were prepared by Ryder
Scott Company, L.P. The reserve information was prepared in accordance with
guidelines established by the Securities and Exchange Commission.

    Estimated proved net recoverable reserves as shown below include only those
quantities that can be expected to be commercially recoverable at prices and
costs in effect at the balance sheet dates under existing regulatory practices
and with conventional equipment and operating methods. Proved developed
reserves represent only those reserves expected to be recovered through
existing wells. Proved undeveloped reserves include those reserves expected to
be recovered from new wells or on undrilled acreage or from existing wells on
which a relatively major expenditure is required for recompletion.

    Net quantities of proved developed and undeveloped reserves of oil,
including condensate and natural gas liquids, for the years ended December 31,
2001 and 2000 are summarized as follows:

<TABLE>
<CAPTION>
                                              2001                 2000
                                      -------------------  -------------------
                                          Oil       Gas        Oil       Gas
                                      (MBbls) (1)  (MMcf)  (MBbls) (1)  (MMcf)
                                      ----------- -------  ----------- -------
<S>                                   <C>         <C>      <C>         <C>
Proved Reserves Beginning of year....   10,672    237,693     9,835    159,699
   Purchases of reserves in place....      211     33,712     1,981     85,437
   Extensions and discoveries........      308     11,547        51      2,699
   Revisions of previous estimates...   (1,520)   (18,822)      659      8,698
   Sales of reserves in place........   (3,382)   (10,512)     (715)    (1,076)
   Production for the year...........     (952)   (22,352)   (1,139)   (17,764)

                                        ------    -------    ------    -------
       End of year...................    5,337    231,266    10,672    237,693

                                        ======    =======    ======    =======
Proved Developed Reserves............
   Beginning of year.................    9,895    177,252     9,358    122,914

                                        ======    =======    ======    =======
   End of year.......................    4,705    175,659     9,895    177,252

                                        ======    =======    ======    =======
</TABLE>
--------
(1) Includes oil, condensate and plant product barrels.

  Standardized Measure of Discounted Future Net Cash Flows From Proved Reserves

    The following is a summary of the standardized measure of discounted future
net cash flows related to the Company's proved oil and natural gas reserves.
For these calculations, estimated future cash flows from estimated future
production of proved reserves are computed using oil and natural gas prices as
of the end of each period presented. Future development and production costs
attributable to the proved reserves were estimated assuming that existing
conditions would continue over the

                                     F-80

<PAGE>

                   3TEC ENERGY CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                          December 31, 2001 and 2000


economic lives of the individual leases and costs were not escalated for the
future. Estimated future income taxes were calculated by applying statutory tax
rates (based on current law adjusted for permanent differences and tax credits)
to the estimated future pre-tax net cash flows related to proved oil and
natural gas reserves, less the tax basis of the properties involved.

    The Company cautions against using this data to determine the value of its
oil and natural gas properties. To obtain the best estimate of the fair value
of the oil and natural gas properties, forecasts of future economic conditions,
varying discount rates, and consideration of other than proved reserves would
have to be incorporated into the calculation. In addition, there are
significant uncertainties inherent in estimating quantities of proved reserves
and in projecting rates of production that impair the usefulness of the data.

    The standardized measure of discounted future net cash flows relating to
proved oil and natural gas reserves for the years ended December 31, 2001 and
2000 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                             2001       2000
                                                          ---------  ----------
<S>                                                       <C>        <C>
Future cash inflows...................................... $ 628,537  $2,349,534
Future production costs and development costs............  (243,201)   (352,703)
Future income tax expenses...............................   (58,051)   (676,227)

                                                          ---------  ----------
Future net cash flows....................................   327,285   1,320,604
10% discount to reflect timing of cash flows.............  (145,686)   (627,930)

                                                          ---------  ----------
Standardized measure of discounted future net cash flows. $ 181,599  $  692,674

                                                          =========  ==========
</TABLE>

    The following are the principal sources of changes in the standardized
measure of discounted future net cash flows for the years ended December 31,
2001 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                           2001       2000
                                                        ---------  ---------
   <S>                                                  <C>        <C>
   Sales of oil and natural gas, net of production cost $ (89,410) $ (78,969)
   Net changes in prices and production cost...........  (765,134)   467,920
   Extensions and discoveries..........................    11,388     15,393
   Purchases of reserves...............................    26,461    397,280
   Sales of reserves...................................   (22,682)    (8,789)
   Revisions of previous quantity estimates............   (24,809)    39,442
   Net change in income taxes..........................   322,700   (304,816)
   Accretion of discount...............................   104,736     19,843
   Changes in production rates (timing) and other......   (74,325)    (3,371)

                                                        ---------  ---------
   Change for year..................................... $(511,075) $ 543,933

                                                        =========  =========
</TABLE>

    The period end prices of oil and natural gas at December 31, 2001 and 2000,
used in the above table were $19.84 and $25.31 per barrel of oil and $2.57 and
$9.40 per thousand cubic feet of natural gas, respectively.


                                     F-81

<PAGE>

                                                                        ANNEX A

                         AGREEMENT AND PLAN OF MERGER

                                 By and Among

                   PLAINS EXPLORATION & PRODUCTION COMPANY,

                              PXP GULF COAST INC.

                                      and

                            3TEC ENERGY CORPORATION

                         Dated as of February 2, 2003

<PAGE>

                               TABLE OF CONTENTS

<TABLE>
   <C>     <S>                                                            <C>
   ARTICLE I THE MERGER..................................................  1
       1.1 The Merger....................................................  1
       1.2 Effective Time of the Merger..................................  1
       1.3 Tax Treatment.................................................  1

   ARTICLE II THE SURVIVING CORPORATION..................................  2
       2.1 Certificate of Incorporation..................................  2
       2.2 Bylaws........................................................  2
       2.3 Directors and Officers........................................  2

   ARTICLE III CONVERSION OF SHARES......................................  2
       3.1 Conversion of Capital Stock...................................  2
       3.2 Surrender and Payment.........................................  4
       3.3 Stock Options; Warrants; Restricted Stock.....................  5
       3.4 No Fractional Shares..........................................  6
       3.5 Dissenter's Rights............................................  6
       3.6 Closing.......................................................  6

   ARTICLE IV REPRESENTATIONS AND WARRANTIES OF TARGET...................  6
       4.1 Organization and Qualification................................  6
       4.2 Capitalization................................................  7
       4.3 Authority.....................................................  7
       4.4 Consents and Approvals; No Violation..........................  8
       4.5 Target SEC Reports............................................  9
       4.6 Financial Statements..........................................  9
       4.7 Absence of Undisclosed Liabilities; Liabilities as of Year End  9
       4.8 Absence of Certain Changes....................................  9
       4.9 Taxes......................................................... 10
      4.10 Litigation.................................................... 10
      4.11 Employee Benefit Plans; ERISA................................. 11
      4.12 Environmental Liability....................................... 12
      4.13 Compliance with Applicable Laws............................... 13
      4.14 Insurance..................................................... 13
      4.15 Labor Matters; Employees...................................... 13
      4.16 Reserve Reports............................................... 14
      4.17 Permits....................................................... 15
      4.18 Material Contracts............................................ 15
      4.19 Required Stockholder Vote or Consent.......................... 15
      4.20 Proxy/Prospectus; Registration Statement...................... 15
      4.21 Intellectual Property......................................... 16
      4.22 Hedging....................................................... 16
      4.23 Brokers....................................................... 16
      4.24 Tax-Free Reorganization....................................... 16
      4.25 Fairness Opinion.............................................. 19
      4.26 Takeover Laws................................................. 19

   ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB..... 19
       5.1 Organization and Qualification................................ 19
       5.2 Capitalization................................................ 20
       5.3 Authority..................................................... 21
       5.4 Consents and Approvals; No Violation.......................... 21
       5.5 Parent SEC Reports............................................ 22
       5.6 Parent Financial Statements................................... 22
       5.7 Absence of Undisclosed Liabilities............................ 22
</TABLE>

                                      i

<PAGE>

<TABLE>
  <C>     <S>                                                             <C>
      5.8 Absence of Certain Changes..................................... 22
      5.9 Taxes.......................................................... 23
     5.10 Litigation..................................................... 24
     5.11 Employee Benefit Plans; ERISA.................................. 24
     5.12 Environmental Liability........................................ 25
     5.13 Compliance with Laws and Parent Material Contracts............. 26
     5.14 Insurance...................................................... 26
     5.15 Labor Matters; Employees....................................... 27
     5.16 Reserve Reports................................................ 27
     5.17 Permits........................................................ 28
     5.18 Required Stockholder Vote or Consent........................... 28
     5.19 Proxy/Prospectus; Registration Statement....................... 28
     5.20 Intellectual Property.......................................... 28
     5.21 Hedging........................................................ 28
     5.22 Brokers........................................................ 28
     5.23 Tax Matters.................................................... 29

  ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER...................... 31
      6.1 Conduct of Business by Target Pending the Merger............... 31
      6.2 Conduct of Business by Parent Pending the Merger............... 33

  ARTICLE VII ADDITIONAL AGREEMENTS...................................... 35
      7.1 Access and Information......................................... 35
      7.2 Acquisition Proposals.......................................... 35
      7.3 Directors' and Officers' Indemnification and Insurance......... 36
      7.4 Further Assurances............................................. 37
      7.5 Expenses....................................................... 37
      7.6 Cooperation.................................................... 37
      7.7 Publicity...................................................... 37
      7.8 Additional Actions............................................. 37
      7.9 Filings........................................................ 38
     7.10 Consents....................................................... 38
     7.11 Employee Matters; Benefit Plans................................ 38
     7.12 Board, Committees and Executive Officers....................... 38
     7.13 Stockholders' Meetings......................................... 38
     7.14 Preparation of the Proxy/Prospectus and Registration Statement. 39
     7.15 Stock Exchange Listing......................................... 40
     7.16 Notice of Certain Events....................................... 40
     7.17 Site Inspections............................................... 40
     7.18 Affiliate Agreements; Tax Treatment............................ 41
     7.19 Stockholder Litigation......................................... 41
     7.20 Certain Parent Board Approvals................................. 41
     7.21 Optional Redemption or Liquidation of Target D Preferred Shares 41

  ARTICLE VIII CONDITIONS TO CONSUMMATION OF THE MERGER.................. 42
      8.1 Conditions to the Obligation of Each Party..................... 42
      8.2 Conditions to the Obligations of Parent........................ 42
      8.3 Conditions to the Obligations of Target........................ 43

  ARTICLE IX SURVIVAL.................................................... 44
      9.1 Survival of Representations and Warranties..................... 44
      9.2 Survival of Covenants and Agreements........................... 44
</TABLE>

                                      ii

<PAGE>

<TABLE>
                   <C>         <S>                             <C>
                   ARTICLE X TERMINATION, AMENDMENT AND WAIVER 44
                       10.1    Termination.................... 44
                       10.2    Effect of Termination.......... 45

                   ARTICLE XI MISCELLANEOUS................... 46
                       11.1    Notices........................ 46
                       11.2    Severability................... 47
                       11.3    Assignment..................... 47
                       11.4    Interpretation................. 47
                       11.5    Counterparts................... 47
                       11.6    Entire Agreement............... 47
                       11.7    Governing Law.................. 47
                       11.8    Submission to Jurisdiction..... 47
                       11.9    Attorneys' Fees................ 48
                      11.10    No Third Party Beneficiaries... 48
                      11.11    Disclosure Schedule............ 48
                      11.12    Amendments and Supplements..... 48
                      11.13    Extensions, Waivers, Etc....... 48
</TABLE>

                                      iii

<PAGE>

                            INDEX OF DEFINED TERMS

<TABLE>
<CAPTION>
                 Term                                Section
                 ----                              -----------
                 <S>                               <C>
                 Additional Cash.................. 3.1(b)(i)
                 Affiliated Group................. 4.24(y)(ii)
                 Agreement........................ Preamble
                 Ancillary Agreements............. 4.3
                 Assessment....................... 7.17
                 Audit............................ 4.9(f)
                 Cash Consideration............... 3.1(b)(i)
                 Closing.......................... 3.6
                 Closing Date..................... 3.6
                 Code............................. Preamble
                 Common Conversion Consideration.. 3.1(b)(i)
                 Common Stock Certificate......... 3.1(b)(i)
                 Common Stock Merger Consideration 3.1(b)(i)
                 Confidentiality Agreements....... 7.1
                 Contract Employees............... 4.11(e)
                 Customary Post-Closing Consents.. 4.4(b)
                 D&O Insurance.................... 7.3(c)
                 de minimis Shares................ 3.1(b)(i)
                 DGCL............................. 1.1
                 Director Nominees................ 7.12
                 Dissenting Shares................ 3.5
                 Dissenting Stockholder........... 3.5
                 Effective Time................... 1.2
                 Enforceability Exception......... 4.3
                 Environmental Laws............... 4.12(a)
                 ERISA............................ 4.11(a)
                 Exchange Act..................... 4.4(b)
                 Exchange Agent................... 3.2(a)
                 Exchange Fund.................... 3.2(a)
                 Exchange Instructions............ 3.2(b)
                 Exchange Ratio................... 3.1(b)(i)
                 Expense Cap...................... 10.2(b)(i)
                 Expenses......................... 7.5(b)
                 GAAP............................. 4.6
                 Governmental Authority........... 3.2(c)
                 Hazardous Substances............. 4.12(b)
                 Hydrocarbons..................... 4.16(a)
                 Indemnified Liabilities.......... 7.3(a)
                 Indemnified Party................ 7.3(a)
                 Inspected Party.................. 7.17
                 Inspecting Party................. 7.17
                 Intellectual Property............ 4.21
                 Liens............................ 4.4(e)
                 Market Price..................... 3.1(b)(iii)
                 Merger........................... Preamble
                 Merger Consideration............. 3.1(a)
                 Merger Sub....................... Preamble
                 Minimum Market Price............. 3.1(b)(iii)
                 Oil and Gas Interests............ 4.16(a)
                 Parent........................... Preamble
</TABLE>

                                      iv

<PAGE>

<TABLE>
<CAPTION>
             Term                                     Section
             ----                                 ----------------
             <S>                                  <C>
             Parent Benefit Plans................ 5.11(a)
             Parent Common Shares................ 3.1(b)(i)(y)
             Parent Disclosure Schedule.......... 5.1(a), 5.2(b)
             Parent Engagement Letters........... 5.22
             Parent ERISA Affiliate.............. 5.11(a)
             Parent Incentive Plan............... 7.13(b)
             Parent Material Adverse Effect...... 5.1(c)
             Parent Material Contract............ 5.13
             Parent Parties...................... Preamble
             Parent Reserve Report............... 5.16(a)
             Parent SEC Reports.................. 5.5
             Parent Share Issuance Approval...... 5.18
             Parent Special Meeting.............. 7.13(b)
             Parent Stockholders' Approval....... 7.13(b)
             Parent Tax Certificate.............. 8.3(c)
             PBGC................................ 4.11(b), 5.11(b)
             PCBs................................ 4.12(e)
             Permits............................. 4.17
             Person.............................. 3.2(c)
             Preferred Conversion Consideration.. 3.1(c)
             Preferred Stock Certificate......... 3.1(c)
             Preferred Stock Merger Consideration 3.1(c)
             proceeding.......................... 7.3(a)
             Proxy/Prospectus.................... 4.20
             Registration Statement.............. 4.20
             Related Person...................... 4.24
             SEC................................. 4.5
             Securities Act...................... 4.4(b)
             Severance Package Table............. 4.11(e)
             Stock Certificates.................. 3.1(c)
             Stock Consideration................. 3.1(b)(i)
             Subsidiary.......................... 4.1(c)
             Surviving Corporation............... 1.1
             Target.............................. Preamble
             Target Acquisition Proposal......... 7.2
             Target B Preferred Shares........... 4.2
             Target Benefit Plans................ 4.11(a)
             Target Breach....................... 10.1(d)
             Target Common Shares................ 3.1(a)
             Target D Preferred Shares........... 3.1(c)
             Target Disclosure Schedule.......... 4.1(a)
             Target Employee Agreement........... 4.11(a)
             Target Employees.................... 4.11(e)
             Target Engagement Letter............ 4.23
             Target ERISA Affiliate.............. 4.11(a)
             Target Material Adverse Effect...... 4.1(c)
             Target Material Contracts........... 4.18(a)
             Target Reserve Report............... 4.16(a)
             Target Restricted Stock............. 3.3(c)
             Target SEC Reports.................. 4.5
             Target Severance Policy............. 4.11(e)
             Target Special Meeting.............. 7.13(a)
</TABLE>

                                      v

<PAGE>

<TABLE>
<CAPTION>
                    Term                           Section
                    ----                          ----------
                    <S>                           <C>
                    Target Stock Options......... 3.3(a)(i)
                    Target Stockholders' Approval 4.19
                    Target Superior Proposal..... 10.1(h)
                    Target Tax Certificate....... 8.2(c)
                    Target Wararnts.............. 4.24(d)
                    Tax Authority................ 4.9(f)
                    Tax Returns.................. 4.9(f)
                    Taxes........................ 4.9(f)
                    Termination Date............. 10.1(b)
                    $3.00 Warrant Consideration.. 3.3(b)
                    Termination Fee.............. 10.2(b)(i)
                    Transactions................. 3.6
                    Voting Agreements............ Preamble
                    WARN Act..................... 4.15(b)
</TABLE>

<TABLE>
<CAPTION>
                 Exhibits
                 --------
                 <C>      <S>
                 7.13(b)  Parent Incentive Plan
                 7.18     Affiliate Agreement
                 8.2(c)   Target Tax Certificate
                 8.3(c)   Parent and Merger Sub Tax Certificate
</TABLE>


                                      vi

<PAGE>

                         AGREEMENT AND PLAN OF MERGER

    This Agreement and Plan of Merger (this "Agreement") dated February 2,
2003, by and among Plains Exploration & Production Company, a Delaware
corporation ("Parent"), PXP Gulf Coast Inc., a Delaware corporation and a
wholly-owned subsidiary of Parent ("Merger Sub," and, together with Parent, the
"Parent Parties") and 3TEC Energy Corporation, a Delaware corporation
("Target").

    WHEREAS, the respective Boards of Directors of the Parent Parties and
Target deem it advisable and in the best interests of their respective
corporations and stockholders that Target merge with and into Merger Sub (the
"Merger") upon the terms and subject to the conditions set forth herein, and
such Boards of Directors have approved the Merger; and

    WHEREAS, concurrently with the execution and delivery of this Agreement,
(i) with the approval of Target's Board of Directors, Parent has entered into
voting agreements with each of EnCap Energy Capital Fund III, L.P., EnCap
Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., ECIC Corporation,
Floyd C. Wilson, R. A. Walker, and Stephen W. Herod under which such parties
have among other things agreed to support the Merger upon the terms and
conditions set forth therein, and (ii) with the approval of Parent's Board of
Directors, Target has entered into voting agreements with each of EnCap Energy
Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P., BOCP Energy
Partners, L.P., Energy Capital Investment Company PLC, Sable Management, L.P.,
and James C. Flores, under which such parties have among other things agreed to
support the Merger upon the terms and conditions set forth therein
(collectively, the "Voting Agreements"); and

    WHEREAS, for federal income tax purposes, it is intended that the Merger
will qualify as a reorganization under the provisions of Section 368(a) of the
United States Internal Revenue Code of 1986, as amended (the "Code");

    NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements contained herein, the parties hereto agree as follows:

                                   ARTICLE I

                                  THE MERGER

    1.1 The Merger.  Upon the terms and subject to the conditions hereof, at
the Effective Time Target shall merge with and into Merger Sub and the separate
corporate existence of Target shall thereupon cease and Merger Sub shall be the
surviving corporation in the Merger (sometimes referred to herein as the
"Surviving Corporation") as a wholly-owned subsidiary of Parent. The Merger
shall have the effects set forth in Section 259 of the Delaware General
Corporation Law (the "DGCL"), including the Surviving Corporation's succession
to and assumption of all rights and obligations of Merger Sub and Target

    1.2 Effective Time of the Merger.  The Merger shall become effective (the
"Effective Time") upon the later of (i) the date of filing of a properly
executed Certificate of Merger relating to the Merger with the Secretary of
State of Delaware in accordance with the DGCL, and (ii) at such later time as
the parties shall agree and set forth in such Certificate of Merger. The filing
of the Certificate of Merger referred to above shall be made as soon as
practicable on the Closing Date set forth in Section 3.6.

    1.3 Tax Treatment.  It is intended that the Merger shall constitute a
reorganization under Section 368(a) of the Code.

                                      1

<PAGE>

                                  ARTICLE II

                           THE SURVIVING CORPORATION

    2.1 Certificate of Incorporation.  The Certificate of Incorporation of
Merger Sub in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation at and after the
Effective Time until thereafter amended in accordance with the terms thereof
and the DGCL.

    2.2 Bylaws.  The bylaws of Merger Sub as in effect immediately prior to the
Effective Time shall be the bylaws of the Surviving Corporation at and after
the Effective Time, and thereafter may be amended in accordance with their
terms and as provided by the Surviving Corporation's Certificate of
Incorporation and bylaws and the DGCL.

    2.3 Directors and Officers.  At and after the Effective Time, the directors
and officers of Merger Sub shall be the directors and officer of the Surviving
Corporation until their respective successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Certificate of Incorporation and
bylaws and the DGCL.

                                  ARTICLE III

                             CONVERSION OF SHARES

    3.1 Conversion of Capital Stock.  As of the Effective Time, by virtue of
the Merger and without any action on the part of the holders of any capital
stock described below:

        (a) All shares of Common Stock of Target, par value $.02 ("Target
    Common Shares"), that are held in Target's treasury shall be canceled and
    cease to exist and no cash, Parent capital stock or other consideration
    shall be delivered in exchange therefor.

        (b) Conversion of Target Common Shares.

            (i) Subject to Sections 3.4 and 3.5, each issued and outstanding
        Target Common Share (other than Target Common Shares treated in
        accordance with Section 3.1(a) or Dissenting Shares) shall be converted
        into the right to receive (x) $8.50 in cash plus, if applicable, the
        Additional Cash (collectively the "Cash Consideration") and (y) the
        number of shares of common stock, par value $.01 per share, of Parent
        (the "Parent Common Shares") equal to the Exchange Ratio (the "Stock
        Consideration" and, together with the Cash Consideration, the "Common
        Conversion Consideration"). All such Target Common Shares, when so
        converted, shall be retired, shall cease to be outstanding and shall
        automatically be cancelled, and the holder of a certificate ("Common
        Stock Certificate") that, immediately prior to the Effective Time
        represented such Target Common Shares shall cease to have any rights
        with respect thereto, except the right to receive, upon the surrender
        of such Common Stock Certificate in accordance with Section 3.2: (A)
        the Common Conversion Consideration, (B) certain dividends and other
        distributions under Section 3.1(f), and (C) cash in lieu of fractional
        Parent Common Shares under Section 3.4 (the "de minimis Shares"), in
        each case without interest (collectively, the "Common Stock Merger
        Consideration"). Notwithstanding the foregoing, if between the date
        hereof and the Effective Time the Parent Common Shares or Target Common
        Shares are changed into a different number of shares or a different
        class, because of any stock dividend, subdivision, reclassification,
        recapitalization, split, combination or exchange of shares, the
        Exchange Ratio and, with respect to the changes in the outstanding
        Target Common Shares, the Cash Consideration, shall be correspondingly
        adjusted to reflect such stock dividend, subdivision, reclassification,
        recapitalization, split, combination or exchange of shares.

                                      2

<PAGE>

            (ii) If the Market Price is less than the Minimum Market Price,
        Parent may either terminate this Agreement under Section 10.1(i) or pay
        the Additional Cash under Section 3.1(b)(i).

            (iii) Additional Definitions

            "Additional Cash" means an amount in cash equal to the product of
        (i) the Minimum Market Price minus the Market Price and (ii) the
        Exchange Ratio.

            "Exchange Ratio" means 0.85 provided that if the Market Price of
        the Parent Common Shares is:

            .  greater than $12.35, then the Exchange Ratio shall equal the
               quotient of (A) $10.50 divided by (B) the Market Price.

            .  less than $7.65, then the Exchange Ratio shall equal the
               quotient of (A) $6.50 divided by (B) the Market Price. If the
               Market Price, is less than the Minimum Market Price the Market
               Price in the preceding sentence shall be deemed to be the
               Minimum Market Price.

            "Market Price" means the average of the closing prices of a Parent
        Common Share on the New York Stock Exchange, as reported in The Wall
        Street Journal, for the 20 consecutive trading days immediately
        preceding the third trading day before the Closing.

            "Minimum Market Price" means $6.25.

        (c) Each share of Series D Preferred Stock of Target, par value $.02
    per share (the "Target D Preferred Shares"), issued and outstanding
    immediately prior to the Effective Time, other than those Target D
    Preferred Shares held by a Dissenting Stockholder, shall be converted into
    the right to receive the amount of cash that would be required to redeem
    such share pursuant to the Certificate of Designation filed with the
    Secretary of State of Delaware with respect thereto as of the Effective
    Time (the "Preferred Conversion Consideration"). All such Target D
    Preferred Shares, when so converted, shall no longer be outstanding and
    shall automatically be cancelled and shall cease to exist, and the holder
    of a certificate ("Preferred Stock Certificate" and, together with the
    Common Stock Certificates, the "Stock Certificates") that, immediately
    prior to the Effective Time, represented outstanding Target D Preferred
    Stock shall cease to have any rights with respect thereto, except the right
    to receive, upon the surrender of such Preferred Stock Certificate, the
    Preferred Conversion Consideration without interest (collectively, the
    "Preferred Stock Merger Consideration," and, together with the Common Stock
    Merger Consideration, the "Merger Consideration").

        (d) The Merger shall not affect any common stock, par value $0.01 per
    share, of Merger Sub issued and outstanding immediately prior to the
    Effective Time, which will remain outstanding and which will represent all
    of the issued and outstanding capital stock of the Surviving Corporation.

        (e) The Merger shall not affect any Parent Common Share issued and
    outstanding immediately prior to the Effective Time.

        (f) No dividends or other distributions declared or made after the
    Effective Time with a record date after the Effective Time shall be paid to
    the holder of any un-surrendered Common Stock Certificate with respect to
    the applicable Common Stock Merger Consideration represented thereby until
    the holder of record of such Common Stock Certificate has surrendered such
    Common Stock Certificate in accordance with Section 3.2. Subject to the
    effect of applicable laws (including escheat and abandoned property laws),
    following surrender of any such Common Stock Certificate, the record holder
    of the certificate or certificates representing the Common Stock Merger
    Consideration issued in exchange therefor shall be paid without interest,
    (i) the amount of dividends or other distributions with a record date after
    the Effective Time theretofore

                                      3

<PAGE>

    payable with respect to Common Stock Merger Consideration, and (ii) if the
    payment date for any dividend or distribution payable with respect to
    Common Stock Merger Consideration has not occurred prior to the surrender
    of such Common Stock Certificate, at the appropriate payment date therefor,
    the amount of dividends or other distributions with a record date after the
    Effective Time but prior to the surrender of such Common Stock Certificate
    and a payment date subsequent to the surrender of such Common Stock
    Certificate.

        (g) All Merger Consideration issued upon the surrender of Stock
    Certificates in accordance with the terms hereof shall be deemed to have
    been issued in full satisfaction of all rights pertaining to such Stock
    Certificates and the Target Common Shares or Target D Preferred Shares
    formerly represented thereby, and from and after the Effective Time there
    shall be no further registration of transfers effected on the stock
    transfer books of the Surviving Corporation of Target Common Shares, or
    Target D Preferred Shares which were outstanding immediately prior to the
    Effective Time. If, after the Effective Time, Stock Certificates are
    presented to the Surviving Corporation for any reason, they shall be
    canceled and exchanged as provided in this Article III.

    3.2 Surrender and Payment.

    (a) Parent shall authorize one or more transfer agent(s) reasonably
acceptable to Target to act as Exchange Agent hereunder (the "Exchange Agent")
with respect to the Merger. At or prior to the Effective Time, Parent shall
deposit with the Exchange Agent for the benefit of the holders of Target Common
Shares and Target D Preferred Shares, for exchange in accordance with this
Section 3.2 through the Exchange Agent, the aggregate amount of Merger
Consideration payable in connection with the Merger (collectively, the
"Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable
instructions, deliver the applicable Merger Consideration in exchange for
surrendered Stock Certificates pursuant to Section 3.1 out of the Exchange
Fund. Except as contemplated by Section 3.2(d), the Exchange Fund shall not be
used for any other purpose.

    (b) Promptly after the Effective Time, Parent shall cause the Exchange
Agent to send to each holder of record of Stock Certificates a letter of
transmittal for use in such exchange (which shall specify that the delivery
shall be effected, and risk of loss and title with respect to the Stock
Certificates shall pass, only upon proper delivery of the Stock Certificates to
the Exchange Agent, and which shall be in a form reasonably acceptable to
Target), and instructions for use in effecting the surrender of Stock
Certificates for payment therefor in accordance herewith (together, the
"Exchange Instructions").

    (c) If any portion of the Merger Consideration is to be paid to a Person
other than the registered holder of Target Common Shares or Target D Preferred
Shares, as applicable, represented by the Stock Certificate(s) surrendered in
exchange therefor, no such issuance or payment shall be made unless (i) the
Stock Certificate(s) so surrendered have been properly endorsed or otherwise be
in proper form for transfer and (ii) the Person requesting such issuance has
paid to the Exchange Agent any transfer or other taxes required as a result of
such issuance to a Person other than the registered holder or establish to the
Exchange Agent's satisfaction that such tax has been paid or is not applicable.
For this Agreement, "Person" means an individual, a corporation, a limited
liability company, a partnership, an association, a trust or any other entity
or organization, including any governmental or regulatory authority or agency
(a "Governmental Authority").

    (d) Any portion of the Exchange Fund that remains unclaimed by the holders
of Target Common Shares or Target D Preferred Shares one year after the
Effective Time shall be returned to Parent, upon demand, and any such holder
who has not exchanged such holder's Stock Certificates in accordance with this
Section 3.2 prior to that time shall thereafter look only to Parent, as a
general creditor thereof, to exchange such Stock Certificates or to pay amounts
to which such holder is entitled

                                      4

<PAGE>

pursuant to Section 3.1. If outstanding Stock Certificates are not surrendered
prior to six years after the Effective Time (or, in any particular case, prior
to such earlier date on which any Merger Consideration issuable or payable upon
the surrender of such Stock Certificates would otherwise escheat to or become
the property of any governmental unit or agency), the Merger Consideration
issuable or payable upon the surrender of such Stock Certificates shall, to the
extent permitted by applicable law, become the property of Parent, free and
clear of all claims or interest of any Person previously entitled thereto.
Notwithstanding the foregoing, none of Parent, Target or the Surviving
Corporation shall be liable to any holder of Stock Certificates for any amount
paid, or Merger Consideration delivered, to a public official pursuant to
applicable abandoned property, escheat or similar laws.

    (e) If any Stock Certificate is lost, stolen or destroyed, upon the making
of an affidavit of that fact by the Person claiming such Stock Certificate is
lost, stolen or destroyed and, if required by the Surviving Corporation, the
posting by such Person of a bond in such reasonable amount as Parent may direct
as indemnity against any claim that may be made against it with respect to such
Stock Certificate, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed Stock Certificate the Merger Consideration in respect
thereof pursuant to this Agreement.

    3.3 Stock Options; Warrants; Restricted Stock.

    (a) Target Options.

        (i) Prior to the Effective Time, Target shall cause all stock options
    ("Target Stock Options") issued pursuant to the Target Benefit Plans listed
    on Section 4.11(a)(1) of the Target Disclosure Schedule to be vested and
    shall cause such holders to exercise such Target Stock Options prior to the
    Effective Time for consideration equal to that number of Target Common
    Shares equal to the quotient of (X) the difference between (1) the product
    of (I) $17.00 times (II) the number of Target Common Shares issuable upon
    exercise of such Target Stock Option minus (2) the aggregate exercise price
    of such Stock Option divided by (Y) $17.00, and if such Target Stock
    Options are not exercised prior to the Effective Time, such options shall
    terminate as of the Effective Time.

        (ii) Target shall use its reasonable best efforts to cause its Board of
    Directors or any committee thereof responsible for the administration of
    Target's option plans to take any and all action necessary to effectuate
    the matters described in this Section 3.3(a) on or before the Effective
    Time.

    (b) Target Warrants.  Target shall use its reasonable best efforts to cause
each warrant to purchase Target Common Shares for $3.00 per share listed on
Section 3.3(b)(i) of the Target Disclosure Schedule to be automatically
exchanged for consideration equal to that Common Stock Merger Consideration
that would have been received by the holder of such warrant had such warrant
been exercised prior to the Effective Time and as a result of such exercise
such holder received Target Common shares equal to the quotient of (X) the
difference between (1) the product of (I) $17.00 times (II) the number of
Target Common Shares issuable upon exercise of such warrant minus (2) the
aggregate exercise price of such warrant divided by (Y) $17.00 (the "$3.00
Warrant Consideration").

    (c) Restricted Stock.  At the Effective Time, all remaining restrictions
with respect to the Target Restricted Stock shall expire and the Target
Restricted Stock shall be treated as Target Common Shares in accordance with
Section 3.1(b). "Target Restricted Stock" means the shares of Target restricted
stock issued pursuant to the Target Benefit Plans.

    (d) Taxes and Interest.  Any amounts payable pursuant to this Section 3.3
shall be subject to any required withholding of taxes and shall be paid without
interest.


                                      5

<PAGE>

    3.4 No Fractional Shares.  No de minimis Shares shall be issued in the
Merger and fractional share interests shall not entitle the owner thereof to
vote or to any rights of a stockholder of Parent. All holders of de minimis
Shares shall be entitled to receive, in lieu thereof, an amount in cash equal
to such fraction times twice the Cash Consideration (but one times the
Additional Cash).

    3.5 Dissenter's Rights.  Notwithstanding anything in this agreement to the
contrary, Target Common Shares and Target D Preferred Shares, if any, issued
and outstanding immediately prior to the Effective Time and held by a holder
who has not voted in favor of the Merger and who has delivered a written demand
for appraisal for such shares in accordance with Section 262 the DGCL (a
"Dissenting Stockholder") shall not be converted into the right to receive the
Common Stock Merger Consideration or the Preferred Stock Merger Consideration,
as applicable, as provided in Section 3.1, unless and until such holder fails
to perfect or effectively withdraws or otherwise loses such holder's right to
appraisal under the DGCL. A Dissenting Stockholder may receive payment of the
fair value of the Target Common Shares or the Target D Preferred Shares, as
applicable, issued and outstanding immediately prior to the Effective Time and
held by such Dissenting Stockholder ("Dissenting Shares") in accordance with
the provisions of the DGCL, provided that such Dissenting Stockholder complies
with Section 262 of the DGCL. At the Effective Time, all Dissenting Shares
shall be cancelled and cease to exist and shall represent only the right to
receive the fair value thereof in accordance with the DGCL. If, after the
Effective Time, any Dissenting Stockholder fails to perfect or effectively
withdraws or otherwise loses such Dissenting Stockholder's right to appraisal,
such Dissenting Stockholder's Dissenting Shares shall thereupon be treated as
if they had been converted, as of the Effective Time, into the right to receive
the Common Stock Merger Consideration or the Preferred Stock Merger
Consideration, as applicable. Target shall give Parent (a) prompt notice of any
written demands for appraisal, withdrawals of demands for appraisal and any
other instruments served under the DGCL, and (b) the opportunity to participate
in and direct all negotiations, proceedings or settlements with respect to
demands for appraisal under the DGCL. Target shall not voluntarily make any
payment with respect to any appraisal demands for appraisal and shall not,
except with Parent's prior written consent, settle or offer to settle any such
demands.

    3.6 Closing.  The closing (the "Closing") of the transactions contemplated
by this Agreement (the "Transactions") shall take place at 10:00 a.m., local
time, on the business day (the "Closing Date") on which all of the conditions
set forth in Article VIII are satisfied or waived, at the offices of Akin Gump
Strauss Hauer & Feld LLP, 1900 Pennzoil Place, South Tower, 711 Louisiana
Street, Houston, Texas 77002, or at such other date and time as Parent and
Target shall agree.

                                  ARTICLE IV

                   REPRESENTATIONS AND WARRANTIES OF TARGET

    Target represents and warrants to the Parent Parties as follows:

        4.1 Organization and Qualification.

        (a) Target is a corporation duly organized, validly existing and in
    good standing under the laws of the State of Delaware, is duly qualified to
    do business as a foreign corporation and is in good standing in the
    jurisdictions set forth in Section 4.1(a) of the disclosure letter
    delivered by Target to Parent contemporaneously with the execution hereof
    (the "Target Disclosure Schedule"), which include each jurisdiction in
    which the character of Target's properties or the nature of its business
    makes such qualification necessary, except in jurisdictions, if any, where
    the failure to be so qualified would not result in a Target Material
    Adverse Effect (as defined below). Target has all requisite corporate power
    and authority to own, use or lease its properties and to carry on its
    business as it is now being conducted. Target has made available to Parent a

                                      6

<PAGE>

    complete and correct copy of its certificate of incorporation and bylaws,
    each as amended to date, and Target's certificate of incorporation and
    bylaws as so delivered are in full force and effect. Target is not in
    default in any respect in the performance, observation or fulfillment of
    any provision of its certificate of incorporation or bylaws.

        (b) Target has no Subsidiaries and has had no Subsidiaries since August
    6, 2002.

        (c) For this Agreement, (i) a "Target Material Adverse Effect" means
    any event, circumstance, condition, development or occurrence causing,
    resulting in or having (or with the passage of time likely to cause, result
    in or have) a material adverse effect on the financial condition, business,
    assets, properties, prospects or results of operations of Target; provided
    that in no event shall any of the following be deemed to constitute or be
    taken into account in determining a Target Material Adverse Effect: any
    event, circumstance, change or effect that results from (A) changes
    affecting the economy generally, (B) changes in the market price of oil or
    natural gas, (C) the public announcement or pending nature of the
    Transactions, (D) compliance with the terms of this Agreement, or (E)
    change in the price of the Target Common Shares or the Parent Common Shares
    and (ii) "Subsidiary" means, with respect to any party, any corporation or
    other organization, whether incorporated or unincorporated, of which (x) at
    least a majority of the securities or other interests having by their terms
    voting power to elect a majority of the Board of Directors or others
    performing similar functions with respect to such corporation or other
    organization is directly or indirectly beneficially owned or controlled by
    such party or by any one or more of its subsidiaries, or by such party and
    one or more of its subsidiaries, or (y) such party or any Subsidiary of
    such party is a general partner of a partnership or a manager of a limited
    liability company.

    4.2 Capitalization.  The authorized capital stock of Target consists of
60,000,000 Target Common Shares and 20,000,000 shares of preferred stock, par
value $.02 per share, of which 266,667 shares have been designated Series B
Preferred Stock (the "Target B Preferred Shares"), and 725,167 shares have been
designated as Target D Preferred Shares. As of the date hereof, (i) 16,780,776
(which includes 62,500 restricted shares for which restrictions have not lapsed
and which will be cancelled at the Effective Time) Target Common Shares were
issued and outstanding, (ii) no Target B Preferred Shares were issued and
outstanding, (iii) 613,919 Target D Preferred Shares were issued and
outstanding, (iv) stock options to acquire 3,358,181 Target Common Shares were
outstanding under all stock option plans and agreements of Target, and (v)
warrants to acquire 1,515,000 Target Common Shares were outstanding under all
warrant agreements of Target. All of the outstanding Target Common Shares and
Target D Preferred Shares are validly issued, fully paid and nonassessable, and
free of preemptive rights. Except as set forth above, and other than this
Agreement, there are no outstanding subscriptions, options, rights, warrants,
convertible securities, stock appreciation rights, phantom equity, or other
agreements or commitments (including "rights plans" or "poison pills")
obligating Target to issue, transfer, sell, redeem, repurchase or otherwise
acquire any shares of its capital stock of any class. Except as contemplated by
the Voting Agreement, there are no agreements, arrangements or other
understandings with respect to the right to vote any shares of capital stock of
Target.

    4.3 Authority.  Target has full corporate power and authority to execute
and deliver this Agreement and any ancillary agreements to which Target is or
will be a party (the "Ancillary Agreements") and, subject to obtaining the
Target Stockholders' Approval, to consummate the Transactions. The execution,
delivery and performance of this Agreement and the Ancillary Agreements to
which Target is or will be a party and the consummation of the Transactions
have been duly and validly authorized by Target's Board of Directors, and no
other corporate proceedings on the part of Target are necessary to authorize
this Agreement and the Ancillary Agreements to which Target is or will be a
party or to consummate the Transactions, other than the Target Stockholders'
Approval. This Agreement has been, and the Ancillary Agreements to which Target
is or will be a party are, or

                                      7

<PAGE>

upon execution will be, duly and validly executed and delivered by Target and,
assuming the due authorization, execution and delivery hereof and thereof by
the other parties hereto and thereto, constitutes, or upon execution will
constitute, valid and binding obligations of Target enforceable against Target
in accordance with their respective terms, except as such enforceability may be
subject to the effects of bankruptcy, insolvency, reorganization, moratorium
and other laws relating to or affecting the rights of creditors and of general
principles of equity (the "Enforceability Exception").

    4.4 Consents and Approvals; No Violation.  The execution and delivery of
this Agreement, the consummation of the Transactions and the performance by
Target of its obligations hereunder will not:

        (a) subject to receipt of the Target Stockholders' Approval, conflict
    with any provision of Target's certificate of incorporation or bylaws, as
    amended;

        (b) subject to obtaining the Target Stockholders' Approval and filing
    of the Certificate of Merger with the Secretary of State of Delaware,
    require any consent, waiver, approval, order, authorization or permit of,
    or registration, filing with or notification to, (i) any Governmental
    Authority, except for applicable requirements of the Securities Act of
    1933, as amended (the "Securities Act"), the Securities Exchange Act of
    1934 (the "Exchange Act"), state laws relating to takeovers, if applicable,
    state securities or blue sky laws, except as set forth in Section 4.4(b) of
    the Target Disclosure Schedule and except for approvals that are
    ministerial in nature and are customarily obtained from Governmental
    Authorities after the Effective Time in connection with transactions of the
    same nature as are contemplated hereby ("Customary Post-Closing Consents")
    or (ii) except as set forth in Section 4.4(b) of the Target Disclosure
    Schedule, any third party other than a Governmental Authority, other than
    such non-Governmental Authority third party consents, waivers, approvals,
    orders, authorizations and permits that would not (i) result in a Target
    Material Adverse Effect, (ii) materially impair the ability of Target, to
    perform its obligations under this Agreement or any Ancillary Agreement or
    (iii) prevent the consummation of any of the Transactions;

        (c) except as set forth in Section 4.4(c) of the Target Disclosure
    Schedule, result in any violation of or the breach of or constitute a
    default (with notice or lapse of time or both) under, or give rise to any
    right of termination, cancellation or acceleration or guaranteed payments
    or a loss of a material benefit under, any of the terms, conditions or
    provisions of any note, lease, mortgage, license, agreement or other
    instrument or obligation to which Target or is a party or by which Target
    or any of its properties or assets may be bound, except for such
    violations, breaches, defaults, or rights of termination, cancellation or
    acceleration, or losses as to which requisite waivers or consents have been
    obtained or which, individually or in the aggregate, would not (i) result
    in a Target Material Adverse Effect, (ii) materially impair the ability of
    Target to perform its obligations under this Agreement or any Ancillary
    Agreement or (iii) prevent the consummation of any of the Transactions;

        (d) except as set forth in Section 4.4(d) of the Target Disclosure
    Schedule, violate the provisions of any order, writ, injunction, judgment,
    decree, statute, rule or regulation applicable to Target;

        (e) except as set forth in Section 4.4(e) of the Target Disclosure
    Schedule, result in the creation of any liens, mortgages, pledges, security
    interests, encumbrances, claims or charges of any kind (collectively,
    "Liens") upon any shares of capital stock or material properties or assets
    of Target under any agreement or instrument to which Target is a party or
    by which Target or any of its properties or assets is bound; or

        (f) except as set forth in Section 4.4(f) of the Target Disclosure
    Schedule or Section 3.5, result in any holder of any securities of Target
    being entitled to appraisal, dissenters' or similar rights.

                                      8

<PAGE>

    4.5 Target SEC Reports.  Except as set forth in Section 4.5 of the Target
Disclosure Schedule, Target has filed with the Securities and Exchange
Commission (the "SEC") each form, registration statement, report, schedule,
proxy or information statement and other document (including exhibits and
amendments thereto), including its Annual Reports to Stockholders incorporated
by reference in certain of such reports, required to be filed by it or its
predecessors with the SEC since January 1, 1999 under the Securities Act or the
Exchange Act (collectively, the "Target SEC Reports"). As of the respective
dates the Target SEC Reports were filed or, if any Target SEC Reports were
amended, as of the date such amendment was filed, each Target SEC Report,
including any financial statements or schedules included therein, (a) complied
in all material respects with all applicable requirements of the Securities Act
and the Exchange Act, as the case may be, and the applicable rules and
regulations promulgated thereunder, and (b) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. No event since
the date of the last Target SEC Report has occurred that would require Target
to file a Current Report on Form 8-K other than the execution of this Agreement.


    4.6 Financial Statements.  Each of the audited consolidated financial
statements and unaudited consolidated interim financial statements of Target
(including any related notes and schedules) included (or incorporated by
reference) in its Annual Reports on Form 10-KSB for each of the three fiscal
years ended December 31, 1999, 2000 and 2001 and its Quarterly Reports on Form
10-Q for its fiscal quarters ended March 31, June 30 and September 30, 2002
have been prepared from, and are in accordance with, the books and records of
Target and its consolidated Subsidiaries, comply in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a consistent basis
(except as may be indicated in the notes thereto and subject, in the case of
quarterly financial statements, to normal and recurring year-end adjustments)
and fairly present, in conformity with GAAP applied on a consistent basis
(except as may be indicated in the notes thereto), the consolidated financial
position of Target and its Subsidiaries as of the date thereof and the
consolidated results of operations and cash flows (and changes in financial
position, if any) of Target and its Subsidiaries for the periods presented
therein (subject to normal year-end adjustments and the absence of financial
footnotes in the case of any unaudited interim financial statements).

    4.7 Absence of Undisclosed Liabilities; Liabilities as of Year End.  Except
(a) as set forth on Section 4.7 of the Target Disclosure Schedule (b) as
specifically disclosed in the Target SEC Reports filed and publicly available
prior to the date hereof and (c) for liabilities and obligations incurred in
the ordinary course of business and consistent with past practice since
December 31, 2001, Target has not incurred any liabilities or obligations of
any nature (contingent or otherwise) that would have a Target Material Adverse
Effect. As of December 31, 2002, Target's long term debt did not exceed $99
million.

    4.8 Absence of Certain Changes.  Except as disclosed in the Target SEC
Reports filed and publicly available prior to the date hereof, as set forth in
Section 4.8 of the Target Disclosure Schedule or as contemplated by this
Agreement, since December 31, 2001 (a) Target has conducted its business only
in the ordinary course of business consistent with past practices, (b) there
has not been any change or development, or combination of changes or
developments that, individually or in the aggregate, would have a Target
Material Adverse Effect, (c) except with respect to the Target D Preferred
Shares, there has not been any declaration, setting aside or payment of any
dividend or other distribution with respect to any shares of capital stock of
Target, or any repurchase, redemption or other acquisition by Target of any
outstanding shares of capital stock or other securities of, or other ownership
interests in, Target, (d) there has not been any amendment of any term of any
outstanding security of Target, and (e) there has not been any change in any
method of accounting or accounting practice by Target, except for any such
change required because of a concurrent change in GAAP.

                                      9

<PAGE>

    4.9 Taxes.  Except as otherwise disclosed in Section 4.9 of the Target
Disclosure Schedule and for matters that would have no adverse effect on Target:

        (a) Target has timely filed (or have had timely filed on their behalf)
    or will file or cause to be timely filed, all material Tax Returns (as
    defined below) required by applicable law to be filed by any of them prior
    to or as of the Closing Date. As of the time of filing, the foregoing Tax
    Returns correctly reflected the material facts regarding the income,
    business, assets, operations, activities, status, or other matters of
    Target or any other information required to be shown thereon. An extension
    of time within which to file a Tax Return that has not been filed has not
    been requested or granted.

        (b) Target has paid (or has had paid on its behalf), or where payment
    is not yet due, has established (or has had established on its behalf and
    for its sole benefit and recourse), or will establish or cause to be
    established on or before the Closing Date, an adequate accrual for the
    payment of all material Taxes (as defined below) due with respect to any
    period ending prior to or as of the Closing Date.

        (c) No Audit (as defined below) by a Tax Authority (as defined below)
    is pending or to the knowledge of Target, threatened, with respect to any
    Tax Returns filed by, or Taxes due from, Target. No issue has been raised
    by any Tax Authority in any Audit of Target that if raised with respect to
    any other period not so audited could be expected to result in a material
    proposed deficiency for any period not so audited. No material deficiency
    or adjustment for any Taxes has been, proposed, asserted, assessed or to
    the knowledge of Target, threatened, against Target. There are no liens for
    Taxes upon the assets of Target, except liens for current Taxes not yet
    delinquent.

        (d) Target has neither given or been requested to give any waiver of
    statutes of limitations relating to the payment of Taxes or have executed
    powers of attorney with respect to Tax matters, which will be outstanding
    as of the Closing Date.

        (e) Prior to the date hereof, Target has disclosed and provided or made
    available true and complete copies to Parent of, all material Tax sharing,
    Tax indemnity, or similar agreements to which Target is a party to, is
    bound by, or has any obligation or liability for Taxes.

        (f) In this Agreement, (i) "Audit" means any audit, assessment of
    Taxes, other examination by any Tax Authority, proceeding or appeal of such
    proceeding relating to Taxes; (ii) "Taxes" means all Federal, state, local
    and foreign taxes, and other assessments of a similar nature (whether
    imposed directly or through withholding), including any interest, additions
    to tax, or penalties applicable thereto; (iii) "Tax Authority" means the
    Internal Revenue Service and any other domestic or foreign Governmental
    Authority responsible for the administration of any Taxes; and (iv) "Tax
    Returns" means all Federal, state, local and foreign tax returns,
    declarations, statements, reports, schedules, forms and information returns
    and any amended Tax Return relating to Taxes.

        (g) Except for the group of which Target is currently a member, Target
    has never been a member of an affiliated group of corporations, within the
    meaning of Section 1504 of the Code.


        (h) Target has not agreed to make nor is it required to make any
    adjustment under Section 481(a) of the Code by reason of change in
    accounting method or otherwise.

    4.10 Litigation.  Except as disclosed in the Target SEC Reports filed and
publicly available prior to the date hereof or Section 4.10 of the Target
Disclosure Schedule and for matters that would not have a Target Material
Adverse Effect, there is no suit, claim, action, proceeding or investigation
pending or, to Target's knowledge, threatened against or directly affecting
Target or any of the directors or officers of Target in their capacity as such,
nor is there any reasonable basis therefor that

                                      10

<PAGE>

could reasonably be expected to have a Target Material Adverse Effect, if
adversely determined. Neither Target nor any officer, director or employee of
Target has been permanently or temporarily enjoined by any order, judgment or
decree of any court or any other Governmental Authority from engaging in or
continuing any conduct or practice in connection with the business, assets or
properties of Target nor, to the knowledge of Target, is Target or any officer,
director or employee of Target under investigation by any Governmental
Authority. Except as disclosed in the Target SEC Reports filed and publicly
available prior to the date hereof or Section 4.10 of the Target Disclosure
Schedule, there is no order, judgment or decree of any court or other tribunal
or other agency extant enjoining or requiring Target to take any action of any
kind with respect to its business, assets or properties. Notwithstanding the
foregoing, no representation or warranty in this Section 4.10 is made with
respect to Environmental Laws, which are covered exclusively by the provisions
set forth in Section 4.12.

    4.11 Employee Benefit Plans; ERISA.

    (a) Section 4.11(a)(1) of the Target Disclosure Schedule contains a true
and complete list of the individual or group employee benefit plans or
arrangements of any type (including plans described in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
sponsored, maintained or contributed to by Target or any trade or business,
whether or not incorporated, which together with Target would be deemed a
"single employer" within the meaning of Section 414(b), (c) or (m) of the Code
or Section 4001(b)(1) of ERISA (a "Target ERISA Affiliate") within six years
prior to the Effective Time ("Target Benefit Plans"), and Section 4.11(a)(2) of
the Target Disclosure Schedule lists each individual employment, severance or
similar agreement with respect to which Target or any Target ERISA Affiliate
has any current or future obligation or liability other than the Target
Severance Policy (as defined below) ("Target Employee Agreement").

    (b) Except as set forth in Section 4.11(b) of the Target Disclosure
Schedule, with respect to each Target Benefit Plan: (i) if intended to qualify
under Section 401(a) or 401(k) of the Code, such plan satisfies the
requirements of such sections, has received a favorable determination letter
from the Internal Revenue Service with respect to its qualification, and its
related trust has been determined to be exempt from tax under Section 501(a) of
the Code and, to the knowledge of Target, nothing has occurred since the date
of such letter to adversely affect such qualification or exemption; (ii) each
such plan has been administered in substantial compliance with its terms and
applicable law, except for any noncompliance with respect to any such plan that
could not reasonably be expected to result in a Target Material Adverse Effect;
(iii) neither Target nor any Target ERISA Affiliate has engaged in, and Target
and each Target ERISA Affiliate do not have any knowledge of any Person that
has engaged in, any transaction or acted or failed to act in any manner that
would subject Target or any Target ERISA Affiliate to any liability for a
breach of fiduciary duty under ERISA that could reasonably be expected to
result in a Target Material Adverse Effect; (iv) no disputes are pending or, to
the knowledge of Target or any Target ERISA Affiliate, threatened; (v) neither
Target nor any Target ERISA Affiliate has engaged in, and Target and each
Target ERISA Affiliate do not have any knowledge of any Person that has engaged
in, any transaction in violation of Section 406(a) or (b) of ERISA or Section
4975 of the Code for which no exemption exists under Section 408 of ERISA or
Section 4975(c) of the Code or Section 4975(d) of the Code that could
reasonably be expected to result in a Target Material Adverse Effect; (vi)
there have been no "reportable events" within the meaning of Section 4043 of
ERISA for which the 30 day notice requirement of ERISA has not been waived by
the Pension Benefit Guaranty Corporation (the "PBGC"); (vii) all contributions
due have been made on a timely basis (within, where applicable, the time limit
established under Section 302 of ERISA or Code Section 412); (viii) no notice
of intent to terminate such plan has been given under Section 4041 of ERISA and
no proceeding has been instituted under Section 4042 of ERISA to terminate such
plan; and (ix) except for defined benefit plans (if applicable), such plan may
be terminated on a prospective basis without any continuing liability for
benefits other than benefits accrued to the date of such termination. All
contributions made or required to be made under any Target Benefit Plan meet
the requirements for deductibility under the

                                      11

<PAGE>

Code, and all contributions which are required and which have not been made
have been properly recorded on the books of Target or a Target ERISA Affiliate.

    (c) No Target Benefit Plan is a "multiemployer plan" (as defined in Section
4001(a)(3) of ERISA) or a "multiple employer plan" (within the meaning of
Section 413(c) of the Code). No event has occurred with respect to Target or a
Target ERISA Affiliate in connection with which Target could be subject to any
liability, lien or encumbrance with respect to any Target Benefit Plan or any
employee benefit plan described in Section 3(3) of ERISA maintained, sponsored
or contributed to by a Target ERISA Affiliate under ERISA or the Code, except
for regular contributions and benefit payments in the ordinary course of plan
business.

    (d) Except as set forth in Section 4.11(d) of the Target Disclosure
Schedule, no present or former employees of Target are covered by any Target
Employee Agreements or plans that provide or will provide severance pay,
post-termination health or life insurance benefits (except as required pursuant
to Section 4980(B) of the Code) or any similar benefits, and the consummation
of the Transactions shall not cause any payments or benefits to any employee to
be either subject to an excise tax or non-deductible to Target under Sections
4999 and 280G of the Code, respectively.

    (e) Attached as Section 4.11(e) of the Target Disclosure Schedule is a
current list of Target's employees (the "Target Employees"), a copy of Target's
severance policy (the "Target Severance Policy"), a severance package table
(the "Severance Package Table") which lists the maximum amount of all severance
pay that may be paid to Target Employees, and a list of Target Employees with
written employment agreements, written letter agreements, agreements covered by
resolution of the Target Board of Directors addressing specific employees, or
other agreements set forth in Section 4.11(a)(2) of the Target Disclosure
Schedule ("Contract Employees").


    4.12 Environmental Liability.  Except as set forth in Section 4.12 of the
Target Disclosure Schedule or as could not reasonably be expected to result in
liabilities that have a Target Material Adverse Effect:

        (a) The businesses of Target has been and are operated in material
    compliance with all applicable federal, state and local statutes,
    ordinances, restrictions, licenses, rules, orders, regulations, permit
    conditions, injunctive obligations, standard, and legal requirements
    relating to the protection of the environment and human health, including
    the common law and the Federal Clean Water Act, Safe Drinking Water Act,
    Resource Conservation & Recovery Act, Clean Air Act, Outer Continental
    Shelf Lands Act, Comprehensive Environmental Response, Compensation and
    Liability Act, and Emergency Planning and Community Right to Know Act, each
    as amended and currently in effect (together, "Environmental Laws").

        (b) Target has not caused or allowed the generation, treatment,
    manufacture, processing, distribution, use, storage, discharge, release,
    disposal, transport or handling of any chemicals, pollutants, contaminants,
    wastes, toxic substances, hazardous substances, petroleum, petroleum
    products or any substance regulated under any Environmental Law (together,
    "Hazardous Substances"), except in material compliance with all
    Environmental Laws, and, to Target's knowledge, no generation, treatment,
    manufacture, processing, distribution, use, storage, discharge, release,
    disposal, transport or handling of any Hazardous Substances has occurred at
    any property or facility owned, leased or operated by Target except in
    material compliance with all Environmental Laws.

        (c) Target has not received any written notice from any Governmental
    Authority or third party or, to the knowledge of Target, any other
    communication alleging or concerning any material violation by Target of,
    or responsibility or liability of Target under, any Environmental

                                      12

<PAGE>

    Law. There are no pending, or to the knowledge of Target, threatened,
    claims, suits, actions, proceedings or investigations with respect to the
    businesses or operations of Target alleging or concerning any material
    violation of, or responsibility or liability under, any Environmental Law,
    nor does Target have any knowledge of any fact or condition that could give
    rise to such a claim, suit, action, proceeding or investigation.

        (d) Target is in possession of and is in compliance with all material
    approvals, permits, licenses, registrations and similar authorizations from
    all Governmental Authorities under all Environmental Laws required for the
    operation of the businesses of Target; there are no pending or, to the
    knowledge of Target, threatened, actions, proceedings or investigations
    alleging violations of or seeking to modify, revoke or deny renewal of any
    of such approvals, permits, licenses, registrations and authorizations; and
    Target does not have knowledge of any fact or condition that is reasonably
    likely to give rise to any action, proceeding or investigation regarding
    the violation of or seeking to modify, revoke or deny renewal of any of
    such approvals, permits, licenses, registrations and authorizations.

        (e) Without in any way limiting the generality of the foregoing, (i) to
    Target's knowledge, all offsite locations where Target has transported,
    released, discharged, stored, disposed or arranged for the disposal of
    Hazardous Substances are licensed and operating as required by law and (ii)
    no polychlorinated biphenyls ("PCBs"), PCB-containing items,
    asbestos-containing materials, or radioactive materials are used or stored
    at any property owned, leased or operated by Target except in material
    compliance with Environmental Laws.

        (f) No claims have been asserted or, to Target's knowledge, threatened
    to be asserted against Target for any personal injury (including wrongful
    death) or property damage (real or personal) arising out of alleged
    exposure or otherwise related to Hazardous Substances used, handled,
    generated, transported or disposed by Target.

    4.13 Compliance with Applicable Laws.  Target holds all material approvals,
licenses, permits, registrations and similar type authorizations necessary for
the lawful conduct of its business, as now conducted, and such business is
being, and Target has not received any notice from any Person that any such
business has been or is being, conducted in violation of any law, ordinance or
regulation, including any law, ordinance or regulation relating to occupational
health and safety, except for possible violations which either individually or
in the aggregate have not resulted and would not result in a Target Material
Adverse Effect; provided, however, notwithstanding the foregoing, no
representation or warranty in this Section 4.13 is made with respect to
Environmental Laws, which are covered exclusively in Section 4.12.

    4.14 Insurance.  Section 4.14 of the Target Disclosure Schedule lists each
insurance policy relating to Target currently in effect. Target has made
available to Parent a true, complete and correct copy of each such policy or
the binder therefor. With respect to each such insurance policy or binder none
of Target or any other party to the policy is in breach or default thereunder
(including with respect to the payment of premiums or the giving of notices),
and Target does not know of any occurrence or any event which (with notice or
the lapse of time or both) would constitute such a breach or default or permit
termination, modification or acceleration under the policy, except for such
breaches or defaults which, individually or in the aggregate, would not result
in a Target Material Adverse Effect. Section 4.14 of the Target Disclosure
Schedule describes any self-insurance arrangements affecting Target.

    4.15 Labor Matters; Employees.

    (a) Except as set forth in Section 4.15 of the Target Disclosure Schedule,
(i) there is no labor strike, dispute, slowdown, work stoppage or lockout
actually pending or, to the knowledge of Target, threatened against or
affecting Target and, during the past five years, there has not been any such

                                      13

<PAGE>

action, (ii) Target is not a party to or bound by any collective bargaining or
similar agreement with any labor organization, or work rules or practices
agreed to with any labor organization or employee association applicable to
employees of Target, (iii) none of the employees of Target are represented by
any labor organization and Target does not have any knowledge of any current
union organizing activities among the employees of Target nor does any question
concerning representation exist concerning such employees, (iv) Target has at
all times been in compliance with all applicable laws respecting employment and
employment practices, terms and conditions of employment, wages, hours of work
and occupational safety and health, and is not engaged in any unfair labor
practices as defined in the National Labor Relations Act or other applicable
law, ordinance or regulation, (v) there is no unfair labor practice charge or
complaint against Target pending or, to the knowledge of Target, threatened
before the National Labor Relations Board or any similar state or foreign
agency, (vi) there is no grievance or arbitration proceeding arising out of any
collective bargaining agreement or other grievance procedure relating to
Target, (vii) neither the Occupational Safety and Health Administration nor any
other federal or state agency has threatened to file any citation, and there
are no pending citations, relating to Target, and (viii) there is no employee
or governmental claim or investigation, including any charges to the Equal
Employment Opportunity Commission or state employment practice agency,
investigations regarding Fair Labor Standards Act compliance, audits by the
Office of Federal Contractor Compliance Programs, Workers' Compensation claims,
sexual harassment complaints or demand letters or threatened claims.

    (b) Since the enactment of the Worker Adjustment and Retraining
Notification Act of 1988 ("WARN Act"), Target has not effectuated (i) a "plant
closing" (as defined in the WARN Act) affecting any site of employment or one
or more facilities or operating units within any site of employment or facility
of Target, or (ii) a "mass layoff" (as defined in the WARN Act) affecting any
site of employment or facility of Target, nor has Target been affected by any
transaction or engaged in layoffs or employment terminations sufficient in
number to trigger application of any similar state or local law, in each case
that could reasonably be expected to have a Target Material Adverse Effect.

    4.16 Reserve Reports.

    (a) All information (excluding assumptions and estimates, but including the
statement of the percentage of reserves from the oil and gas wells and other
interests evaluated therein to which Target is entitled and the percentage of
the costs and expenses related to such wells or interests to be borne by
Target) supplied to Ryder Scott Company, L.P. by or on behalf of Target that
was material to such firm's estimates of proved oil and gas reserves
attributable to the Oil and Gas Interests (as hereinafter defined) of Target in
connection with the preparation of the proved oil and gas reserve reports
concerning the Oil and Gas Interests of Target as of December 31, 2002 and
prepared by such engineering firm (the "Target Reserve Report") was (at the
time supplied or as modified or amended prior to the issuance of the Target
Reserve Report) to Target's knowledge accurate in all material respects and
Target has no knowledge of any material errors in such information that existed
at the time of such issuance. For this Agreement "Oil and Gas Interests" means
direct and indirect interests in and rights with respect to oil, gas, mineral,
and related properties and assets of any kind and nature, direct or indirect,
including working, leasehold and mineral interests and operating rights and
royalties, overriding royalties, production payments, net profit interests and
other non-working interests and non-operating interests; all interests in
rights with respect to oil, condensate, gas, casinghead gas and other liquid or
gaseous hydrocarbons (collectively, "Hydrocarbons") and other minerals or
revenues therefrom, all contracts in connection therewith and claims and rights
thereto (including all oil and gas leases, operating agreements, unitization
and pooling agreements and orders, division orders, transfer orders, mineral
deeds, royalty deeds, oil and gas sales, exchange and processing contracts and
agreements, and in each case, interests thereunder), surface interests, fee
interests, reversionary interests, reservations, and concessions; all
easements, rights of way, licenses, permits, leases, and other interests
associated with, appurtenant to, or necessary for the operation of any of the
foregoing;

                                      14

<PAGE>

and all interests in equipment and machinery (including wells, well equipment
and machinery), oil and gas production, gathering, transmission, treating,
processing, and storage facilities (including tanks, tank batteries, pipelines,
and gathering systems), pumps, water plants, electric plants, gasoline and gas
processing plants, refineries, and other tangible personal property and
fixtures associated with, appurtenant to, or necessary for the operation of any
of the foregoing.

    (b) Set forth in Section 4.16(b) of the Target Disclosure Schedule is a
list of all material Oil and Gas Interests that were included in the Target
Reserve Report that have been disposed of prior to the date hereof.

    4.17 Permits.  Immediately prior to the Effective Time and except for
Customary Post-Closing Consents, Target holds all of the permits, licenses,
certificates, consents, approvals, entitlements, plans, surveys, relocation
plans, environmental impact reports and other authorizations of Governmental
Authorities ("Permits") required or necessary to construct, own, operate, use
and/or maintain its properties and conduct its operations as presently
conducted, except for such Permits, the lack of which, individually or in the
aggregate, would not have a Target Material Adverse Effect; provided, however,
that notwithstanding the foregoing, no representation or warranty in this
Section 4.17 is made with respect to Permits issued pursuant to Environmental
Laws, which are covered exclusively in Section 4.12.

    4.18 Material Contracts.

    (a) Set forth in Section 4.18(a) of the Target Disclosure Schedule or the
Target SEC Reports is a list of each contract, lease, indenture, agreement,
arrangement or understanding to which Target is subject that is currently in
effect and is of a type that would be required to be included as an exhibit to
a Form S-1 Registration Statement pursuant to the rules and regulations of the
SEC if such a registration statement were filed by Target (collectively, the
"Target Material Contracts").

    (b) Except as set forth in Section 4.18(a) or 4.18(b) of the Target
Disclosure Schedule or the Target SEC Reports, the Oil and Gas Interests of
Target are not subject to (i) any instrument or agreement evidencing or related
to indebtedness for borrowed money, whether directly or indirectly, or (ii) any
agreement not entered into in the ordinary course of business in which the
amount involved is in excess of $1,000,000. In addition, (A) all Target
Material Contracts the valid and legally binding obligations of Target, and to
the knowledge of Target, each of the other parties thereto and are enforceable
in accordance with their respective terms; (B) Target is not in material breach
or default with respect to, and to the knowledge of Target, no other party to
any Target Material Contract is in material breach or default with respect to,
its obligations thereunder, including with respect to payments or otherwise;
(C) no party to any Target Material Contract has given notice of any action to
terminate, cancel, rescind or procure a judicial reformation thereof; and (D)
except as set forth in the Target SEC reports no Target Material Contract
contains any provision that prevents Target from owning, managing and operating
the Oil and Gas Interests of Target in accordance with historical practices.

    4.19 Required Stockholder Vote or Consent.  The only votes or written
consents of the holders of any class or series of Target's capital stock
necessary to consummate the Transactions are (i) the adoption of this Agreement
by the holders of a majority of the votes entitled to be cast by holders of
Target Common Shares and (ii) the adoption of the Agreement by the holders of a
majority of the votes entitled to be cast by holders of Target D Preferred
Shares if such shares are outstanding at the time of such meeting (collectively
the "Target Stockholders' Approval").

    4.20 Proxy/Prospectus; Registration Statement.  None of the information to
be supplied by Target for inclusion in (a) the joint proxy statement relating
to the Target Special Meeting and the

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Parent Special Meeting (in each case, as defined below) (also constituting the
prospectus in respect of Parent Common Shares into which Target Common Shares
will be converted) (the "Proxy/Prospectus"), to be filed by Target and Parent
with the SEC, and any amendments or supplements thereto, or (b) the
Registration Statement on Form S-4 (the "Registration Statement") to be filed
by Parent with the SEC in connection with the Merger, and any amendments or
supplements thereto, will, at the respective times such documents are filed,
and, in the case of the Proxy/Prospectus, at the time the Proxy/Prospectus or
any amendment or supplement thereto is first mailed to the Target stockholders,
at the time of the Target Special Meeting and the Parent Special Meeting and at
the Effective Time, and, in the case of the Registration Statement, when it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be made therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.

    4.21 Intellectual Property.  Target owns, or licenses or otherwise has the
right to use, all patents, patent rights, trademarks, rights, trade names,
trade name rights, service marks, service mark rights, copyrights, technology,
know-how, processes and other proprietary intellectual property rights and
computer programs ("Intellectual Property") currently used in the conduct of
the business of Target, except where the failure to so own or otherwise have
the right to use such Intellectual Property would not, individually or in the
aggregate, have a Target Material Adverse Effect. No Person has notified Target
that its use of such Intellectual Property infringes on the rights of any
Person, subject to such claims and infringements as do not, individually or in
the aggregate, give rise to any liability on the part of Target that could have
a Target Material Adverse Effect, and, to Target's knowledge, no Person is
infringing on any right of Target with respect to any such Intellectual
Property. No claims are pending or, to Target's knowledge, threatened that
Target is infringing or otherwise adversely affecting the rights of any Person
with regard to any Intellectual Property.

    4.22 Hedging.  Section 4.22 of the Target Disclosure Schedule sets forth
for the periods shown obligations of Target for the delivery of Hydrocarbons
attributable to any of the properties of Target in the future on account of
prepayment, advance payment, take-or-pay or similar obligations without then or
thereafter being entitled to receive full value therefor. Except as set forth
in Section 4.22 of the Target Disclosure Schedule, as of the date hereof,
Target is not bound by futures, hedge, swap, collar, put, call, floor, cap,
option or other contracts that are intended to benefit from, relate to or
reduce or eliminate the risk of fluctuations in the price of commodities,
including Hydrocarbons, or securities.

    4.23 Brokers.  No broker, finder or investment banker (other than Credit
Suisse First Boston LLC or Bear Stearns, the fees and expenses of which will be
paid by Target) is entitled to any brokerage, finder's fee or other fee or
commission payable by Target in connection with the Transactions based upon
arrangements made by and on behalf of Target. True and correct copies of all
agreements and engagement letters currently in effect with Credit Suisse First
Boston LLC or Bear Stearns (the "Target Engagement Letters") have been provided
to Parent.

    4.24 Tax-Free Reorganization.  Neither Target nor, to the knowledge of
Target, any of its affiliates has taken or agreed to take any action that would
prevent the Merger from constituting a reorganization within the meaning of
Section 368(a) of the Code. Without limiting the generality of the foregoing:

        (a) The Merger will be carried out strictly in accordance with this
    Agreement and the Ancillary Agreement, and there are no other written or
    oral agreements regarding the Merger other than those expressly referred to
    in this Agreement.

        (b) The fair market value of Parent Common Shares and cash received by
    each holder of Target Common Shares in connection with the Merger will be
    approximately equal to the fair market value of the shares of Target Common
    Shares surrendered in the exchange.

                                      16

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        (c) To the best knowledge of Target, neither Parent nor Merger Sub nor
    any Related Person (defined below) has any plan or intention to redeem or
    otherwise reacquire, directly or indirectly, any Parent Common Shares to be
    issued in the Merger.

        (d) To the best knowledge of Target, the aggregate fair market value,
    determined at the Effective Time, of the Parent Common Shares to be
    received in the Merger will not be less than forty percent (40%) of the
    value, determined at the Effective Time, of Target Common Shares and any
    warrants to purchase Target Common Shares ("Target Warrants") outstanding
    immediately before the Effective Time. For this purpose, it is assumed that
    the fair market value of the outstanding Target Common Shares and Target
    Warrants will equal the fair market value of the aggregate Merger
    Consideration.

        (e) Prior to the Effective Time and in connection with or anticipation
    of the Merger, (i) none of the Target Common Shares will be redeemed, (ii)
    no extraordinary distribution will be made with respect to Target Common
    Shares, and (iii) none of the Target Common Shares will be acquired by
    Target or any Related Person.

        (f) Target will redeem its outstanding Series D Preferred Stock
    immediately before the Merger solely with Target's funds. Parent will
    provide no funds to Target, directly or indirectly, for Target to redeem
    such Series D Preferred Stock or for Target to repay debt incurred to
    redeem such stock.

        (g) The only capital stock of Target issued and outstanding is Target
    Common Stock and Series D Preferred Stock.

        (h) Target and Target stockholders will each pay their respective
    expenses, if any, incurred in connection with the Merger.

        (i) Any compensation paid to the Target stockholders who enter (or have
    entered) into employment, consulting or noncompetitive contracts, if any,
    with Parent, Merger Sub, or the Surviving Corporation (a) will be for
    services actually rendered or to be rendered, (b) will be commensurate with
    amounts paid to third parties bargaining at arm's length for similar
    services, and (c) will not represent consideration for the surrender of the
    Target Common Shares in the Merger.

        (j) No debt of Target is guaranteed by any Target stockholder.

        (k) Target owns no stock of Parent.

        (l) Merger Sub will acquire at least ninety percent (90%) of the fair
    market value of the net assets and at least seventy percent (70%) of the
    gross assets held by Target immediately prior to the Merger. For purposes
    of this representation, amounts paid by Target to dissenters, amounts paid
    by Target to stockholders who receive cash or other property, Target assets
    used to pay its reorganization expenses, and all redemptions and
    distributions (including the redemption of the Series D Preferred Stock,
    but excluding regular, normal dividends) made by Target immediately
    preceding the transfer, will be included in assets of Target held
    immediately prior to the Merger.

        (m) No assets of Target have been sold, transferred or otherwise
    disposed of which would prevent Parent from continuing the historic
    business of Target or from using a significant portion of Target's historic
    business assets in a business following the Merger. Target intends to
    continue its historic business or use a significant portion of its historic
    business assets in a business.

        (n) Target is not an investment company as defined in Section
    368(a)(2)(F) of the Code. An investment company is (a) a regulated
    investment company; (b) a real estate investment trust; or (c) a
    corporation (i) fifty percent (50%) or more of the value of whose total
    assets are stock and securities, and (ii) eighty percent (80%) or more of
    the value of whose total assets are held for investment. For this purpose,
    "total assets" shall not include cash and cash items (including
    receivables) and government securities.

                                      17

<PAGE>

        (o) The fair market value of the assets of Target transferred to Merger
    Sub in the Merger will equal or exceed the sum of the liabilities assumed
    or paid by Parent or Merger Sub, plus the amount of liabilities, if any, to
    which the transferred assets are subject.

        (p) The total adjusted basis of the assets of Target transferred to
    Merger Sub in the Merger will equal or exceed the sum of the liabilities
    assumed or paid by Parent or Merger Sub, plus the amount of liabilities, if
    any, to which the transferred assets are subject.

        (q) Target is not under the jurisdiction of a court in a title 11 or
    similar case within the meaning of Section 368(a)(3)(A) of the Code.

        (r) There is no intercorporate indebtedness existing between Parent and
    Target, or between Merger Sub and Target, that was or will be issued,
    acquired, or settled at a discount in connection with the Merger.

        (s) Target has substantial non-tax business purposes and reasons for
    the Merger, and the terms of the Merger are the product of arm's length
    negotiations.

        (t) Target will not take, and Target is not aware of any plan or
    intention of any of the Target stockholders to take, any position on any
    federal, state or local income or franchise tax return, or take any other
    tax reporting position, that is inconsistent with the treatment of the
    Merger as a reorganization within the meaning of Section 368(a) of the
    Code, unless otherwise required by a "determination" (as defined in Code
    Section 1313(a)(1)).

        (u) No stock or securities of Target, or to the knowledge of Target, no
    stock or securities of Parent, will be issued to any Target stockholder for
    services rendered to or for the benefit of Parent, Merger Sub, or Target in
    connection with the Merger.

        (v) No stock or securities of Parent or of Target will be issued to any
    Target stockholder for any indebtedness owed to any Target stockholder in
    connection with the Merger.

        (w) The liabilities of Target to be assumed or paid by Parent and
    Merger Sub and the liabilities to which the transferred assets of Target
    are subject were incurred by Target in the ordinary course of its business.

        (x) No assets were transferred to Target, nor did Target assume any
    liabilities, in anticipation of the Merger.

        (y) The undersigned officer is authorized to make all of the
    certifications and representations set forth herein.

        For purposes of this section, a "Related Person" with respect to either
    Parent or Merger Sub shall mean

            (i) a corporation that, immediately before or immediately after a
        purchase, exchange, redemption, or other acquisition of Parent Common
        Stock, is a member of an Affiliated Group (as defined herein) of which
        Parent (or any successor corporation) is a member, or

            (ii) a corporation in which Parent (or any successor corporation),
        owns, or which owns with respect to Parent (or any successor
        corporation), directly or indirectly, immediately before or immediately
        after such purchase, exchange, redemption, or other acquisition, at
        least 50% of the total combined voting power of all classes of stock
        entitled to vote or at least 50% of the total value of shares of all
        classes of stock, taking into account for purposes of this clause (ii)
        any stock owned by 5% or greater stockholders of Parent (or any
        successor) or such corporation, a proportionate share of the stock
        owned by entities in which Parent (or any successor) or such
        corporation owns an interest, and any stock which may be acquired
        pursuant to the exercise of options.

                                      18

<PAGE>

        For purposes of this section, "Affiliated Group" shall mean one or more
    chains of corporations connected through stock ownership with a common
    parent corporation, but only if

            (x) the common parent owns directly stock that possesses at least
        80% of the total voting power, and has a value at least equal to 80% of
        the total value, of the stock in at least one of the other
        corporations, and

            (y) stock possessing at least 80% of the total voting power, and
        having a value at least equal to 80% of the total value, of the stock
        in each corporation (except the common parent) is owned directly by one
        or more of the other corporations.


        For purposes of the preceding sentence, "stock" does not include any
    stock that (a) is not entitled to vote, (b) is limited and preferred as to
    dividends and does not participate in corporate growth to any significant
    extent, (c) has redemption and liquidation rights that do not exceed the
    issue price of such stock (except for a reasonable redemption or
    liquidation premium), and (d) is not convertible into another class of
    stock.

    4.25 Fairness Opinion.  Target's Board of Directors has received a written
opinion from each of Credit Suisse First Boston LLC and Bear Stearns to the
effect that, as of the date of such opinions, the Common Conversion
Consideration is fair, from a financial point of view, to the holders of the
Target Common Shares. True and complete copies of such opinion have been given
to Parent.

    4.26 Takeover Laws.  Target and Target's Board of Directors have each taken
all actions necessary to be taken such that no restrictive provision of any
"moratorium," "control share acquisition," "fair price," "interested
shareholder," "affiliate transaction," "business combination," or other similar
anti-takeover statutes, laws or regulations of any state, including the State
of Delaware and Section 203 of the DGCL, or any applicable anti-takeover
provision in the certificate of incorporation or bylaws of the Target, is, or
at the Effective Time will be, applicable to Target, Parent, Merger Sub, Target
Common Shares or Target D Preferred Shares, the Voting Agreements, this
Agreement or the Transactions.

                                   ARTICLE V

            REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

    Parent and Merger Sub hereby jointly and severally represent and warrant to
Target as follows:

        5.1 Organization and Qualification.

        (a) Each of Parent and Merger Sub is a corporation duly organized,
    validly existing and in good standing under the laws of the State of
    Delaware, is duly qualified to do business as a foreign corporation and is
    in good standing in the jurisdictions set forth in Section 5.1(a) of the
    disclosure letter delivered by Parent to Target contemporaneously with the
    execution hereof (the "Parent Disclosure Schedule"), which include each
    jurisdiction in which the character of Parent's or Merger Sub's properties
    or the nature of its business makes such qualification necessary, except in
    jurisdictions, if any, where the failure to be so qualified would not
    result in a Parent Material Adverse Effect (as defined below). Each Parent
    Party has all requisite corporate power and authority to own, use or lease
    its properties and to carry on its business as it is now being conducted.
    Each Parent Party has made available to Target a complete and correct copy
    of its certificate of incorporation and bylaws, each as amended to date,
    and Parent's and Merger Sub's certificate of incorporation and bylaws as so
    delivered are in full force and effect. Neither Parent nor Merger Sub is in
    default in any respect in the performance, observation or fulfillment of
    any provision of its certificate of incorporation or bylaws. Merger Sub is
    a direct, wholly owned subsidiary of Parent formed solely for the purpose
    of effecting the Merger and has conducted no activity and has incurred no
    liability or obligation other than as contemplated by this Agreement.

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<PAGE>

        (b) Section 5.1(b) of the Parent Disclosure Schedule lists the name and
    jurisdiction of organization of each Subsidiary of Parent (other than
    Merger Sub) and the jurisdictions in which each such Subsidiary is
    qualified or holds licenses to do business as a foreign corporation or
    other organization as of the date hereof. Each of Parent's Subsidiaries is
    a corporation duly organized, validly existing and in good standing under
    the laws of its jurisdiction of incorporation, is duly qualified to do
    business as a foreign corporation and is in good standing in the
    jurisdictions listed in Section 5.1(b) of the Parent Disclosure Schedule,
    which includes each jurisdiction in which the character of such
    Subsidiary's properties or the nature of its business makes such
    qualification necessary, except in jurisdictions, if any, where the failure
    to be so qualified would not result in a Parent Material Adverse Effect.
    Each of Parent's Subsidiaries has the requisite corporate power and
    authority to own, use or lease its properties and to carry on its business
    as it is now being conducted and as it is now proposed to be conducted.
    Parent has made available to Target a complete and correct copy of the
    certificate of incorporation and bylaws (or similar organizational
    documents) of each of Parent's Subsidiaries, each as amended to date, and
    the certificate of incorporation and bylaws (or similar organizational
    documents) as so delivered are in full force and effect. No Subsidiary of
    Parent is in default in any respect in the performance, observation or
    fulfillment of any provision of its certificate of incorporation or bylaws
    (or similar organizational documents). Other than Parent's Subsidiaries,
    Parent does not beneficially own or control, directly or indirectly, 5% or
    more of any class of equity or similar securities of any corporation or
    other organization, whether incorporated or unincorporated.

        (c) For this Agreement, a "Parent Material Adverse Effect" means any
    event, circumstance, condition, development or occurrence causing,
    resulting in or having (or with the passage of time likely to cause, result
    in or have) a material adverse effect on the financial condition, business,
    assets, properties, prospects or results of operations of Parent and its
    Subsidiaries, taken as a whole; provided that, in no event shall any of the
    following be deemed to constitute or be taken into account in determining a
    Parent Material Adverse Effect: any event, circumstance, change or effect
    that results from (i) changes affecting the economy generally, (ii) changes
    in the market price of oil or natural gas, (iii) the public announcement or
    pending nature of the Transactions, (iv) compliance with the terms of this
    Agreement, or (v) change in the price of the Target Common Shares or the
    Parent Common Shares.

        5.2 Capitalization.

        (a) The authorized capital stock of Parent consists of 100,000,000
    Parent Common Shares, and 5,000,000 shares of preferred stock of Parent,
    par value $.01 per share. As of the date hereof, Parent has (i) 24,224,448
    Parent Common Shares issued and outstanding, (ii) no Parent Common Shares
    in treasury, (iii) no shares of preferred stock outstanding (iv) no
    outstanding stock options to acquire Parent Common Shares under any stock
    option plans or agreements of Parent, and (v) no more than 4,023,834 stock
    appreciation rights of Parent. All the outstanding Parent Common Shares are
    validly issued, fully paid and nonassessable, and free of preemptive
    rights. Except as set forth above, and other than this Agreement, there are
    no outstanding subscriptions, options, rights, warrants, convertible
    securities, stock appreciation rights, phantom equity, or other agreements
    or commitments (including "rights plans" or "poison pills") obligating
    Parent to issue, transfer, sell, redeem, repurchase or otherwise acquire
    any shares of its capital stock of any class. Except as contemplated by the
    Voting Agreement, there are no agreements, arrangements or other
    understandings with respect to the right to vote any shares of capital
    stock of Parent.

        (b) Except as set forth in Section 5.2(b) Parent Disclosure Letter,
    Parent is, directly or indirectly, the record and beneficial owner of all
    of the outstanding shares of capital stock of each Parent Subsidiary, there
    are no irrevocable proxies with respect to any such shares, and no equity
    securities of any Parent Subsidiary are or may become required to be issued
    because of

                                      20

<PAGE>

    any options, warrants, rights to subscribe to, calls or commitments of any
    character whatsoever relating to, or securities or rights convertible into
    or exchangeable or exercisable for, shares of any capital stock of any
    Parent Subsidiary, and there are no contracts, commitments, understandings
    or arrangements by which Parent or any Parent Subsidiary is or may be bound
    to issue additional shares of capital stock of any Parent Subsidiary or
    securities convertible into or exchangeable or exercisable for any such
    shares. Except as set forth in Section 5.2(b) to the Parent Disclosure
    Schedule, all of such shares so owned by Parent are validly issued, fully
    paid and nonassessable and are owned by it free and clear of all Liens.

    5.3 Authority.  Each of Parent and, solely with respect to this Agreement,
Merger Sub, has full corporate power and authority to execute and deliver this
Agreement and the Ancillary Agreements to which it is or will be a party and,
subject to obtaining the Parent Share Issuance Approval to consummate the
Transactions. The execution, delivery and performance of this Agreement and the
Ancillary Agreements to which it is or will be a party and the consummation of
the Transactions have been duly and validly authorized by each Parent Party's
Board of Directors, and no other corporate proceedings on the part of either
Parent Party are necessary to authorize this Agreement or the Ancillary
Agreements to which any of them are or will be a party or to consummate the
Transactions, other than the Parent Share Issuance Approval. This Agreement has
been, and the Ancillary Agreements to which Parent or Merger Sub is or will be
a party are, or upon execution will be, duly and validly executed and delivered
by each Parent Party and, assuming the due authorization, execution and
delivery hereof and thereof by the other parties hereto and thereto,
constitutes or upon execution will constitute, valid and binding obligations of
each Parent Party enforceable against such Persons in accordance with their
respective terms, except for the Enforceability Exception.

    5.4 Consents and Approvals; No Violation.  The execution and delivery of
this Agreement, the consummation of the Transactions and the performance by
each Parent Party of its obligations hereunder will not:

        (a) subject to obtaining the Parent Share Issuance Approval, conflict
    with any provision of the certificate of incorporation or bylaws, as
    amended, of Parent or the certificates of incorporation or bylaws (or other
    similar organizational documents) of any of its Subsidiaries;

        (b) subject to obtaining the Parent Share Issuance Approval and the
    filing of the Certificate of Merger with the Secretary of State of
    Delaware, require any consent, waiver, approval, order, authorization or
    permit of, or registration, filing with or notification to, (i) any
    Governmental Authority, except for applicable requirements of the
    Securities Act, the Exchange Act, state laws relating to takeovers, if
    applicable, state securities or blue sky laws, and Customary Post-Closing
    Consents or (ii) except as set forth in Section 5.4(b) of the Parent
    Disclosure Schedule, any third party other than a Governmental Authority,
    other than such non-Governmental Authority third party consents, waivers,
    approvals, orders, authorizations and permits that would not (i) result in
    a Parent Material Adverse Effect, (ii) materially impair the ability of
    Parent or any of its Subsidiaries to perform its obligations under this
    Agreement or any Ancillary Agreement or (iii) prevent the consummation of
    any of the Transactions;

        (c) except as set forth in Section 5.4(c) of the Parent Disclosure
    Schedule, result in any violation of or the breach of or constitute a
    default (with notice or lapse of time or both) under, or give rise to any
    right of termination, cancellation or acceleration or guaranteed payments
    or a loss of a material benefit under, any of the terms, conditions or
    provisions of any note, lease, mortgage, license, agreement or other
    instrument or obligation to which Parent or any of its Subsidiaries is a
    party or by which Parent or any of its Subsidiaries or any of their
    respective properties or assets may be bound, except for such violations,
    breaches, defaults, or rights of termination, cancellation or acceleration,
    or losses as to which requisite waivers or consents have been obtained or
    which, individually or in the aggregate, would not (i) result in a Parent
    Material

                                      21

<PAGE>

    Adverse Effect, (ii) materially impair the ability of Parent or any of its
    Subsidiaries to perform its obligations under this Agreement or any
    Ancillary Agreement or (iii) prevent the consummation of any of the
    Transactions;

        (d) violate the provisions of any order, writ, injunction, judgment,
    decree, statute, rule or regulation applicable to Parent or any of its
    Subsidiaries;

        (e) result in the creation of any Lien upon any material properties or
    assets or on any shares of capital stock of Parent or its Subsidiaries
    (other than Target and its Subsidiaries after the Effective Time) under any
    agreement or instrument to which Parent or any of its Subsidiaries is a
    party or by which Parent or any of its Subsidiaries or any of their
    properties or assets is bound; or

        (f) result in any holder of any securities of Parent being entitled to
    appraisal, dissenters' or similar rights.

    5.5 Parent SEC Reports.  Parent has filed with the SEC each form,
registration statement, report, schedule, proxy or information statement and
other document (including exhibits and amendments thereto), filed with the SEC
since November 8, 2002 under the Securities Act or the Exchange Act
(collectively, the "Parent SEC Reports"). As of the respective dates such
Parent SEC Reports were filed or, if any such Parent SEC Reports were amended,
as of the date such amendment was filed, each Parent SEC Report, including any
financial statements or schedules included therein, (a) complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act, as the case may be, and the applicable rules and regulations
promulgated thereunder, and (b) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. No event since the
date of the last Parent SEC Report has occurred that would require Parent to
file a Current Report on Form 8-K other than the execution of this Agreement.

    5.6 Parent Financial Statements.  Each of the audited consolidated
financial statements and unaudited consolidated interim financial statements of
Parent (including any related notes and schedules) included (or incorporated by
reference) in its Report on Form 10 made effective on December 6, 2002 have
been prepared from, and are in accordance with, the books and records of Parent
and its consolidated Subsidiaries, comply in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with GAAP
applied on a consistent basis (except as may be indicated in the notes thereto
and subject, in the case of quarterly financial statements, to normal and
recurring year-end adjustments) and fairly present, in conformity with GAAP
applied on a consistent basis (except as may be indicated in the notes
thereto), the consolidated financial position of Parent and its Subsidiaries as
of the date thereof and the consolidated results of operations and cash flows
(and changes in financial position, if any) of Parent and its Subsidiaries for
the periods presented therein (subject to normal year-end adjustments and the
absence of financial footnotes in the case of any unaudited interim financial
statements).

    5.7 Absence of Undisclosed Liabilities.  As of the date hereof, except (a)
as specifically disclosed in the Parent SEC Reports filed and publicly
available prior to the date hereof and (b) for liabilities and obligations
incurred in the ordinary course of business and consistent with past practice
since December 31, 2001, neither Parent nor any of its Subsidiaries has
incurred any liabilities or obligations of any nature (contingent or otherwise)
that would have a Parent Material Adverse Effect.

    5.8 Absence of Certain Changes.  Except as disclosed in the Parent SEC
Reports filed and publicly available prior to the date hereof, as set forth in
Section 5.8 of the Parent Disclosure Schedule or as contemplated by this
Agreement, since December 31, 2001 (a) Parent and its Subsidiaries have

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<PAGE>

conducted their respective businesses only in the ordinary course of business
consistent with past practices, (b) there has not been any change or
development, or combination of changes or developments that, individually or in
the aggregate, would have a Parent Material Adverse Effect, (c) there has not
been any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of Parent, or any
repurchase, redemption or other acquisition by Parent or any of its
Subsidiaries of any outstanding shares of capital stock or other securities of,
or other ownership interests in, Parent or any of its Subsidiaries, (d) there
has not been any amendment of any term of any outstanding security of Parent or
any of its Subsidiaries, and (e) there has not been any change in any method of
accounting or accounting practice by Parent or any of its Subsidiaries, except
for any such change required because of a concurrent change in GAAP or to
conform a Subsidiary's accounting policies and practices to those of Parent.

    5.9 Taxes.  Except as otherwise disclosed in Section 5.9 of the Parent
Disclosure Schedule and for matters that would not have a Parent Material
Adverse Effect:

        (a) Parent and each of its Subsidiaries have timely filed (or have had
    timely filed on their behalf) or will file or cause to be timely filed, all
    material Tax Returns required by applicable law to be filed by any of them
    prior to or as of the Closing Date. As of the time of filing, the foregoing
    Tax Returns correctly reflected the facts regarding the income, business,
    assets, operations, activities, status, or other matters of Parent or any
    other information required to be shown thereon. An extension of time within
    which to file a Tax Return that has not been filed has not been requested
    or granted.

        (b) Parent and each of its Subsidiaries have paid (or have had paid on
    their behalf), or where payment is not yet due, have established (or have
    had established on their behalf and for their sole benefit and recourse),
    or will establish or cause to be established on or before the Closing Date,
    an adequate accrual for the payment of all material Taxes (as defined
    below) due with respect to any period ending prior to or as of the Closing
    Date.

        (c) No Audit by a Tax Authority is pending or, to the knowledge of
    Parent, threatened with respect to any Tax Returns filed by, or Taxes due
    from, Parent or any Subsidiary. No issue has been raised by any Tax
    Authority in any Audit of Parent or any of its Subsidiaries that if raised
    with respect to any other period not so audited could be expected to result
    in a material proposed deficiency for any period not so audited. No
    material deficiency or adjustment for any Taxes has been proposed,
    asserted, assessed, or, to the knowledge of Parent, threatened against
    Parent or any of its Subsidiaries. There are no liens for Taxes upon the
    assets of Parent or any of its Subsidiaries, except liens for current Taxes
    not yet delinquent.

        (d) Neither Parent nor any of its Subsidiaries has given or been
    requested to give any waiver of statutes of limitations relating to the
    payment of Taxes or have executed powers of attorney with respect to Tax
    matters, which will be outstanding as of the Closing Date.

        (e) Prior to the date hereof, Parent and its Subsidiaries have
    disclosed, and provided or made available true and complete copies to
    Target of, all material Tax sharing, Tax indemnity, or similar agreements
    to which Parent or any of its Subsidiaries are a party to, is bound by, or
    has any obligation or liability for Taxes.

        (f) Neither Parent nor any of its Subsidiaries has given or been
    requested to give any waiver of statutes of limitations relating to the
    payment of Taxes or have executed powers of attorney with respect to Tax
    matters, which will be outstanding as of the Closing Date.

        (g) Prior to the date hereof, Parent and its Subsidiaries have
    disclosed, and provided or made available true and complete copies to
    Target of, all material Tax sharing, Tax indemnity, or similar agreements
    to which Parent or any of its Subsidiaries are a party to, is bound by, or
    has any obligation or liability for Taxes.

                                      23

<PAGE>

        (h) Except as set forth in Section 5.9(h) of the Parent Disclosure
    Schedule, and except for the group of which Parent is currently a member
    and any group affiliated with Plains Resources Inc., Parent has never been
    a member of an affiliated group of corporations, within the meaning of
    Section 1504 of the Code.

        (i) Parent has not agreed to make nor is it required to make any
    adjustment under Section 481(a) of the Code by reason of change in
    accounting method or otherwise.

        (j) After consultation with counsel, Parent is aware of no facts which
    would prevent its counsel from rendering the opinion set forth in Section
    8.1(f)

    5.10 Litigation.  Except as disclosed in the Parent SEC Reports filed and
publicly available prior to the date hereof or Section 5.10 of the Parent
Disclosure Schedule and for matters that would not have a Parent Material
Adverse Effect, there is no suit, claim, action, proceeding or investigation
pending or, to Parent's knowledge, threatened against or directly affecting
Parent, any Subsidiaries of Parent or any of the directors or officers of
Parent or any of its Subsidiaries in their capacity as such, nor is there any
reasonable basis therefor that could reasonably be expected to have a Parent
Material Adverse Effect, if adversely determined. Neither Parent nor any of its
Subsidiaries, nor any officer, director or employee of Parent or any of its
Subsidiaries, has been permanently or temporarily enjoined by any order,
judgment or decree of any court or any other Governmental Authority from
engaging in or continuing any conduct or practice in connection with the
business, assets or properties of Parent or such Subsidiary, nor, to the
knowledge of Parent, is Parent, any Subsidiary or any officer, director or
employee of Parent or its Subsidiaries under investigation by any Governmental
Authority. Except as disclosed in the Parent SEC Reports filed and publicly
available prior to the date hereof or Section 5.10 of the Parent Disclosure
Schedule, there is no order, judgment or decree of any court or other tribunal
or other agency extant enjoining or requiring Parent or any of its Subsidiaries
to take any action of any kind with respect to its business, assets or
properties. Notwithstanding the foregoing, no representation or warranty in
this Section 5.10 is made with respect to Environmental Laws, which are covered
exclusively by the provisions set forth in Section 5.12.


    5.11 Employee Benefit Plans; ERISA.

        (a) Section 5.11(a)(1) of the Parent Disclosure Schedule contains a
    true and complete list of the individual or group employee benefit plans or
    arrangements of any type (including plans described in Section 3(3) of
    ERISA), sponsored, maintained or contributed to by Parent or any trade or
    business, whether or not incorporated, which together with Parent would be
    deemed a "single employer" within the meaning of Section 414(b), (c) or (m)
    of the Code or Section 4001(b)(1) of ERISA (a "Parent ERISA Affiliate")
    within six years prior to the Effective Time ("Parent Benefit Plans"), and
    Schedule 5.11(a)(2) of the Parent Disclosure Schedule lists each individual
    employment, severance or similar agreement with respect to which Parent or
    any Parent ERISA Affiliate has any current or future obligation or
    liability.

        (b) With respect to each Parent Benefit Plan: (i) if intended to
    qualify under Section 401(a) or 401(k) of the Code, such plan satisfies the
    requirements of such sections, has received a favorable determination
    letter from the Internal Revenue Service with respect to its qualification,
    and its related trust has been determined to be exempt from tax under
    Section 501(a) of the Code and, to the knowledge of Parent, nothing has
    occurred since the date of such letter to adversely affect such
    qualification or exemption; (ii) each such plan has been administered in
    substantial compliance with its terms and applicable law, except for any
    noncompliance with respect to any such plan that could not reasonably be
    expected to result in a Parent Material Adverse Effect; (iii) neither
    Parent nor any Parent ERISA Affiliate has engaged in, and Parent and each
    Parent ERISA Affiliate do not have any knowledge of any Person that has
    engaged in, any transaction or acted or failed to act in any manner that
    would subject Parent or any Parent ERISA Affiliate to any liability for a
    breach of fiduciary duty under ERISA that could reasonably be

                                      24

<PAGE>

    expected to result in a Parent Material Adverse Effect; (iv) no disputes
    are pending or, to the knowledge of Parent or any Parent ERISA Affiliate,
    threatened; (v) neither Parent nor any Parent ERISA Affiliate has engaged
    in, and Parent and each Parent ERISA Affiliate do not have any knowledge of
    any Person that has engaged in, any transaction in violation of Section
    406(a) or (b) of ERISA or Section 4975 of the Code for which no exemption
    exists under Section 408 of ERISA or Section 4975(c) of the Code or Section
    4975(d) of the Code that could reasonably be expected to result in a Parent
    Material Adverse Effect; (vi) there have been no "reportable events" within
    the meaning of Section 4043 of ERISA for which the 30 day notice
    requirement of ERISA has not been waived by the Pension Benefit Guaranty
    Corporation (the "PBGC"); (vii) all contributions due have been made on a
    timely basis (within, where applicable, the time limit established under
    Section 302 of ERISA or Code Section 412); (viii) no notice of intent to
    terminate such plan has been given under Section 4041 of ERISA and no
    proceeding has been instituted under Section 4042 of ERISA to terminate
    such plan; and (ix) except for defined benefit plans (if applicable), such
    plan may be terminated on a prospective basis without any continuing
    liability for benefits other than benefits accrued to the date of such
    termination. All contributions made or required to be made under any Parent
    Benefit Plan meet the requirements for deductibility under the Code, and
    all contributions which are required and which have not been made have been
    properly recorded on the books of Parent or a Parent ERISA Affiliate.


        (c) No Parent Benefit Plan is a "multiemployer plan" (as defined in
    Section 4001(a)(3) of ERISA) or a "multiple employer plan" (within the
    meaning of Section 413(c) of the Code). No event has occurred with respect
    to Parent or a Parent ERISA Affiliate in connection with which Parent could
    be subject to any liability, lien or encumbrance with respect to any Parent
    Benefit Plan or any employee benefit plan described in Section 3(3) of
    ERISA maintained, sponsored or contributed to by a Parent ERISA Affiliate
    under ERISA or the Code, except for regular contributions and benefit
    payments in the ordinary course of plan business.

        (d) Except as set forth in Section 5.11(d) of the Parent Disclosure
    Schedule, no present or former employees of Parent or any of its
    Subsidiaries are covered by any employee agreements or plans that provide
    or will provide severance pay, post-termination health or life insurance
    benefits (except as required pursuant to Section 4980(B) of the Code) or
    any similar benefits, and the consummation of the Transactions shall not
    cause any payments or benefits to any employee to be either subject to an
    excise tax or non-deductible to Parent under Sections 4999 and 280G of the
    Code, respectively.

    5.12 Environmental Liability. Except as set forth in Section 5.12 of the
Parent Disclosure Schedule or as could not reasonably be expected to result in
liabilities that have a Parent Material Adverse Effect:

        (a) The businesses of Parent and its Subsidiaries have been and are
    operated in material compliance with all Environmental Laws.

        (b) Neither Parent nor any of its Subsidiaries has caused or allowed
    the generation, treatment, manufacture, processing, distribution, use,
    storage, discharge, release, disposal, transport or handling of any
    Hazardous Substances, except in material compliance with all Environmental
    Laws, and, to Parent's knowledge, no generation, treatment, manufacture,
    processing, distribution, use, storage, discharge, release, disposal,
    transport or handling of any Hazardous Substances has occurred at any
    property or facility owned, leased or operated by Parent for any of its
    Subsidiaries except in material compliance with all Environmental Laws.

        (c) Neither Parent nor any of its Subsidiaries has received any written
    notice from any Governmental Authority or third party or, to the knowledge
    of Parent, any other communication alleging or concerning any material
    violation by Parent or any of its Subsidiaries of, or responsibility or
    liability of Parent or any of its Subsidiaries under, any Environmental
    Law. There

                                      25

<PAGE>

    are no pending, or to the knowledge of Parent, threatened, claims, suits,
    actions, proceedings or investigations with respect to the businesses or
    operations of Parent or any of its Subsidiaries alleging or concerning any
    material violation of, or responsibility or liability under, any
    Environmental Law, nor does Parent have any knowledge of any fact or
    condition that could give rise to such a claim, suit, action, proceeding or
    investigation.

        (d) Parent and its Subsidiaries are in possession of and are in
    compliance with all material approvals, permits, licenses, registrations
    and similar authorizations from all Governmental Authorities under all
    Environmental Laws required for the operation of the businesses of Parent
    and its Subsidiaries; there are no pending or, to the knowledge of Parent,
    threatened, actions, proceedings or investigations alleging violations of
    or seeking to modify, revoke or deny renewal of any of such approvals,
    permits, licenses, registrations and authorizations; and Parent does not
    have knowledge of any fact or condition that is reasonably likely to give
    rise to any action, proceeding or investigation regarding the violation of
    or seeking to modify, revoke or deny renewal of any of such approvals,
    permits, licenses, registrations and authorizations.

        (e) Without in any way limiting the generality of the foregoing, (i) to
    Parent's knowledge, all offsite locations where Parent or any of its
    Subsidiaries has transported, released, discharged, stored, disposed or
    arranged for the disposal of Hazardous Substances are licensed and
    operating as required by law and (ii) no PCBs, PCB-containing items,
    asbestos-containing materials, or radioactive materials are used or stored
    at any property owned, leased or operated by Parent or any of its
    Subsidiaries except in material compliance with Environmental Laws.

        (f) No claims have been asserted or, to Parent's knowledge, threatened
    to be asserted against Parent or its Subsidiaries for any personal injury
    (including wrongful death) or property damage (real or personal) arising
    out of alleged exposure or otherwise related to Hazardous Substances used,
    handled, generated, transported or disposed by Parent or its Subsidiaries.

    5.13 Compliance with Laws and Parent Material Contracts.  Neither Parent
nor any of its Subsidiaries is in violation of, or in default under, and no
event has occurred that (with notice or the lapse of time or both) would
constitute a violation of or default under, (a) its certificate of
incorporation, bylaws, or other governing document, (b) any applicable law,
rule, regulation, order, writ, decree or judgment of any Governmental
Authority, or (c) any Parent Material Contract, except (in the case of clause
(b) or (c) above) for any violation or default that would not, individually or
in the aggregate, have a Parent Material Adverse Effect. No investigation or
review by any Governmental Authority with respect to Parent is pending or, to
the knowledge of Parent, threatened, other than those the outcome of which
would not, individually or in the aggregate, have a Parent Material Adverse
Effect. To the knowledge of Parent, no party to any Parent Material Contract is
in material breach of the terms, provisions and conditions of such Parent
Material Contract. "Parent Material Contract" means any written or oral
agreements, contracts, commitments or understandings to which Parent is a
party, by which Parent is directly or indirectly bound, or to which any asset
of Parent may be subject, involving total value or consideration in excess of
$1,000,000.

    5.14 Insurance.  Section 5.14 of the Parent Disclosure Schedule lists each
insurance policy relating to Parent or its Subsidiaries currently in effect.
Parent has made available to Target a true, complete and correct copy of each
such policy or the binder therefor. With respect to each such insurance policy
or binder none of Parent, any of its Subsidiaries or any other party to the
policy is in breach or default thereunder (including with respect to the
payment of premiums or the giving of notices), and Parent does not know of any
occurrence or any event which (with notice or the lapse of time or both) would
constitute such a breach or default or permit termination, modification or
acceleration under the policy, except for such breaches or defaults which,
individually or in the aggregate, would not result in a Parent Material Adverse
Effect. Section 5.14 of the Parent Disclosure Schedule describes any
self-insurance arrangements affecting Parent or its Subsidiaries.

                                      26

<PAGE>

    5.15 Labor Matters; Employees.

        (a) Except as set forth in Section 5.15 of the Parent Disclosure
    Schedule, (i) there is no labor strike, dispute, slowdown, work stoppage or
    lockout actually pending or, to the knowledge of Parent, threatened against
    or affecting Parent or any of its Subsidiaries and, during the past five
    years, there has not been any such action, (ii) none of Parent or any of
    its Subsidiaries is a party to or bound by any collective bargaining or
    similar agreement with any labor organization, or work rules or practices
    agreed to with any labor organization or employee association applicable to
    employees of Parent or any of its Subsidiaries, (iii) none of the employees
    of Parent or any of its Subsidiaries are represented by any labor
    organization and none of Parent or any of its Subsidiaries have any
    knowledge of any current union organizing activities among the employees of
    Parent or any of its Subsidiaries nor does any question concerning
    representation exist concerning such employees, (iv) Parent and its
    Subsidiaries have each at all times been in compliance with all applicable
    laws respecting employment and employment practices, terms and conditions
    of employment, wages, hours of work and occupational safety and health, and
    are not engaged in any unfair labor practices as defined in the National
    Labor Relations Act or other applicable law, ordinance or regulation, (v)
    there is no unfair labor practice charge or complaint against any of Parent
    or any of its Subsidiaries pending or, to the knowledge of Parent,
    threatened before the National Labor Relations Board or any similar state
    or foreign agency, (vi) there is no grievance or arbitration proceeding
    arising out of any collective bargaining agreement or other grievance
    procedure relating to Parent or any of its Subsidiaries, (vii) neither the
    Occupational Safety and Health Administration nor any other federal or
    state agency has threatened to file any citation, and there are no pending
    citations, relating to Parent or any of its Subsidiaries, and (viii) there
    is no employee or governmental claim or investigation, including any
    charges to the Equal Employment Opportunity Commission or state employment
    practice agency, investigations regarding Fair Labor Standards Act
    compliance, audits by the Office of Federal Contractor Compliance Programs,
    Workers' Compensation claims, sexual harassment complaints or demand
    letters or threatened claims.

        (b) Since the enactment of the WARN Act, none of Parent or any of its
    Subsidiaries has effectuated (i) a "plant closing" (as defined in the WARN
    Act) affecting any site of employment or one or more facilities or
    operating units within any site of employment or facility of any of Parent
    or any of its Subsidiaries, or (ii) a "mass layoff" (as defined in the WARN
    Act) affecting any site of employment or facility of Parent or any of its
    Subsidiaries, nor has Parent or any of its Subsidiaries been affected by
    any transaction or engaged in layoffs or employment terminations sufficient
    in number to trigger application of any similar state or local law, in each
    case that could reasonably be expected to have a Parent Material Adverse
    Effect.

    5.16 Reserve Reports.

        (a) All information (excluding assumptions and estimates but including
    the statement of the percentage of reserves from the oil and gas wells and
    other interests evaluated therein to which Parent is entitled and the
    percentage of the costs and expenses related to such wells or interests to
    be borne by Parent) supplied to Ryder Scott Company, L.P. and Netherland,
    Sewell & Associates, Inc. by or on behalf of Parent that was material to
    such firm's estimates of proved oil and gas reserves attributable to the
    Oil and Gas Interests (as hereinafter defined) of Parent in connection with
    the preparation of the proved oil and gas reserve reports concerning the
    Oil and Gas Interests of Parent as of December 31, 2002 and prepared by
    such engineering firm (the "Parent Reserve Report") was (at the time
    supplied or as modified or amended prior to the issuance of the Parent
    Reserve Report) to Parent's knowledge accurate in all material respects and
    Parent has no knowledge of any material errors in such information that
    existed at the time of such issuance.

                                      27

<PAGE>

        (b) Set forth in Section 5.16(b) of the Parent Disclosure Schedule is a
    list of all material Oil and Gas Interests that were included in the Parent
    Reserve Report that have been disposed of prior to the date hereof.

    5.17 Permits.  Immediately prior to the Effective Time and except for
Customary Post Closing Consents, Parent and its Subsidiaries hold all of the
Permits required or necessary to construct, own, operate, use and/or maintain
its properties and conduct its operations as presently conducted, except for
such Permits, the lack of which, individually or in the aggregate, would not
have a Parent Material Adverse Effect; provided, however, that notwithstanding
the foregoing, no representation or warranty in this Section 5.17 is made with
respect to Permits issued pursuant to Environmental Laws, which are covered
exclusively in Section 5.12.

    5.18 Required Stockholder Vote or Consent.  The only vote or written
consent of the holders of any class or series of Parent's capital stock that
shall be necessary to consummate the Transactions is the approval by a majority
of the voting power of the Parent Common Shares of the issuance of Parent
Common Shares to the holders of Target Common Shares as a result of the
Transactions (the "Parent Share Issuance Approval").

    5.19 Proxy/Prospectus; Registration Statement.  None of the information to
be supplied by Parent for inclusion in (a) the Proxy/Prospectus to be filed by
Target and Parent with the SEC, and any amendments or supplements thereto, or
(b) the Registration Statement to be filed by Parent with the SEC in connection
with the Merger, and any amendments or supplements thereto, will, at the
respective times such documents are filed, and, in the case of the
Proxy/Prospectus, at the time the Proxy/Prospectus or any amendment or
supplement thereto is first mailed to the Target and Parent stockholders, at
the time of the Target Special Meeting and the Parent Special Meeting and at
the Effective Time, and, in the case of the Registration Statement, when it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be made therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.

    5.20 Intellectual Property.  Parent or its Subsidiaries own, or are
licensed or otherwise have the right to use, all Intellectual Property
currently used in the conduct of the business of Parent and its Subsidiaries,
except where the failure to so own or otherwise have the right to use such
Intellectual Property would not, individually or in the aggregate, have a
Parent Material Adverse Effect. No Person has notified either Parent or any of
its Subsidiaries that their use of the Intellectual Property infringes on the
rights of any Person, subject to such claims and infringements as do not,
individually or in the aggregate, give rise to any liability on the part of
Parent and its Subsidiaries that could have a Parent Material Adverse Effect,
and, to Parent's knowledge, no Person is infringing on any right of Parent or
any of its Subsidiaries with respect to any such Intellectual Property. No
claims are pending or, to Parent's knowledge, threatened that Parent or any of
its Subsidiaries is infringing or otherwise adversely affecting the rights of
any Person with regard to any Intellectual Property.

    5.21 Hedging.  Section 5.21 of the Parent Disclosure Schedule sets forth
for the periods shown obligations of Parent and each of its Subsidiaries for
the delivery of Hydrocarbons attributable to any of the properties of Parent or
any of its Subsidiaries in the future on account of prepayment, advance
payment, take-or-pay or similar obligations without then or thereafter being
entitled to receive full value therefor. Except as set forth in Section 5.21 of
the Parent Disclosure Schedule, as of the date hereof, neither Parent nor any
of its Subsidiaries is bound by futures, hedge, swap, collar, put, call, floor,
cap, option or other contracts that are intended to benefit from, relate to or
reduce or eliminate the risk of fluctuations in the price of commodities,
including Hydrocarbons, or securities.

    5.22 Brokers.  No broker, finder or investment banker (other than Lehman
Brothers Inc. the fees and expenses of which will be paid by Parent) is
entitled to any brokerage, finder's fee or other fee or

                                      28

<PAGE>

commission payable by Parent or any of its Subsidiaries in connection with the
Transactions based upon arrangements made by and on behalf of Parent or any of
its Subsidiaries. True and correct copies of all agreements and engagement
letters currently in effect with Lehman Brothers Inc. (the "Parent Engagement
Letters") have been provided to Target.

    5.23 Tax Matters.  Neither Parent nor, to the knowledge of Parent, any of
its affiliates has taken or agreed to take any action that would prevent the
Merger from constituting a reorganization within the meaning of Section 368(a)
of the Code. Without limiting the generality of the foregoing:

        (a) The Merger will be carried out strictly in accordance with this
    Agreement and the Ancillary Agreements, and there are no other written or
    oral agreements relating to the Merger other than those expressly referred
    to in this Agreement.

        (b) In connection with the Merger, no Target Common Shares will be
    acquired by Parent or a Related Person for consideration other than Parent
    Common Shares, except for the Cash Consideration, payments to the
    dissenting stockholders, if any, and any cash received in lieu of
    fractional share interests in Parent Common Shares.

        (c) The fair market value of Parent Common Shares and cash received by
    each holder of Target Common Shares in connection with the Merger will be
    approximately equal to the fair market value of the Target Common Shares
    surrendered in the exchange.

        (d) Parent will provide no funds to Target, directly or indirectly, for
    Target to redeem its Series D Preferred Stock or for Target to repay debt
    incurred to redeem such stock.

        (e) Neither Parent nor Merger Sub (nor any Related Person as defined in
    Attachment A) has any plan or intention to redeem or otherwise reacquire,
    directly or indirectly, any Parent Common Shares to be issued in the Merger.

        (f) Parent has no stock repurchase program and has no current plan or
    intention to adopt such a plan.

        (g) To the best knowledge of Parent, the aggregate fair market value,
    determined at the Effective Time, of the Parent Common Shares to be
    received in the Merger will not be less than forty percent (40%) of the
    value, determined at the Effective Time, of the Target Common Shares and
    Target Warrants outstanding immediately before the Effective Time. For this
    purpose, it is assumed that the fair market value of the outstanding Target
    Common Shares and Target Warrants will equal the fair market value of the
    aggregate Merger Consideration.

        (h) Neither Parent nor any Related Person owns, nor has it owned during
    the past five years, any shares of stock of the Target. Neither Parent nor
    any Related Person has caused any other person to acquire stock of the
    Target on behalf of Parent or a Related Person, and will not directly or
    indirectly acquire any stock of the Target in connection with the Merger,
    except as described in the Merger Agreement.

        (i) Parent has not, directly or indirectly, transferred any cash or
    property to the Target (or any entity controlled directly or indirectly by
    the Target) for less than full and adequate consideration and has not made
    any loan to the Target (or any entity controlled directly or indirectly by
    the Target) in anticipation of the Merger.

        (j) There is no intercompany indebtedness existing between Parent and
    Target, or between Merger Sub and Target, that was or will be issued,
    acquired, or settled at a discount in connection with the Merger.

        (k) Parent will pay its own expenses incurred in connection with or as
    part of the Merger or related transactions. Parent has not paid and will
    not pay, directly or indirectly, any expenses (including transfer taxes)
    incurred by any holder of Target Common Shares in connection with or

                                      29

<PAGE>

    as part of the Merger or any related transactions. Parent has not agreed to
    assume, nor will it directly or indirectly assume, any expense or other
    liability, whether fixed or contingent, of any holder of Target Common
    Shares.

        (l) Any compensation paid to the holders of Target Common Shares who
    enter (or have entered) into employment, consulting or noncompetitive
    contracts, if any, with Parent, Merger Sub, or the Surviving Corporation
    (a) will be for services actually rendered or to be rendered, (b) will be
    commensurate with amounts paid to third parties bargaining at arm's length
    for similar services, and (c) will not represent consideration for the
    surrender of the Target Common Shares in the Merger.

        (m) Merger Sub is wholly and directly owned by Parent and has been
    newly formed solely to consummate the Merger. Prior to the Effective Time,
    Merger Sub will have no assets other than cash to satisfy capital
    requirements under state law and has not, and will not, conduct any
    business activities or other operations of any kind other than the issuance
    of its stock to Parent or as otherwise expressly required by the Merger
    Agreement.

        (n) At the Effective Time of the Merger, Merger Sub will not have or
    issue any warrants, options, convertible securities, or any other type of
    right pursuant to which any person could acquire any stock in Merger Sub.

        (o) Merger Sub will acquire at least ninety percent (90%) of the fair
    market value of the net assets and at least seventy percent (70%) of the
    gross assets held by Target immediately prior to the Merger. For purposes
    of this representation, amounts paid by Target to dissenters, amounts paid
    by Target to stockholders who receive cash or other property, Target assets
    used to pay its reorganization expenses, and all redemptions and
    distributions (including the redemption of the Series D Preferred Stock,
    but excluding regular, normal dividends) made by Target immediately
    preceding the transfer, will be included in assets of Target held
    immediately prior to the Merger.

        (p) Following the Merger, the Surviving Corporation will continue the
    historic business of Target or use a significant portion of its assets in a
    business, within the meaning of Treas. Reg.(S)1.368-1(d).

        (q) Parent has no plan or intention to liquidate the Surviving
    Corporation following the Merger; to merge the Surviving Corporation with
    another corporation; to sell or otherwise dispose of the stock of Merger
    Sub; or to sell or otherwise dispose of any of the assets of Target except
    for dispositions made in the ordinary course of business or transfers or
    successive transfers to one or more corporations controlled (within the
    meaning of Section 368(c) of the Code) in each case by the transferor
    corporation.

        (r) Following the Merger, Parent has no plan or intention to cause the
    Surviving Corporation to issue additional shares of its stock that would
    result in Parent owning stock possessing less than eighty percent (80%) of
    the total combined voting power of all classes of stock entitled to vote or
    less than eighty percent (80%) of the total number of shares of all other
    classes of stock of the Surviving Corporation.

        (s) Parent is paying no consideration for the Target stock other than
    the Merger Consideration.

        (t) To the best knowledge of Parent, any Target liabilities assumed or
    paid by Parent or Merger Sub and the liabilities to which the transferred
    assets of the Target are subject were incurred by the Target in the
    ordinary course of its business.

        (u) Neither Parent nor Merger Sub is an investment company within the
    meaning of Sections 368(a)(2)(F) of the Code. An investment company is (1)
    a regulated investment company; (2) a real estate investment trust; or (3)
    a corporation (i) fifty percent (50%) or more of

                                      30

<PAGE>

    the value of whose total assets are stock and securities, and (ii) eighty
    percent (80%) or more of the value of whose total assets are held for
    investment. For this purpose, "total assets" shall not include cash and
    cash items (including receivables) and government securities.

        (v) Parent has substantial non-tax business purposes and reasons for
    the Merger, and the terms of the Merger are the product of arm's length
    negotiations.

        (w) Neither Parent nor the Surviving Corporation will take any position
    on any federal, state or local income or franchise tax return, or take any
    other tax reporting position that is inconsistent with the treatment of the
    Merger as a reorganization within the meaning of Section 368(a) of the
    Code, unless otherwise required by a "determination" (as defined in Code
    Section 1313(a)(1)).

        (x) No stock or securities of Parent will be issued to any Target
    stockholder for services rendered to or for the benefit of Parent, Merger
    Sub, or the Target in connection with the Merger.

        (y) To the best knowledge of Parent, no stock or securities of the
    Target will be issued to any Target stockholder for services rendered to or
    for the benefit of Parent, Merger Sub, or the Target in connection with the
    Merger.

        (z) No stock or securities of Parent will be issued for any
    indebtedness owed to any Target stockholder in connection with the Merger.

        (aa) To the best knowledge of Parent, no stock or securities of the
    Target will be issued for any indebtedness owed to any Target stockholder
    in connection with the Merger.

        (bb) No stock of Merger Sub will be issued in connection with the
    Merger.

        (cc) Rights received by the Parent stockholders pursuant to Parent's
    [Poison Pill Agreement] are not separately tradeable, are contingent, are
    non-exercisable, are subject to redemption if they become exercisable, and
    have no ascertainable fair market value.

        (dd) The undersigned officer is authorized to make all of the
    certifications and representations set forth herein.


                                  ARTICLE VI

                    CONDUCT OF BUSINESS PENDING THE MERGER

    6.1 Conduct of Business by Target Pending the Merger.  From the date hereof
until the Effective Time, except as Parent otherwise agrees in writing, as set
forth in the Target Disclosure Schedule, or as otherwise contemplated by this
Agreement, Target shall conduct its business in the ordinary course consistent
with past practice and shall use all reasonable efforts to preserve intact its
business organizations and relationships with third parties and to keep
available the services of its present officers and key employees, subject to
the terms of this Agreement. Except as otherwise provided in this Agreement,
and without limiting the generality of the foregoing, from the date hereof
until the Effective Time, without Parent's written consent (which consent shall
not be unreasonably withheld):

        (a) Target shall not adopt or propose any change to its certificate of
    incorporation or bylaws (or similar organizational documents);

        (b) Target shall not (i) declare, set aside or pay any dividend or
    other distribution with respect to any shares of capital stock of Target
    (except for accumulated dividends on the Target D Preferred Shares) or (ii)
    except as contemplated in Article III or Section 7.21, repurchase, redeem
    or otherwise acquire any outstanding shares of capital stock or other
    securities of, or other ownership interests in Target;

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        (c) Target shall not merge or consolidate with any other Person or
    acquire assets of any other Person for aggregate consideration in excess of
    $1,000,000, or enter a new line of business or commence business operations
    in any country in which Target is not operating as of the date hereof;

        (d) Except as set forth in Section 6.1(d) of the Target Disclosure
    Schedule, Target shall not sell, lease, license or otherwise surrender,
    relinquish or dispose of any assets or properties with an aggregate fair
    market value exceeding $1,000,000 (other than sales of Hydrocarbons in the
    ordinary course of business);

        (e) Target shall not settle any material Audit, make or change any
    material Tax election or file any material amended Tax Return except as set
    forth in Section 4.9 of the Target Disclosure Schedule;

        (f) Except as otherwise permitted by this Agreement, Target shall not
    issue any securities (whether through the issuance or granting of options,
    warrants, rights or otherwise and except pursuant to existing obligations
    disclosed in the Target SEC Reports filed and publicly available prior to
    the date hereof or the Target Disclosure Schedule), enter into any
    amendment of any term of any outstanding security of Target, incur any
    indebtedness except trade debt in the ordinary course of business and debt
    pursuant to existing credit facilities or arrangements (except as set forth
    in Section 6.1(f) of the Target Disclosure Schedule), fail to make any
    required contribution to any Target Benefit Plan, increase compensation,
    bonus (except for compensation or bonuses as set forth in Section 6.1(f) of
    the Target Disclosure Schedule) or other benefits payable to (except for
    payments pursuant to 401(k) plans), or modify or amend any employment
    agreements or severance agreements with, any executive officer or former
    employee or enter into any settlement or consent with respect to any
    pending litigation other than settlements in the ordinary course of
    business;

        (g) Target shall not change any method of accounting or accounting
    practice by Target except for any such change required by GAAP;

        (h) Target shall not take any action that would give rise to a claim
    under the WARN Act or any similar state law or regulation because of a
    "plant closing" or "mass layoff" (each as defined in the WARN Act);

        (i) Target shall not amend or otherwise change the terms of the Target
    Engagement Letters, except to the extent that any such amendment or change
    would result in terms more favorable to Target;

        (j) Except as set forth in Section 6.1(j) of the Target Disclosure
    Schedule, Target shall not become bound or obligated to participate in any
    operation, or consent to participate in any operation, with respect to any
    Oil and Gas Interests that will individually cost in excess of $1,000,000
    unless the operation is a currently existing obligation of Target or
    necessary to extend, preserve or maintain an Oil and Gas Interest;

        (k) Target shall timely meet its royalty payment obligations in
    connection with its oil and gas leases.

        (l) Target shall not (i) enter into any futures, hedge, swap, collar,
    put, call, floor, cap, option or other contracts that are intended to
    benefit from or reduce or eliminate the risk of fluctuations in the price
    of commodities, including Hydrocarbons or securities, other than in the
    ordinary course of business in accordance with Target's current policies or
    (ii) enter into any fixed price commodity sales agreements with a duration
    of more than three months;

        (m) Target shall not (i) adopt, amend (other than amendments that
    reduce the amounts payable by Target, or amendments required by law to
    preserve the qualified status of a Target Benefit Plan or otherwise comply
    with ERISA, the Code or other applicable law) or assume an

                                      32

<PAGE>

    obligation to contribute to any employee benefit plan or arrangement of any
    type or collective bargaining agreement or enter into any employment,
    severance or similar contract with any Person (including contracts with
    management of Target that might require that payments be made upon
    consummation of the Transactions) or amend any such existing contracts to
    increase any amounts payable thereunder or benefits provided thereunder,
    (ii) engage in any transaction (either acting alone or in conjunction with
    any Target Benefit Plan or trust created thereunder) in connection with
    which Target could be subjected (directly or indirectly) to either a civil
    penalty assessed pursuant to subsections (c), (i) or (l) of Section 502 of
    ERISA or a tax imposed pursuant to Chapter 43 of Subtitle D of the Code,
    (iii) terminate any Target Benefit Plan in a manner, or take any other
    action with respect to any Target Benefit Plan, that could result in the
    liability of Target to any person, (iv) take any action that could
    adversely affect the qualification of any Target Benefit Plan or its
    compliance with the applicable requirements of ERISA, (v) fail to make full
    payment when due of all amounts which, under the provisions of any Target
    Benefit Plan, any agreement relating thereto or applicable law, Target is
    required to pay as contributions thereto or (vi) fail to file, on a timely
    basis, all reports and forms required by federal regulations with respect
    to any Target Benefit Plan;

        (n) Target shall not (i) approve an increase in salary for any Target
    Employees or (ii) without Parent's prior written consent (which consent
    shall not be unreasonably withheld), terminate any Target Employee entitled
    to any severance payment upon such termination;

        (o) Target shall not organize or acquire any Person that could become a
    Subsidiary;

        (p) Target shall not enter into any commitment or agreement to license
    or purchase seismic data that will cost in excess of $1,000,000, other than
    pursuant to agreements or commitments existing on the date hereof; and

        (q) Target shall not agree or commit to do any of the foregoing.

    6.2 Conduct of Business by Parent Pending the Merger.  From the date hereof
until the Effective Time, except as Target otherwise agrees in writing, as set
forth in the Parent Disclosure Schedule, or as otherwise contemplated by this
Agreement, Parent shall conduct its business in the ordinary course consistent
with past practice and shall use all reasonable efforts to preserve intact its
business organizations and relationships with third parties and to keep
available the services of its present officers and key employees, subject to
the terms of this Agreement. Except as otherwise provided in this Agreement,
and without limiting the generality of the foregoing, from the date hereof
until the Effective Time, without Target's written consent (which consent shall
not be unreasonably withheld):

        (a) Parent shall not adopt or propose any change to its certificate of
    incorporation or bylaws that would alter the terms of the Parent Common
    Shares;

        (b) Except as set forth in Section 6.2(b) to the Parent Disclosure
    Schedule, Parent shall not, and shall not permit any of its Subsidiaries to
    (i) declare, set aside or pay any dividend or other distribution with
    respect to any shares of capital stock of Parent or its subsidiaries
    (except for intercompany dividends from direct or indirect wholly owned
    subsidiaries, (ii) repurchase, redeem or otherwise acquire any outstanding
    shares of capital stock or other securities of, or other ownership
    interests in, Parent or any of its Subsidiaries, other than intercompany
    acquisitions of stock, or (iii) provide any funds to Target, directly or
    indirectly, for Target to redeem the Target Series D Preferred Shares, or
    for Target to repay debt incurred to redeem such shares;

        (c) Parent shall not, and shall not permit any of its Subsidiaries to,
    merge or consolidate with any other Person or acquire assets of any other
    Person for aggregate consideration in excess of $5,000,000, or enter a new
    line of business or commence business operations in any country in which
    Parent is not operating as of the date hereof;

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<PAGE>

        (d) Except as set forth in Section 6.2(d) of the Parent Disclosure
    Schedule, Parent shall not, and shall not permit any of its Subsidiaries
    to, sell, lease, license or otherwise surrender, relinquish or dispose of
    any assets or properties (other than among Parent and its direct and
    indirect wholly owned Subsidiaries) with an aggregate fair market value
    exceeding $5,000,000 (other than sales of Hydrocarbons in the ordinary
    course of business);

        (e) Except as otherwise permitted by this Agreement, Parent shall not
    (i) issue equity securities for consideration in excess of $5,000,000 in
    the aggregate, or (ii) incur any indebtedness except trade debt in the
    ordinary course of business, debt pursuant to existing credit facilities or
    arrangements, debt incurred to pay the Cash Consideration and the Preferred
    Stock Merger Consideration, and other debt, which other debt shall not
    exceed $5,000,000 in the aggregate;

        (f) Parent shall not change any method of accounting or accounting
    practice by Parent or any of its Subsidiaries, except for any such change
    required by GAAP;

        (g) Parent shall not amend or otherwise change the terms of the Parent
    Engagement Letter, except to the extent that any such amendment or change
    would result in terms more favorable to Parent;

        (h) Parent shall not adopt a plan of complete or partial liquidation,
    dissolution, or reorganization;

        (i) Except as set forth in Section 6.2(i) of the Parent Disclosure
    Schedule, Parent shall not become bound or obligated to participate in any
    operation, or consent to participate in any operation, with respect to any
    Oil and Gas Interests that will individually cost in excess of $5,000,000
    unless the operation is a currently existing obligation of Parent or
    necessary to extend, preserve or maintain an Oil and Gas Interest;

        (j) Parent shall not (i) enter into any futures, hedge, swap, collar,
    put, call, floor, cap, option or other contracts that are intended to
    benefit from or reduce or eliminate the risk of fluctuations in the price
    of commodities, including Hydrocarbons or securities, other than in the
    ordinary course of business in accordance with Parent's current policies or
    (ii) enter into any fixed price commodity sales agreements with a duration
    of more than three months;

        (k) Parent shall not (i) adopt, amend (other than the adoption of the
    Parent Incentive Plan (as defined), and amendments that reduce the amounts
    payable by Parent, or amendments required by law to preserve the qualified
    status of a Parent Benefit Plan or otherwise comply with ERISA, the Code or
    other applicable law) or assume an obligation to contribute to any employee
    benefit plan or arrangement of any type or collective bargaining agreement
    or enter into any employment, severance or similar contract with any Person
    or amend any such existing contracts to increase any amounts payable
    thereunder or benefits provided thereunder, (ii) engage in any transaction
    (either acting alone or in conjunction with any Parent Benefit Plan or
    trust created thereunder) in connection with which Parent could be
    subjected (directly or indirectly) to either a civil penalty assessed
    pursuant to subsections (c), (i) or (l) of Section 502 of ERISA or a tax
    imposed pursuant to Chapter 43 of Subtitle D of the Code, (iii) terminate
    any Parent Benefit Plan in a manner, or take any other action with respect
    to any Parent Benefit Plan, that could result in the liability of Parent to
    any person, (iv) take any action that could adversely affect the
    qualification of any Parent Benefit Plan or its compliance with the
    applicable requirements of ERISA, (v) fail to make full payment when due of
    all amounts which, under the provisions of any Parent Benefit Plan, any
    agreement relating thereto or applicable law, Parent is required to pay as
    contributions thereto or (vi) fail to file, on a timely basis, all reports
    and forms required by federal regulations with respect to any Parent
    Benefit Plan; provided, however, that Parent may issue stock options, stock
    appreciation rights, and bonuses in the ordinary course of business;

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<PAGE>

        (l) Parent shall not enter into any commitment or agreement to license
    or purchase seismic data that will cost in excess of $5,000,000, other than
    pursuant to agreements or commitments existing on the date hereof; and

        (m) Parent shall not, and shall not permit any of its Subsidiaries to,
    agree or commit to do any of the foregoing.

                                  ARTICLE VII

                             ADDITIONAL AGREEMENTS

    7.1 Access and Information.  The parties shall each afford to the other and
to the other's financial advisors, legal counsel, accountants, consultants,
financing sources, and other authorized representatives access during normal
business hours throughout the period prior to the Effective Time to all of its
books, records, properties, contracts, leases, plants and personnel and, during
such period, each shall furnish promptly to the other (a) a copy of each
report, schedule and other document filed or received by it pursuant to the
requirements of federal or state securities laws, and (b) all other information
as such other party reasonably may request, provided that no investigation
pursuant to this Section 7.1 shall affect any representations or warranties
made herein or the conditions to the obligations of the respective parties to
consummate the Merger. Each party shall hold in confidence all nonpublic
information until such time as such information is otherwise publicly available
and, if this Agreement is terminated, each party will deliver to the other all
documents, work papers and other materials (including copies) obtained by such
party or on its behalf from the other party as a result of this Agreement or in
connection herewith, whether so obtained before or after the execution hereof.
Notwithstanding the foregoing, the Confidentiality Agreements dated January 10,
2003 and January 20, 2003 between Parent and Target (the "Confidentiality
Agreements") shall survive the execution and delivery of this Agreement.

    7.2 Acquisition Proposals.

    From the date hereof until the termination of this Agreement, Target shall
not, and shall cause its officers, directors, employees or other agents not to,
directly or indirectly, (a) take any action to solicit, initiate or encourage
any Target Acquisition Proposal or (b) engage in discussions or negotiations
with, or disclose any nonpublic information relating to Target or afford access
to its books or records to any Person that may be considering making, or has
made, a Target Acquisition Proposal. Nothing contained in this Section 7.2
shall prohibit Target and its Board of Directors from (i) taking and disclosing
a position with respect to a tender offer by a third party pursuant to Rules
14d-9 and 14e-2(a) under the Exchange Act, or (ii) prior to obtaining the
Target Stockholders' Approval, furnishing information, including nonpublic
information to, or entering into negotiations with, any Person that has
indicated its willingness to make an unsolicited bona fide Target Acquisition
Proposal if, and only to the extent that (with respect to this Section 7.2 F
only):

        (A) such unsolicited bona fide proposal relating to a Target
    Acquisition Proposal is made by a third party that Target's Board of
    Directors determines in good faith has the good faith intent to proceed
    with negotiations to consider, and the financial and legal capability to
    consummate, such Target Acquisition Proposal,

        (B) Target's Board of Directors determines in good faith after
    consultation with its independent legal counsel and financial advisor
    (taking into account among other things the legal, financial, regulatory
    and other aspects of the proposal, the Person making the proposal, the
    likelihood of consummation and the time to complete such transaction) that
    such Target Acquisition Proposal is a Target Superior Proposal,

        (C) contemporaneously with furnishing such information to, or entering
    into discussions with, such Person, Target enters into a customary
    confidentiality agreement with such Person,

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<PAGE>

        (D) contemporaneously with furnishing such information to, or entering
    into discussions or negotiations with, such Person, Target provides written
    notice to Parent to the effect that it is furnishing information to, or
    entering into discussions or negotiations with, such Person,

        (E) such Target Acquisition Proposal is not subject to any financing
    contingencies, and

        (F) Target uses all reasonable efforts to keep Parent informed in all
    material respects of the status and terms of any such negotiations or
    discussions (including the identity of the Person with whom such
    negotiations or discussions are being held) and provides Parent copies of
    such written proposals and any amendments or revisions thereto or
    correspondence related thereto; provided, that Parent agrees to execute a
    confidentiality agreement, in form reasonably acceptable to it, with
    respect to any such information delivered to Parent pursuant to this clause
    (G), which confidentiality agreement shall be subject to Parent's
    disclosure obligations arising under applicable law or securities exchange
    regulations.

    The term "Target Acquisition Proposal" means any offer or proposal for, or
any indication of interest in, a merger, acquisition, consolidation or other
business combination directly or indirectly involving Target or the acquisition
of a substantial equity interest in, or a substantial portion of the assets of,
Target, other than the Transactions.

    7.3 Directors' and Officers' Indemnification and Insurance.

    (a) For six years after the Effective Time, the Surviving Corporation shall
indemnify, defend and hold harmless each person who is now, or has been at any
time prior to the date hereof or who becomes prior to the Effective Time, an
officer or director of Target and its Subsidiaries (each an "Indemnified
Party"), who was or is made or is threatened to be made a party or is otherwise
involved in any action, suit or proceeding, whether civil, criminal, or
investigative (a "proceeding") against all losses, damages, liabilities, fees
and expenses (including reasonable fees and disbursements of counsel and
experts and judgments, fines, losses, claims, liabilities and amounts paid in
settlement (provided that any such settlement is effected with the prior
written consent of Parent, which will not be unreasonably withheld)) actually
and reasonably incurred by the Indemnified Party because the Indemnified Party
is or was a director or officer of Target or any of its Subsidiaries pertaining
to any act or omission existing or occurring at or prior to the Effective Time
including any act or omission relating to this Agreement or the Transactions
(the "Indemnified Liabilities") to the full extent permitted under Delaware law
or the Surviving Corporation's certificate of incorporation and bylaws. If an
Indemnified Party makes or asserts any claim for Indemnified Liabilities, any
determination required to be made with respect to whether an Indemnified
Party's conduct complies with the standards set forth under the DGCL shall be
made by independent counsel mutually acceptable to the Surviving Corporation
and the Indemnified Party; and provided, further, that nothing herein shall
impair any rights or obligations of any Indemnified Party. If any claim or
claims are brought against any Indemnified Party (whether arising before or
after the Effective Time), such Indemnified Party may select counsel for the
defense of such claim, which counsel shall be reasonably acceptable to Target
(if selected before the Effective Time) and the Surviving Corporation (if
selected after the Effective Time).

    (b) The Surviving Corporation shall promptly advance all reasonable
out-of-pocket expenses of each Indemnified Party in connection with any such
action or proceeding described above, as such expenses are incurred, to the
fullest extent permitted by the DGCL, subject to the receipt by the Surviving
Corporation of an undertaking by or on behalf of such Indemnified Party to
repay such amount if it shall ultimately be determined that such Indemnified
Party is not entitled to be indemnified by the Surviving Corporation.

    (c) The Surviving Corporation shall maintain Target's existing officers'
and directors' liability insurance policy ("D&O Insurance") for a period of at
least six years after the Effective Time, but only to the extent related to
actions or omissions prior to the Effective Time; provided, that the Surviving

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<PAGE>

Corporation may substitute therefor policies of substantially similar coverage
and amounts containing terms no less advantageous to such former directors or
officers.

    7.4 Further Assurances.  Each party shall use all reasonable efforts to
obtain all consents and approvals and to do all other things necessary for the
consummation of the Transactions. The parties shall take such further action to
deliver or cause to be delivered to each other at the Closing and at such other
times thereafter as shall be reasonably agreed by such parties such additional
agreements or instruments as any of them may reasonably request for the purpose
of carrying out this Agreement and the Transactions. The parties shall afford
each other access to all information, documents, records and personnel who may
be necessary for any party to comply with laws or regulations (including the
filing and payment of taxes and handling tax audits), to fulfill its
obligations with respect to indemnification hereunder or to defend itself
against suits or claims of others. Parent and Target shall duly preserve all
files, records or any similar items of Parent or Target received or obtained as
a result of the Transactions with the same care and for the same period of time
as it would preserve its own similar assets.

    7.5 Expenses.

    (a) Except as provided in Sections 10.2(b) and 7.17, each party shall bear
solely and entirely, all Expenses (as defined below) that they incur; provided,
however, that if this Agreement is terminated for any reason, then the
allocable share of the Parent Parties and Target for all Expenses (including
any fees and expenses of accountants, experts, and consultants, but excluding
the fees and expenses of legal counsel and investment bankers) related to
preparing, printing, filing and mailing the Registration Statement, the
Proxy/Prospectus and all SEC and other regulatory filing fees incurred in
connection with the Registration Statement, and Proxy/Prospectus shall be
allocated one-half each.

    (b) "Expenses" as used in this Agreement shall include all reasonable
out-of-pocket expenses (including all reasonable fees and expenses of outside
counsel, accountants, financing sources, investment bankers, experts and
consultants to a party hereto and its affiliates) incurred by a party or on its
behalf in connection with or related to the due diligence, authorization,
preparation, negotiation, execution and performance of this Agreement, the
preparation, printing, filing and mailing of the Registration Statement and the
Proxy/Prospectus, the solicitation of stockholder approvals, and all other
matters related to the consummation of the Transactions (subject to reasonable
documentation).

    7.6 Cooperation.  Subject to compliance with applicable law, from the date
hereof until the Effective Time, each party shall confer on a regular and
frequent basis with one or more representatives of the other parties to report
operational matters of materiality and the general status of ongoing operations
and shall promptly provide the other party or its counsel with copies of all
filings made by such party with any Governmental Authority in connection with
this Agreement and the Transactions.

    7.7 Publicity.  Neither Target, Parent nor any of their respective
affiliates shall issue or cause the publication of any press release or other
announcement with respect to the Transactions without the prior consultation of
the other party, except as may be required by law or by any listing agreement
with a national securities exchange, and each party shall use reasonable
efforts to provide copies of such release or other announcement to the other
party hereto, and give due consideration to such comments as each such other
party may have, prior to such release or other announcement.

    7.8 Additional Actions.  Subject to the terms and conditions of this
Agreement, each party agrees to use all reasonable efforts to take, or cause to
be taken, all action and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations, or to remove any
injunctions or other impediments or delays, to consummate and make effective
the Transactions, subject, however, to the Target Stockholders' Approval and
the Parent Share Issuance Approval.

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    7.9 Filings.  Each party shall make all filings such party is required to
make in connection herewith or desirable to achieve the purposes contemplated
hereby, and shall cooperate as needed with respect to any such filing by any
other party.

    7.10 Consents.  Each of Parent and Target shall use all reasonable efforts
to obtain all consents necessary or advisable in connection with its
obligations hereunder.

    7.11 Employee Matters; Benefit Plans.

    (a) On or prior to the Effective Time, Target shall pay the severance pay
as indicated on the Severance Package Table to the Target Employees.

    (b) Notwithstanding Section 7.11(a), Target shall not pay such severance
pay to any Target Employee (other than a Contract Employee) to whom severance
pay would not be payable under the Target Severance Policy.

    (c) With respect to any Target Employee who is not paid severance pay on or
prior to the Effective Time, all the terms and provisions of the Severance
Policy and the Contract Employees' employment agreements shall continue in full
force and effect.

    7.12 Parent Board of Directors.  Prior to the mailing to stockholders of
the Proxy/Prospectus, (i) the nominating committee of Target's Board of
Directors shall select two individuals reasonably acceptable to Parent (the
"Director Nominees") for nomination as directors of Parent. Parent shall use
its best efforts to cause the Director Nominees to be elected as members of
Parent's Board of Directors by Parent's existing Board of Directors
simultaneous with Closing, subject to applicable law. Each Director Nominee
shall serve as a director for a term expiring at Parent's next annual meeting
of stockholders following the Effective Time and until his successor is elected
and qualified, provided that Parent shall use its best efforts to cause its
Board to re-nominate him as a director for election at the following annual
meeting at the discretion of Parent's Board of Directors. If at any time prior
to the Effective Time, any Director Nominee shall be unable or elects not to
serve as a director at the Effective Time, then Target's Board of Directors
shall nominate another individual who is reasonably acceptable to Parent.
Parent shall take such action, including amending its bylaws, as required to
cause the number of directors constituting Parent's Board of Directors
immediately after the Effective Time to be increased from four to six members
(as applicable).

    7.13 Stockholders' Meetings.

    (a) Target shall, as promptly as reasonably practicable after the date
hereof (i) take all steps reasonably necessary to call, give notice of, convene
and hold a special meeting of its stockholders (the "Target Special Meeting")
for the purpose of securing the Target Stockholders' Approval, (ii) distribute
to its stockholders the Proxy/Prospectus in accordance with applicable federal
and state law and its certificate of incorporation and bylaws, which
Proxy/Prospectus shall contain the recommendation of the Target Board of
Directors that its stockholders approve this Agreement, and (iii) use all
reasonable efforts to solicit from its stockholders proxies in favor of
approval of this Agreement and to secure the Target Stockholders' Approval, and
(iv) cooperate and consult with Parent with respect to each of the foregoing
matters; provided, that nothing contained in this Section 7.13(a) shall
prohibit the Target Board of Directors from failing to make or from withdrawing
or modifying its recommendation to the Target stockholders hereunder if such
Board of Directors, after consultation with independent legal counsel,
determines in good faith that such action is necessary for Target's Board of
Directors to comply with its fiduciary duties under applicable law.

    (b) Parent shall, as promptly as reasonably practicable after the date
hereof (i) take all steps reasonably necessary to call, give notice of, convene
and hold a special meeting of its stockholders

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<PAGE>

(the "Parent Special Meeting") for the purpose of (A) securing the Parent Share
Issuance Approval and (B) securing the approval by the holders of a majority of
the Parent Common Shares represented in person or by proxy and voting with
respect thereto of the Parent 2003 Incentive Plan having the terms contemplated
by Exhibit 7.13(b) (the "Parent Incentive Plan" and, together with the Parent
Share Issuance Approval, the "Parent Stockholders' Approval"), (ii) distribute
to its stockholders the Proxy/Prospectus in accordance with applicable federal
and state law and its certificate of incorporation and bylaws, which
Proxy/Prospectus shall contain the recommendation of the Parent Board of
Directors that its stockholders approve this Agreement, (iii) use all
reasonable efforts to solicit from its stockholders proxies to secure the
Parent Stockholders' Approval, and (iv) cooperate and consult with Target with
respect to each of the foregoing matters; provided, that nothing contained in
this Section 7.13(b) shall prohibit the Parent Board of Directors from failing
to make or from withdrawing or modifying its recommendation to the Parent
stockholders hereunder if Parent's Board of Directors, after consultation with
and in consultation with independent legal counsel, determines in good faith
that such action is necessary for such Board of Directors to comply with its
fiduciary duties under applicable law.

    (c) If a Target Superior Proposal is received and Target accepts such
Target Superior Proposal and thereby terminates this Agreement under Section
10.1(h), then, unless Parent terminates this Agreement under Section 10.1(h),
prior to the termination of this Agreement taking effect under Section 10.1(h),
Target shall be obligated to comply with Section 7.13(a) and the other terms of
this Agreement, including by holding the Target Special Meeting. If the Target
Stockholders' Approval is not secured at such meeting, then at such time this
Agreement shall be deemed to be terminated by Target under Section 10.1(h),
Target shall pay to Parent the Termination Fee and the Expenses of Target up to
the Expense Cap as provided in Section 10.2. Target acknowledges and agrees
that Parent would be damaged irreparably if any provision of this Section
7.13(c) is not performed in accordance with its specific terms or is otherwise
breached. Accordingly, Target agrees that Parent will be entitled to an
injunction or injunctions to prevent breaches of this Section 7.13(c) and to
enforce specifically this Agreement and its terms and provisions in any action
or proceeding instituted in any court of the United States or any state thereof
having jurisdiction over the parties and the matter, in addition to any other
remedy to which Parent may be entitled, at law or in equity.

    7.14 Preparation of the Proxy/Prospectus and Registration Statement.

    (a) Parent and Target shall promptly prepare and file with the SEC a
preliminary version of the Proxy/Prospectus and will use all reasonable efforts
to respond to the comments of the SEC in connection therewith and to furnish
all information required to prepare the definitive Proxy/Prospectus. At any
time from (and including) the initial filing with the SEC of the
Proxy/Prospectus, Parent shall file with the SEC the Registration Statement
containing the Proxy/Prospectus so long as Parent shall have provided to Target
a copy of the Registration Statement containing the Proxy/Prospectus at least
ten days prior to any filing thereof and any supplement or amendment at least
two days prior to any filing thereof. Subject to the foregoing sentence, Parent
and Target shall jointly determine the date that the Registration Statement is
filed with the SEC. Parent and Target shall use all reasonable efforts to have
the Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing. Parent shall also take any action
(other than qualifying to do business in any jurisdiction in which it is not
now so qualified or filing a general consent to service of process in any
jurisdiction) required to be taken under any applicable state securities laws
in connection with the issuance of Parent Common Shares in the Merger and
Target shall furnish all information concerning Target and the holders of
shares of Target capital stock as may be reasonably requested in connection
with any such action. Promptly after the effectiveness of the Registration
Statement, Parent and Target shall cause the Proxy/Prospectus to be mailed to
their respective stockholders, and if necessary, after the definitive
Proxy/Prospectus has been mailed, promptly circulate amended, supplemented or
supplemental proxy materials and, if required in connection therewith,
re-solicit proxies or written

                                      39

<PAGE>

consents, as applicable. Parent shall advise Target and Target shall advise
Parent, as applicable, promptly after it receives notice thereof, of the time
when the Registration Statement becomes effective or any supplement or
amendment has been filed, the issuance of any stop order, the suspension of the
qualification of the Parent Common Shares for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Proxy/Prospectus
or the Registration Statement or comments thereon and responses thereto or
requests by the SEC for additional information.

    (b) Following receipt by PricewaterhouseCoopers LLP, Parent's independent
auditors, of an appropriate request from Target pursuant to SAS No. 72, Parent
shall use all reasonable efforts to cause to be delivered to Target a letter of
PricewaterhouseCoopers LLP, dated a date within two business days before the
effective date of the Registration Statement, and addressed to Target, in form
and substance reasonably satisfactory to Target and customary in scope and
substance for "cold comfort" letters delivered by independent public
accountants in connection with registration statements and proxy statements
similar to the Proxy/Prospectus.

    (c) Following receipt by KPMG LLP, Target's independent auditors, of an
appropriate request from Parent pursuant to SAS No. 72, Target shall use all
reasonable efforts to cause to be delivered to Parent a letter of KPMG LLP,
dated a date within two business days before the effective date of the
Registration Statement, and addressed to Parent, in form and substance
satisfactory to Parent and customary in scope and substance for "cold comfort"
letters delivered by independent public accountants in connection with
registration statements and proxy statements similar to the Proxy/Prospectus.

    7.15 Stock Exchange Listing.  Parent shall use all reasonable efforts to
cause the Parent Common Shares to be issued in the Merger to be approved for
listing on the New York Stock Exchange at or prior to the Effective Time,
subject to official notice of issuance.

    7.16 Notice of Certain Events.  Each party shall promptly as reasonably
practicable notify the other parties of:

        (a) any notice or other communication from any Person alleging that the
    consent of such Person (or other Person) is or may be required in
    connection with the Transactions;

        (b) any notice or other communication from any Governmental Authority
    in connection with the Transactions;

        (c) any actions, suits, claims, investigations or proceedings commenced
    or, to the best of its knowledge, threatened against, relating to or
    involving or otherwise affecting it or any of its Subsidiaries which, if
    pending on the date hereof, would have been required to have been disclosed
    pursuant to Sections 4.10, 4.12, 5.10 or 5.12, or which relate to the
    consummation of the Transactions;

        (d) any notice of, or other communication relating to, a default or
    event that, with notice or lapse of time or both, would become a default,
    received by it or any of its Subsidiaries subsequent to the date hereof,
    under any material agreement; and

        (e) any Target Material Adverse Effect or Parent Material Adverse
    Effect or the occurrence of any event which is reasonably likely to result
    in a Target Material Adverse Effect or a Parent Material Adverse Effect, as
    the case may be.

    7.17 Site Inspections.  Subject to compliance with applicable law, from the
date hereof until the Effective Time, each party may undertake (at that party's
sole cost and expense) an environmental and operational assessment or
assessments (an "Assessment") of the other party's operations, business and/or
properties that are the subject of this Agreement. An Assessment may include a
review of

                                      40

<PAGE>

permits, files and records including, but not limited to, environmental
investigations, audits, assessments, studies, testing and management plans and
systems, as well as visual and physical inspections and testing. Before
conducting an Assessment, the party intending to conduct such Assessment (the
"Inspecting Party") shall confer with the party whose operations, business or
property is the subject of such Assessment (the "Inspected Party") regarding
the nature, scope and scheduling of such Assessment, and shall comply with such
conditions as the Inspected Party may reasonably impose to avoid interference
with the Inspected Party's operations or business. The Inspected Party shall
cooperate in good faith with the Inspecting Party's effort to conduct an
Assessment.

    7.18 Affiliate Agreements; Tax Treatment.

    (a) Target shall identify in a letter to Parent all Persons who are, on the
date hereof, "affiliates" of Target, as such term is used in Rule 145 under the
Securities Act. Target shall use all reasonable efforts to cause its respective
affiliates to deliver to Parent not later than 10 days prior to the date of the
Parent Special Meeting, a written agreement substantially in the form attached
as Exhibit 7.18, and shall use all reasonable efforts to cause Persons who
become "affiliates" after such date but prior to the Closing Date to execute
and deliver agreements at least 5 days prior to the Closing Date.

    (b) Each party shall use all reasonable efforts to cause the Merger to
qualify, and shall not take, and shall use all reasonable efforts to prevent
any subsidiary of such party from taking, any actions which could prevent the
Merger from qualifying, as a reorganization under the provisions of Section
368(a) of the Code.

    7.19 Stockholder Litigation.  Each of Parent and Target shall give the
other the reasonable opportunity to participate in the defense of any
litigation against Parent or Target, as applicable, and its directors relating
to the Transactions.

    7.20 Certain Parent Board Approvals.  Parent shall use its best efforts to
cause its Board of Directors prior to the Effective Time to approve in the form
required by Rule 16b-3 under the Exchange Act certain acquisitions of Parent
Common Shares pursuant to the Merger, as directed by Target and in form
reasonably acceptable to Target.

    7.21 Optional Redemption or Liquidation of Target D Preferred
Shares.  Target may take any and all actions necessary to redeem or liquidate
the Target D Preferred Shares effective after the Record Date for the Target
Special Meeting and on or prior to the Effective Time for an amount equal to
the Preferred Stock Conversion Consideration, except that dividends shall only
be paid through the date of redemption.

    7.22 Registration Rights Agreement.  Parent and Target agree to use their
reasonable best efforts to cause the parties to the Registration Rights
Agreement, dated as of August 27, 1999, as amended on October 19, 1999, by and
among Middle Bay Oil Company, Inc. and the parties listed on Schedule 1
thereto, to be amended such that no parties thereto will have registration
rights with respect to their Parent Common Shares after the Effective Time if
the Parent Common Shares they receive in the Merger may be transferred either
(a) in one 90-day period under Rule 144 under the Securities Act, or (b) in a
transaction exempt from registration under the Securities Act because such
parties have received Parent Common Shares in a registered transaction under
the Proxy/Prospectus.

                                      41

<PAGE>

                                 ARTICLE VIII

                   CONDITIONS TO CONSUMMATION OF THE MERGER

    8.1 Conditions to the Obligation of Each Party.  The respective obligations
of each party to effect the Merger shall be subject to the fulfillment at or
prior to the Effective Time of the following conditions:

        (a) The Target Stockholders' Approval and the Parent Share Issuance
    Approval must have been obtained.

        (b) No action, suit or proceeding instituted by any Governmental
    Authority may be pending and no statute, rule, order, decree or regulation
    and no injunction, order, decree or judgment of any court or Governmental
    Authority of competent jurisdiction may be in effect, in each case which
    would prohibit, restrain, enjoin or restrict the consummation of the
    Transactions; provided, however, that the party seeking to terminate this
    Agreement pursuant to this subsection (b) must have used all reasonable
    best efforts to prevent the entry of such injunction or other order.

        (c) The Registration Statement must have become effective in accordance
    with the provisions of the Securities Act and no stop order suspending the
    effectiveness of the Registration Statement may be in effect and no
    proceeding for such purpose may be pending before or threatened by the SEC.

        (d) Each of Target and Parent must have obtained all material permits,
    authorizations, consents, or approvals required to consummate the
    Transactions.

        (e) The Parent Common Shares to be issued in the Merger must have been
    approved for listing on the New York Stock Exchange, subject to official
    notice of issuance.

        (f) Parent must have received a supplemental ruling from the Internal
    Revenue Service or a tax opinion reasonably acceptable to Plains Resources
    Inc. from counsel to Parent to the effect that the Transactions would not
    adversely affect the tax treatment of the spin-off of Parent from Plains
    Resources Inc. under Section 355 of the Code as ruled by the Internal
    Revenue Service in its private letter rulings to Plains Resources Inc.
    dated November 5, 2002 and May 22, 2002; provided, however, that if counsel
    to Parent shall not render such opinion, this condition shall nonetheless
    be deemed satisfied if other nationally-recognized counsel shall render
    such opinion to Parent.

    8.2 Conditions to the Obligations of Parent.  The obligation of Parent to
effect the Merger is subject to the satisfaction at or prior to the Effective
Time of the following conditions:

        (a) Target must have performed in all material respects its obligations
    under this Agreement required to be performed by it at or prior to the
    Effective Time and the representations and warranties of Target contained
    in this Agreement, to the extent qualified with respect to materiality must
    be true and correct in all respects, and to the extent not so qualified
    must be true and correct in all material respects, in each case as of the
    date hereof and at and as of the Effective Time as if made at and as of
    such time, except as expressly contemplated by the Target Disclosure
    Schedule or this Agreement and except that the accuracy of representations
    and warranties that by their terms speak as of the date hereof or some
    other date shall be determined as of such date, and Parent must have
    received a certificate of the Chief Executive Officer and Chief Financial
    Officer of Target as to the satisfaction of this condition.

        (b) From the date hereof through the Effective Time, there must not
    have occurred any change in the financial condition, business, operations
    or prospects of Target, that would constitute a Target Material Adverse
    Effect.

                                      42

<PAGE>

        (c) Target must have delivered to its counsel, Parent and Parent's
    counsel a certificate signed on behalf of Target by a duly authorized
    officer of Target certifying the representations set forth in the form of
    Target Tax Certificate attached as Exhibit 8.2(c) (the "Target Tax
    Certificate").

        (d) Parent must have received an opinion from Akin Gump Strauss Hauer &
    Feld LLP prior to the effectiveness of the Registration Statement and also
    as of the Effective Time to the effect that (i) the Merger constitutes a
    reorganization under Section 368(a) of the Code, (ii) Parent and Target
    shall each be a party to that reorganization, and (iii) no gain or loss
    shall be recognized by Parent or Target because of the Merger; provided,
    however, that if counsel to Parent shall not render such opinion, this
    condition shall nonetheless be deemed satisfied if counsel to Target shall
    render such opinion to Parent; provided further, that in rendering such
    opinion, such counsel may rely upon the Parent Tax Certificate and the
    Target Tax Certificate.

        (e) Each consent, waiver and approval set forth in Section 4.4(c) of
    the Target Disclosure Schedule must have been obtained, and Target must
    have provided Parent with copies thereof.

    8.3 Conditions to the Obligations of Target.  The obligation of Target to
effect the Merger is subject to the satisfaction at or prior to the Effective
Time of the following conditions:

        (a) Parent must have performed in all material respects its obligations
    under this Agreement required to be performed by it at or prior to the
    Effective Time and the representations and warranties of Parent contained
    in this Agreement, to the extent qualified with respect to materiality must
    be true and correct in all respects, and to the extent not so qualified
    must be true and correct in all material respects, in each case as of the
    date hereof and at and as of the Effective Time as if made at and as of
    such time, except as expressly contemplated by the Parent Disclosure
    Schedule or this Agreement and except that the accuracy of representations
    and warranties that by their terms speak as of the date hereof or some
    other date shall be determined as of such date, and Target must have
    received a certificate of the Chief Executive Officer and Chief Financial
    Officer of Parent as to the satisfaction of this condition.

        (b) From the date hereof through the Effective Time, there must not
    have occurred any change in the financial condition, business, operations
    or prospects of Parent that would constitute a Parent Material Adverse
    Effect.

        (c) Parent must have delivered to its counsel, Target and Target's
    counsel a certificate signed on behalf of Parent by a duly authorized
    officer of Parent certifying the representations set forth in the form of
    Parent Tax Certificate attached as Exhibit 8.3(c) (the "Parent Tax
    Certificate").

        (d) Target must have received an opinion from Thompson & Knight, LLP
    prior to the effectiveness of the Registration Statement and also as of the
    Effective Time to the effect that (i) the Merger constitutes a
    reorganization under Section 368(a) of the Code, (ii) Target and Parent
    shall each be a party to that reorganization, and (iii) no gain or loss
    shall be recognized by the Target stockholders upon the receipt of Parent
    Common Shares in exchange for Target Common Shares pursuant to the Merger
    except with respect to the Cash Consideration, the Series D Preferred Stock
    Merger Consideration and any cash received in lieu of fractional share
    interests; provided, however, that if counsel to Target shall not render
    such opinion, this condition shall nonetheless be deemed satisfied if
    counsel to Parent shall render such opinion to Target; provided further,
    that in rendering such opinion, such counsel may rely upon the Parent Tax
    Certificate and the Target Tax Certificate.

                                      43

<PAGE>

                                  ARTICLE IX

                                   SURVIVAL

    9.1 Survival of Representations and Warranties.  The representations and
warranties of the parties contained in this Agreement shall not survive the
Effective Time.

    9.2 Survival of Covenants and Agreements.  The covenants and agreements of
the parties to be performed after the Effective Time contained in this
Agreement shall survive the Effective Time.

                                   ARTICLE X

                       TERMINATION, AMENDMENT AND WAIVER

    10.1 Termination.  This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval by the stockholders of
Target or Parent:

        (a) by the mutual written consent of Parent and Target;

        (b) by either Parent or Target if the Effective Time has not occurred
    on or before August 31, 2003 (the "Termination Date"), provided that the
    party seeking to terminate this Agreement pursuant to this Section 10.1(b)
    shall not have breached in any material respect its obligations under this
    Agreement in any manner that shall have proximately contributed to the
    failure to consummate the Merger on or before the Termination Date;

        (c) by Target if there has been a material breach by Parent of any
    representation, warranty, covenant or agreement set forth in this Agreement
    which breach (if susceptible to cure) has not been cured in all material
    respects within 20 business days following receipt by Parent of notice of
    such breach;

        (d) by Parent, if there has been a material breach by Target of any
    representation, warranty, covenant or agreement set forth in this Agreement
    which breach (if susceptible to cure) has not been cured in all material
    respects within 20 business days following receipt by Target of notice of
    such breach (a "Target Breach");

        (e) by either Target or Parent, if any applicable law, rule or
    regulation that makes consummation of the Merger illegal is extant or if
    any judgment, injunction, order or decree of a court or other Governmental
    Authority of competent jurisdiction restrains or prohibits the consummation
    of the Merger, and such judgment, injunction, order or decree becomes final
    and nonappealable;

        (f) by either Target or Parent, if either of the stockholder approvals
    referred to in Section 7.13 is not obtained because of the failure to
    obtain the Target Stockholders Approval or the Parent Share Issuance
    Approval upon a vote at a duly held meeting of stockholders or at any
    adjournment or postponement thereof;

        (g) by Parent, if (i) Target's Board of Directors withdraws, modifies
    or changes its recommendation of this Agreement or the Merger in a manner
    adverse to Parent or resolves to do any of the foregoing or Target's Board
    of Directors recommends to Target's stockholders any Target Acquisition
    Proposal or resolves to do so; (ii) a tender offer or exchange offer for
    outstanding shares of Target's capital stock then representing 30% or more
    of the combined power to vote generally for the election of directors is
    commenced, and Target's Board of Directors does not, within the applicable
    period required by law, recommend that stockholders not tender their shares
    into such tender or exchange offer; or (iii) Target shall have breached any
    of its obligations under Section 7.2; or

                                      44

<PAGE>

        (h) by Parent, or, subject to Section 7.13(c), Target, if Target
    accepts a Target Superior Proposal. For this Agreement, "Target Superior
    Proposal" means bona fide written Target Acquisition Proposal that (i)
    Target's Board of Directors in good faith determines, after consultation
    with its financial advisors and its outside legal counsel, is reasonably
    likely to be consummated taking into account the Person making such Target
    Acquisition Proposal and all legal, financial, regulatory and other
    relevant aspects of such Target Acquisition Proposal, and Target's Board of
    Directors in good faith determines, after consultation with its financial
    advisors and its outside legal counsel, that such Target Acquisition
    Proposal would, if consummated, result in a transaction that is more
    favorable from a financial point of view to the holders of Target Common
    Shares than the Transactions; provided, however, that Target may not
    terminate this Agreement under this Section 10.1(h) unless it pays the
    Termination Fee plus Parent's Expenses up to the Expense Cap and has used
    all reasonable efforts to provide Parent with five business days prior
    written notice of its intent to so terminate this Agreement together with a
    detailed summary of the terms and conditions of such Target Acquisition
    Proposal; provided further, during such five (5) day period, Target shall
    and shall direct its respective financial and legal advisors to negotiate
    in good faith with Parent to make such adjustments in the terms and
    conditions of this Agreement as would result, in the opinion of Target's
    Board of Directors, after consultation with its financial advisors and
    outside legal counsel, in a revised Parent proposal that is reasonably
    capable of being completed, and, if consummated, may reasonably be expected
    to result in a transaction that is at least as favorable from a financial
    point of view to the holders of Target Common Stock as the Target Superior
    Proposal.

        (i) by Parent, if the Market Price is less than the Minimum Market
    Price.

    10.2 Effect of Termination.

    (a) If this Agreement is terminated and the Merger is abandoned under this
Article X, all obligations of the parties shall terminate, except the parties'
obligations pursuant to this Section 10.2 and except for Sections 7.5, 7.7,
9.1, 9.2, 11.2, 11.6, 11.7, 11.8, 11.9 and the last two sentences of Section
7.1, provided that nothing herein shall relieve any party from liability for
any breaches hereof.

    (b) Termination by Parent.

        (i) If (x) a Target Acquisition Proposal shall have been made or shall
    have otherwise become publicly known or any Person (other than Parent or
    any of its affiliates) shall have publicly announced an intention (whether
    or not conditional) to make a Target Acquisition Proposal, (y) this
    Agreement is terminated by Parent under Section 10.1(f) (failure to obtain
    the Target Stockholder's Approval), Section 10.1(b) (Effective Time has not
    occurred on or prior to Termination Date) or Section 10.1(d) (Target
    Breach), and (z) in each case, within twelve months after such termination
    of this Agreement:

            (A) a transaction is consummated, which transaction, if offered or
        proposed, would constitute a Target Acquisition Proposal,

            (B) a definitive agreement (the execution and delivery of which has
        been authorized by the boards of directors, or comparable bodies) that
        would if consummated constitute a Target Acquisition Proposal is
        entered into or

            (C) (X) any Person acquires beneficial ownership or the right to
        acquire beneficial ownership of, or any "group" (as such term is
        defined under Section 13(d) of the Exchange Act and the rules and
        regulations promulgated hereunder), shall have been formed that
        beneficially owns, or has the right to acquire beneficial ownership of,
        outstanding shares of capital stock of Target then representing 50% or
        more of the combined power to vote

                                      45

<PAGE>

        generally for the election of directors, and (Y) Target's Board of
        Directors has taken any action for the benefit of such person, that
        facilitates the acquisition by such person or group of such beneficial
        ownership,

    then Target shall promptly (and no later than one business day after the
    first to occur of any of clauses (A)-(C) above) pay to Parent a termination
    fee of $9.0 million (the "Termination Fee"), plus Parent's Expenses up to
    $1.0 million (the "Expense Cap").

        (ii) If (x) Parent terminates this Agreement under Section 10.1(g)
    (change of recommendation; recommendation of Target Acquisition Proposal;
    failure to reject; breach of Sections 7.2 or (y) Target or Parent
    terminates this Agreement pursuant to Section 10.1(h) (Target Superior
    Proposal), Target shall promptly (and in any event no later than one
    business day after such termination) pay to Parent the Termination Fee plus
    Parent's Expenses up to the Expense Cap.

                                  ARTICLE XI

                                 MISCELLANEOUS

    11.1 Notices.  All notices or communications hereunder shall be in writing
(including facsimile or similar writing) addressed as follows:

    To Parent:

        Plains Exploration & Production Company
        500 Dallas Street, Suite 700
        Houston, Texas 77002-4804
        Attention: James C. Flores
        Telephone: (713) 739-6700
        Facsimile: (713) 654-1523

    With a copy (which shall not constitute notice) to:

        Akin Gump Strauss Hauer & Feld LLP
        1900 Pennzoil Place South Tower
        711 Louisiana Street
        Houston, Texas 77002
        Attention: Michael E. Dillard, P.C.
        Facsimile No.: (713) 236-0822

    To Target:

        3TEC Energy Corporation
        700 Milam, Suite 1100
        Houston, Texas 77002
        Attention: Floyd C. Wilson
        Telephone: (713) 821-7100
        Facsimile: (713) 821-7200

                                      46

<PAGE>

    With a copy (which shall not constitute notice) to:

        Hinkle Elkouri Law Firm L.L.C.
        301 N. Main, Suite 2000
        Wichita, Kansas 67202
        Attention: David S. Elkouri
        Telephone: (316) 660-6111
        Facsimile: (316) 660-6011

        and

        Thompson & Knight LLP
        333 Clay Street, Suite 3300
        Houston, Texas 77002
        Attention: Dallas Parker or Timothy T. Samson
        Facsimile: (713) 654-1871

Any such notice or communication shall be deemed given (i) when made, if made
by hand delivery, and upon confirmation of receipt, if made by facsimile, (ii)
one business day after being deposited with a next-day courier, postage
prepaid, or (iii) three business days after being sent certified or registered
mail, return receipt requested, postage prepaid, in each case addressed as
above (or to such other address as such party may designate in writing from
time to time).

    11.2 Severability.  If any provision of this Agreement shall be declared to
be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect.

    11.3 Assignment.  This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal
representatives, successors, and assigns; provided, however, that neither this
Agreement nor any rights hereunder shall be assignable or otherwise subject to
hypothecation and any assignment in violation hereof shall be null and void.

    11.4 Interpretation.  The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

    11.5 Counterparts.  This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same Agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to each party.

    11.6 Entire Agreement.  This Agreement, all documents contemplated herein
or required hereby, and the Confidentiality Agreements represent the entire
Agreement of the parties with respect to the subject matter hereof and shall
supersede any and all previous contracts, arrangements or understandings
between the parties with respect to the subject matter hereof.

    11.7 Governing Law.  This Agreement shall be construed, interpreted, and
governed in accordance with the laws of the state of Delaware, without
reference to rules relating to conflicts of law.

    11.8 Submission to Jurisdiction.  Each party to this Agreement submits to
the exclusive jurisdiction of any state or federal court sitting in the State
of Delaware in any dispute or action arising out of or relating to this
Agreement and agrees that all claims in respect of such dispute or action may
be heard and determined in any such court. Each party also agrees not to bring
any dispute or action arising out of or relating to this Agreement in any other
court. Each party agrees that a final judgment in any dispute or action so
brought will be conclusive and may be enforced by dispute or action on the
judgment or in any other manner provided at law (common, statutory or other) or
in equity. Each party waives any defense of inconvenient forum to the
maintenance of any dispute or action so brought and waives any bond, surety, or
other security that might be required of any other party with respect thereto.

                                      47

<PAGE>

    11.9 Attorneys' Fees.  If any action at law or equity, including an action
for declaratory relief, is brought to enforce or interpret any provision of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and expenses from the other party, which fees and expenses
shall be in addition to any other relief which may be awarded.

    11.10 No Third Party Beneficiaries.  Except as provided in Section 7.3, no
Person other than the parties is an intended beneficiary of this Agreement or
any portion hereof.

    11.11 Disclosure Schedules.  The disclosures made on any disclosure
schedule, including the Target Disclosure Schedule and the Parent Disclosure
Schedule, with respect to any representation or warranty shall be deemed to be
made with respect to any other representation or warranty requiring the same or
similar disclosure to the extent that the relevance of such disclosure to other
representations and warranties is reasonably evident from the face of the
disclosure schedule. The inclusion of any matter on any disclosure schedule
will not be deemed an admission by any party that such listed matter is
material or that such listed matter has or would have a Target Material Adverse
Effect or a Parent Material Adverse Effect, as applicable.

    11.12 Amendments and Supplements.  At any time before or after approval of
the matters presented in connection with the Merger by the respective
stockholders of Parent and Target and prior to the Effective Time, this
Agreement may be amended or supplemented in writing by Parent and Target with
respect to any of the terms contained in this Agreement, except as otherwise
provided by law; provided, however, that following approval of this Agreement
by the stockholders of Parent, or Target, as applicable, there shall be no
amendment or change to the provisions hereof unless permitted by the DGCL
without further approval by the stockholders of Parent, or Target, as
applicable.

    11.13 Extensions, Waivers, Etc.  At any time prior to the Effective Time,
either party may (a) extend the time for the performance of any of the
obligations or acts of the other party;

    (b) waive any inaccuracies in the representations and warranties of the
other party contained herein or in any document delivered pursuant hereto; or

    (c) subject to the proviso of Section 11.12 waive compliance with any of
the agreements or conditions of the other party contained herein.

    Notwithstanding the foregoing, no failure or delay by Parent or Target in
exercising any right hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right hereunder. Any agreement on the part
of a party hereto to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party.

                           [SIGNATURE PAGE FOLLOWS]

                                      48

<PAGE>

    IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.

                                              PLAINS EXPLORATION &
                                              PRODUCTION  COMPANY

                                              By:     /s/  James C. Flores
                                                  -----------------------------
                                             Name:  James C. Flores
                                             Title:    Chief Executive Officer

                                              PXP GULF COAST INC.

                                              By:     /s/  James C. Flores
                                                  -----------------------------
                                             Name:  James C. Flores
                                             Title:    Chief Executive Officer

                                              3TEC ENERGY CORPORATION

                                              By:     /s/  Floyd C. Wilson
                                                  -----------------------------
                                             Name:  Floyd C. Wilson
                                             Title:    Chief Executive Officer

                                      49

<PAGE>

                                                                        ANNEX B

                                                               February 2, 2003

Board of Directors
Plains Exploration & Production Company
500 Dallas Street
Suite 700
Houston, TX 77002

Members of the Board:

    We understand that Plains Exploration & Production Company ("Plains" or the
"Company") intends to enter into a definitive agreement (the "Agreement") with
3TEC Energy Corporation ("3TEC") pursuant to which Plains will acquire 3TEC for
a mix of cash and stock. Immediately upon the effectiveness of the Merger, each
share of common stock of 3TEC will be converted into the right to receive $8.50
in cash, plus an amount of shares of common stock of the Company ("Company
Common Stock") equal to the Exchange Ratio. For purposes of the Agreement, the
"Exchange Ratio" is equal to 0.85, provided that if the Market Price (as
defined in the Agreement) of the Company Common Stock is (a) greater than
$12.35, then the Exchange Ratio shall be equal to the quotient of (A) $10.50
divided by (B) the Market Price, and (b) less than $7.65, then the Exchange
Ratio shall equal to quotient of (A) $6.50 divided by (B) the Market Price (the
"Proposed Transaction). The transaction will be structured as a Section 368(a)
merger and will be tax-free to 3TEC shareholders who receive Company Common
Stock in the transaction. The terms and conditions of the Proposed Transaction
are set forth in more detail in the Agreement between the Company and 3TEC.

    We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to
the Company of the consideration to be paid by the Company in the Proposed
Transaction. We have not been requested to opine as to, and our opinion does
not in any manner address, the Company's underlying business decision to
proceed with or effect the Proposed Transaction.

    In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction, (2) publicly available
information concerning 3TEC that we believe to be relevant to our analysis,
including Annual Reports on Form 10-K for the fiscal year ended December 31,
2001 and Quarterly Reports on Form 10-Q for the quarter ended September 30,
2002, (3) financial and operating information with respect to the business,
operations and prospects of 3TEC furnished to us by the Company and 3TEC
including preliminary unaudited 2002 financial statements, (4) financial and
operating information with respect to the business, operations and prospects of
the Company furnished to us by the Company, (5) certain estimates prepared by
3TEC of 3TEC's proved and non-proved reserves and future production, revenue,
operating costs and capital investment ("3TEC Estimates"), (6) certain
estimates of 3TEC's proved reserves prepared by Ryder Scott Company, 3TEC's
third party reserve engineers ("Ryder Scott Estimates"), (7) a trading history
of 3TEC's common stock from January 30, 2002 to the present and a comparison of
that trading history with those of other companies that we deemed relevant, (8)
a comparison of the historical financial results and present financial
condition of 3TEC with those of other companies that we deemed relevant, (9) a
comparison of the financial terms of the Proposed Transaction with the
financial terms of certain other transactions that we deemed relevant, and (10)
an analysis of 3TEC's contributions to the Company on a pro forma basis,
including its impact on pro forma earnings and cash flow per share. In
addition, we have had discussions with the management of 3TEC concerning its
business, operations, assets, financial condition and prospects and have
undertaken such other studies, analyses and investigations as we deemed
appropriate.

<PAGE>

    In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information
and have further relied upon the assurances of management of 3TEC that they are
not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial projections of 3TEC and
the 3TEC Estimates, upon advice of the Company and 3TEC we have assumed that
such projections and estimates have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of 3TEC as to the future financial performance of 3TEC and that 3TEC
will perform substantially in accordance with such projections and estimates.
With respect to the financial projections of the Company, upon advice of the
Company we have assumed that such projections have been reasonably prepared on
a basis reflecting the best currently available estimates and judgments of the
Company's management as to the future financial performance of the Company and
that the Company will perform substantially in accordance with such
projections. In arriving at our opinion, we have not conducted a physical
inspection of the properties and facilities of 3TEC and have not made or
obtained any evaluations or appraisals of the assets or liabilities of 3TEC,
other than the Ryder Scott Estimates. Our opinion necessarily is based upon
market, economic and other conditions as they exist on, and can be evaluated as
of, the date of this letter.

    Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be paid
by the Company in the Proposed Transaction is fair to the Company.

    We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive fees for our services which are
contingent upon the delivery of the opinion and the consummation of the
Proposed Transaction. In addition, the Company has agreed to indemnify us for
certain liabilities that may arise out of the rendering of this opinion. We
also have performed various investment banking services for the Company in the
past and have received customary fees for such services. In the ordinary course
of our business, we actively trade in the securities of the Company for our own
account and for the accounts of our customers and, accordingly, may at any time
hold a long or short position in such securities.

    This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as
to how such stockholder should vote with respect to the Proposed Transaction.

                                          LEHMAN BROTHERS

<PAGE>


                                      3

<PAGE>

                                                                        ANNEX C

                               February 2, 2003

Board of Directors
3TEC Energy Corporation
700 Milam, Suite 1100
Houston, Texas 77002

Members of the Board:

    You have asked us to advise you with respect to the fairness, from a
financial point of view, to the holders of shares of common stock, par value
$0.02 per share ("3TEC Common Stock"), of 3TEC Energy Corporation (the
"Company"), of the Merger Consideration (as defined below) set forth in the
Agreement and Plan of Merger, dated as of February 2, 2003 (the "Merger
Agreement"), among Plains Exploration & Production Company (the "Acquiror"),
PXP Gulf Coast Inc., a wholly-owned subsidiary of Acquiror (the "Merger Sub")
and the Company. The Merger Agreement provides for, among other things, the
merger (the "Merger") of the Company with the Merger Sub pursuant to which each
outstanding share of 3TEC Common Stock will be converted into the right to
receive (i) $8.50 in cash (the "Cash Consideration") and (ii) 0.85 of a share
of common stock, par value $0.01 per share ("Acquiror Common Stock"), of the
Acquiror (the "Stock Consideration" and, together with the Cash Consideration,
the "Merger Consideration"); provided, however, that (A) if the average of the
closing prices of shares of Acquiror Common Stock on the New York Stock
Exchange, as reported in The Wall Street Journal, for the 20 consecutive
trading days immediately preceding the third trading day before the closing
date of the Merger (the "Average Market Price") is greater than $12.35, then
the Stock Consideration shall be the number of shares of Acquiror Common Stock
equal to the quotient obtained by dividing $10.50 by the Average Market Price,
or (B) if the Average Market Price is less than $7.65, then the Stock
Consideration shall be the number of shares of Acquiror Common Stock equal to
the quotient obtained by dividing $6.50 by the Average Market Price; provided,
further, that if the Average Market Price is below $6.25 (the "Minimum Market
Price"), then, subject to the right of the Acquiror to terminate the Merger
Agreement, the Stock Consideration shall be the number of shares of Acquiror
Common Stock equal to the quotient obtained by dividing $6.50 by the Minimum
Market Price and the Cash Consideration will include an additional amount equal
to the product of (i) the Minimum Market Price minus the Average Market Price
and (ii) the Stock Consideration calculated in accordance with this item (B).

    In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and the Acquiror, as
well as the Merger Agreement and certain related agreements. We have also
reviewed certain other information relating to the Company and the Acquiror,
including certain financial forecasts, provided to or discussed with us by the
Company and the Acquiror, respectively, certain oil and gas reserve reports
(the "Reserve Reports") prepared for the Company and the Acquiror by Ryder
Scott Company and Netherland, Sewell & Associates, Inc. (the "Petroleum
Consultants") and have met with the Company's and the Acquiror's managements to
discuss the business and prospects of the Company and the Acquiror. We have
also considered certain financial and stock market data of the Company and the
Acquiror, and we have compared those data with similar data for other publicly
held companies in businesses we deemed similar to the Company and the Acquiror,
and we have considered, to the extent publicly available, the financial terms
of certain other business combinations and other transactions which have
recently been effected or announced. We also considered such other information,
financial studies, analyses and investigations and financial, economic and
market criteria which we deemed relevant.

    In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
such information being complete and

<PAGE>

accurate in all material respects. With respect to the financial forecasts and
the Reserve Reports, we have been advised, and have assumed, that such
forecasts and the Reserve Reports have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
Company's and the Acquiror's managements and the Petroleum Consultants as to
the future financial performance and oil and gas reserves of the Company and
the Acquiror, respectively. We also have assumed, with your consent, that in
the course of obtaining necessary regulatory and third party approvals and
consents for the Merger, no modification, delay, limitation, restriction or
condition will be imposed that will have an adverse effect on the Company or
the Acquiror or the contemplated benefits of the Merger and that the Merger
will be consummated in accordance with the terms of the Merger Agreement,
without waiver, modification or amendment of any material term, condition or
agreement therein. In addition, we have not been requested to make, and have
not made, an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Company or the Acquiror, nor have we been
furnished with any such evaluations or appraisals, other than the Reserve
Reports. Our opinion is necessarily based upon information available to us and
financial, economic, market and other conditions as they exist and can be
evaluated on the date hereof. We are not expressing any opinion as to the
actual value of Acquiror Common Stock when issued pursuant to the Merger or the
prices at which such Acquiror Common Stock will trade at any time. In
connection with our engagement, we approached third parties to solicit
indications of interest in a possible acquisition of the Company and held
preliminary discussions with certain of these parties prior to the date hereof.
Our opinion also does not address the relative merits of the Merger as compared
to other business strategies that might be available to the Company nor does it
address the Company's underlying business decision to effect the Merger.

    We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger. We and our affiliates have
in the past provided, and may in the future provide, certain investment banking
and financial services to the Company and EnCap Investments, L.L.C. ("EnCap")
and certain affiliates of EnCap unrelated to the Merger for which we have
received, and expect to receive, compensation. In addition, certain funds
affiliated or associated with Credit Suisse First Boston have a direct or
indirect interest in EnCap and its affiliates. In the ordinary course of our
business, we and our affiliates may actively trade the debt and equity
securities of the Company, the Acquiror and certain affiliates of EnCap for our
and our affiliates' own accounts and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.

    It is understood that this letter is for the information of Board of
Directors in connection with its consideration of the Merger and does not
constitute a recommendation to any stockholder as to how such stockholder
should vote or act on any matter relating to the Merger.

    Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger Consideration is fair, from a financial point of view,
to the holders of Company Common Stock.

                                          Very truly yours,

                                          CREDIT SUISSE FIRST BOSTON LLC

                                                  /s/ DAVID A. DENUNZIO
                                          By:
                                            -----------------------------------

<PAGE>

                                                                        ANNEX D

[Logo of Bear Stearns]

February 2, 2003

The Board of Directors
3TEC Energy Corporation
700 Milam, Suite 1100
Houston, TX 77002

Ladies and Gentlemen:

    We understand that 3TEC Energy Corporation ("3TEC") and Plains Exploration
& Production Company ("Plains"), and PXP Gulf Coast Inc., a Delaware
corporation and a wholly-owned subsidiary of Plains ("Merger Sub"), have
entered into an Agreement and Plan of Merger dated February 2, 2003 (the
"Merger Agreement"), pursuant to which (subject to an alternative transaction
structure as specified in the Merger Agreement) 3TEC will be merged with and
into Merger Sub (the "Merger" or "Transaction"). We further understand that, at
the effective time of the Merger, each issued and outstanding share of common
stock, par value $0.02 per share, of 3TEC ("3TEC Common Stock") will be
converted into the right to receive (i) $8.50 in cash (the "Cash
Consideration") and (ii) 0.85 of a share of common stock, par value $0.01 per
share ("Plains Common Stock"), of Plains (the "Stock Consideration" and,
together with the Cash Consideration, the "Merger Consideration"); provided,
however, that (A) if the average of the closing prices of shares of Plains
Common Stock on the New York Stock Exchange, as reported in The Wall Street
Journal, for the 20 consecutive trading days immediately preceding the third
trading day before the closing date of the Merger (the "Market Price") is
greater than $12.35, then the Stock Consideration shall be the number of shares
of Plains Common Stock equal to the quotient obtained by dividing $10.50 by the
Market Price, or (B) if the Market Price is less than $7.65, then the Stock
Consideration shall be the number of shares of Plains Common Stock equal to the
quotient obtained by dividing $6.50 by the Market Price; provided, however,
that if the Market Price is below $6.25 (the "Minimum Market Price"), the
Minimum Market Price will be used in the formula set forth in this item (B)
instead of the Market Price and, subject to the Plains' right to terminate the
Merger Agreement, the Merger Consideration will include an additional cash
amount equal to the product of (i) the Minimum Market Price minus the Market
Price and (ii) the number of shares of Plains Common Stock received by a holder
of one share of 3TEC Common Stock pursuant to the formula set forth in this
clause (B). You have provided us with a draft copy of the Merger Agreement. The
terms and conditions of the Transaction are more fully set forth in the Merger
Agreement.

    You have asked us to render our opinion as to whether the Merger
Consideration is fair, from a financial point of view, to the holders of 3TEC
Common Stock.

    In the course of performing our review and analyses for rendering this
opinion, we have:

   .  reviewed the Merger Agreement;

   .  reviewed 3TEC's Annual Reports to Shareholders and Annual Reports on Form
      10-K for the years ended December 31, 1999 through 2001, its Quarterly
      Reports on Form 10-Q for the periods ended March 31, 2002, June 30, 2002
      and September 30, 2002 and its Reports on Form 8-K and Registration
      Statement on Form S-3 for the three years ended the date hereof;

<PAGE>

3TEC Energy Corporation
February 2, 2003
Page 2

   .  reviewed certain operating and financial information, including
      projections through the years ended December 31, 2004, provided to us by
      management relating to 3TEC's business and prospects;

   .  met with certain members of 3TEC's senior management to discuss 3TEC's
      business, operations, historical and projected financial results and
      future prospects;

   .  reviewed Plains' (and Plains Resources Inc., which distributed shares of
      Plains to its shareholders on December 18, 2002, where applicable) Annual
      Reports on Form 10-K for the years ended December 31, 1999 through 2001,
      its Quarterly Reports on Form 10-Q for the periods ended March 31, 2002,
      June 30, 2002 and September 30, 2002 and its Reports on Form 8-K and
      Registration Statement on Form S-3 for the three years ended the date
      hereof;

   .  reviewed certain operating and financial information, including
      projections through the year ended December 31, 2003, provided to us by
      management relating to Plains' business and prospects;

   .  met with certain members of Plains' senior management to discuss Plains'
      business, operations, historical and projected financial results and
      future prospects;

   .  reviewed third party reserve engineering reports, including estimates and
      assumptions regarding the proved reserves of 3TEC and Plains prepared as
      of December 31, 2002, as supplied to us by 3TEC and Plains, respectively;

   .  reviewed the historical prices, trading multiples and trading volumes of
      the common shares of 3TEC and Plains;

   .  reviewed publicly available financial data, stock market performance data
      and trading multiples of companies which we deemed generally comparable
      to 3TEC and Plains, as appropriate;

   .  reviewed the terms of recent transactions involving companies and assets
      which we deemed generally comparable to 3TEC and the Transaction;

   .  performed discounted cash flow analyses based on the projections and
      third party reserve report for 3TEC furnished to us;

   .  reviewed the pro forma financial results, financial condition and
      capitalization of Plains giving effect to the Transaction and

   .  conducted such other studies, analyses, inquiries and investigations as
      we deemed appropriate.

    We have relied upon and assumed, without independent verification, the
accuracy and completeness of the financial and other information, including,
without limitation, the projections and reserve engineering reports provided to
us by 3TEC and Plains. With respect to 3TEC's and Plains' projected financial
results and estimates and assumptions underlying the reserve engineering
reports, we have relied on representations that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the senior managements of 3TEC and Plains as to the expected
future performance of 3TEC and Plains, respectively. We have not assumed any
responsibility for the independent verification of any such information or of
the projections and reserve engineering reports provided to us, and we have
further relied upon the assurances of the senior managements of 3TEC and Plains
that they are unaware of any facts that would make the information, projections
and reserve engineering reports provided to us incomplete or misleading.

<PAGE>

3TEC Energy Corporation
February 2, 2003
Page 3

    In arriving at our opinion, we have not performed or obtained any
independent appraisal of the assets or liabilities (contingent or otherwise) of
3TEC and Plains, nor have we been furnished with any such appraisals. During
the course of our engagement, we were asked by the Board of Directors to
solicit indications of interest from various third parties regarding a
transaction with 3TEC, and we have considered the results of such solicitation
in rendering our opinion. We have assumed that the Transaction will be
consummated in a timely manner and in accordance with the terms of the Merger
Agreement without any limitations, restrictions, conditions, amendments or
modifications, regulatory or otherwise, that collectively would have a material
effect on Plains.

    We do not express any opinion as to the price or range of prices at which
the shares of common stock of 3TEC and Plains may trade subsequent to the
announcement of the Transaction or as to the price or range of prices at which
the shares of common stock of Plains may trade subsequent to the consummation
of the Transaction.

    We have acted as a financial advisor to 3TEC in connection with the
Transaction and will receive a customary fee for such services, a substantial
portion of which is contingent on successful consummation of the Transaction.
Bear Stearns has been previously engaged by 3TEC to provide certain investment
banking and financial advisory services for which we received customary fees.
In the ordinary course of business, Bear Stearns and its affiliates may
actively trade the equity and debt securities and/or bank debt of 3TEC and/or
Plains for our own account and for the account of our customers and,
accordingly, may at any time hold a long or short position in such securities
or bank debt.

    It is understood that this letter is intended for the benefit and use of
the Board of Directors of 3TEC and does not constitute a recommendation to the
Board of Directors of 3TEC or any holders of 3TEC common stock as to how to
vote in connection with the Transaction This opinion does not address 3TEC's
underlying business decision to pursue the Transaction, the relative merits of
the Transaction as compared to any alternative business strategies that might
exist for 3TEC or the effects of any other transaction in which 3TEC might
engage. This letter is not to be used for any other purpose, or be reproduced,
disseminated, quoted from or referred to at any time, in whole or in part,
without our prior written consent; provided, however, that this letter may be
included in its entirety in any joint proxy statement / prospectus to be
distributed to the holders of 3TEC common stock in connection with the
Transaction. Our opinion is subject to the assumptions and conditions contained
herein and is necessarily based on economic, market and other conditions, and
the information made available to us, as of the date hereof. We assume no
responsibility for updating or revising our opinion based on circumstances or
events occurring after the date hereof.

    Based on and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger Consideration is fair, from a financial point of view,
to the holders of 3TEC Common Stock.

                                          Very truly yours,

                                          BEAR, STEARNS & CO. INC.

                                                  /s/ STEPHEN M. STRATY
                                          By:
                                            -----------------------------------
                                                  Senior Managing Director

                                      3

<PAGE>

                                                                        Annex E

Section 262 of the Delaware General Corporation Law

    (a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S) 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.

    (b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251 (other than a merger effected pursuant to
(S) 251(g) of this title), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or
(S) 264 of this title:

        (1) Provided, however, that no appraisal rights under this section
    shall be available for the shares of any class or series of stock, which
    stock, or depository receipts in respect thereof, at the record date fixed
    to determine the stockholders entitled to receive notice of and to vote at
    the meeting of stockholders to act upon the agreement of merger or
    consolidation, were either (i) listed on a national securities exchange or
    designated as a national market system security on an interdealer quotation
    system by the National Association of Securities Dealers, Inc. or (ii) held
    of record by more than 2,000 holders; and further provided that no
    appraisal rights shall be available for any shares of stock of the
    constituent corporation surviving a merger if the merger did not require
    for its approval the vote of the stockholders of the surviving corporation
    as provided in subsection (f) of (S) 251 of this title.

        (2) Notwithstanding paragraph (1) of this subsection, appraisal rights
    under this section shall be available for the shares of any class or series
    of stock of a constituent corporation if the holders thereof are required
    by the terms of an agreement of merger or consolidation pursuant to
    (S)(S) 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
    such stock anything except:

            a. Shares of stock of the corporation surviving or resulting from
        such merger or consolidation, or depository receipts in respect thereof;

            b. Shares of stock of any other corporation, or depository receipts
        in respect thereof, which shares of stock (or depository receipts in
        respect thereof) or depository receipts at the effective date of the
        merger or consolidation will be either listed on a national securities
        exchange or designated as a national market system security on an
        interdealer quotation system by the National Association of Securities
        Dealers, Inc. or held of record by more than 2,000 holders;

            c. Cash in lieu of fractional shares or fractional depository
        receipts described in the foregoing subparagraphs a. and b. of this
        paragraph; or

            d. Any combination of the shares of stock, depository receipts and
        cash in lieu of fractional shares or fractional depository receipts
        described in the foregoing subparagraphs a., b. and c. of this
        paragraph.

        (3) In the event all of the stock of a subsidiary Delaware corporation
    party to a merger effected under (S) 253 of this title is not owned by the
    parent corporation immediately prior to the merger, appraisal rights shall
    be available for the shares of the subsidiary Delaware corporation.

                                      1

<PAGE>

    (c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.

    (d) Appraisal rights shall be perfected as follows:

        (1) If a proposed merger or consolidation for which appraisal rights
    are provided under this section is to be submitted for approval at a
    meeting of stockholders, the corporation, not less than 20 days prior to
    the meeting, shall notify each of its stockholders who was such on the
    record date for such meeting with respect to shares for which appraisal
    rights are available pursuant to subsection (b) or (c) hereof that
    appraisal rights are available for any or all of the shares of the
    constituent corporations, and shall include in such notice a copy of this
    section. Each stockholder electing to demand the appraisal of such
    stockholder's shares shall deliver to the corporation, before the taking of
    the vote on the merger or consolidation, a written demand for appraisal of
    such stockholder's shares. Such demand will be sufficient if it reasonably
    informs the corporation of the identity of the stockholder and that the
    stockholder intends thereby to demand the appraisal of such stockholder's
    shares. A proxy or vote against the merger or consolidation shall not
    constitute such a demand. A stockholder electing to take such action must
    do so by a separate written demand as herein provided. Within 10 days after
    the effective date of such merger or consolidation, the surviving or
    resulting corporation shall notify each stockholder of each constituent
    corporation who has complied with this subsection and has not voted in
    favor of or consented to the merger or consolidation of the date that the
    merger or consolidation has become effective; or

        (2) If the merger or consolidation was approved pursuant to (S) 228 or
    (S) 253 of this title, then, either a constituent corporation before the
    effective date of the merger or consolidation, or the surviving or
    resulting corporation within ten days thereafter, shall notify each of the
    holders of any class or series of stock of such constituent corporation who
    are entitled to appraisal rights of the approval of the merger or
    consolidation and that appraisal rights are available for any or all shares
    of such class or series of stock of such constituent corporation, and shall
    include in such notice a copy of this section. Such notice may, and, if
    given on or after the effective date of the merger or consolidation, shall,
    also notify such stockholders of the effective date of the merger or
    consolidation. Any stockholder entitled to appraisal rights may, within 20
    days after the date of mailing of such notice, demand in writing from the
    surviving or resulting corporation the appraisal of such holder's shares.
    Such demand will be sufficient if it reasonably informs the corporation of
    the identity of the stockholder and that the stockholder intends thereby to
    demand the appraisal of such holder's shares. If such notice did not notify
    stockholders of the effective date of the merger or consolidation, either
    (i) each such constituent corporation shall send a second notice before the
    effective date of the merger or consolidation notifying each of the holders
    of any class or series of stock of such constituent corporation that are
    entitled to appraisal rights of the effective date of the merger or
    consolidation or (ii) the surviving or resulting corporation shall send
    such a second notice to all such holders on or within 10 days after such
    effective date; provided, however, that if such second notice is sent more
    than 20 days following the sending of the first notice, such second notice
    need only be sent to each stockholder who is entitled to appraisal rights
    and who has demanded appraisal of such holder's shares in accordance with
    this subsection. An affidavit of the secretary or assistant secretary or of
    the transfer agent of the corporation that is required to give either
    notice that such notice has been given shall, in the absence of fraud, be
    prima facie evidence of the facts stated therein. For purposes of
    determining the stockholders entitled to receive either notice, each
    constituent corporation may fix, in advance, a record date that shall be
    not more than 10 days prior to the date the notice is given,

                                      2

<PAGE>

    provided, that if the notice is given on or after the effective date of the
    merger or consolidation, the record date shall be such effective date. If
    no record date is fixed and the notice is given prior to the effective
    date, the record date shall be the close of business on the day next
    preceding the day on which the notice is given.

    (e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise entitled
to appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms
offered upon the merger or consolidation. Within 120 days after the effective
date of the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after such stockholder's written request for such a statement is received
by the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.

    (f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.

    (g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.

    (h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any

                                      3

<PAGE>

stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such
is required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.

    (i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.

    (j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.

    (k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be upon such terms as the Court deems just.

    (l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.

                                      4

<PAGE>

                                                                        ANNEX F

                   PLAINS EXPLORATION AND PRODUCTION COMPANY
                                 (the Company)

                        CHARTER OF THE AUDIT COMMITTEE

Mission Statement

    The Audit Committee ("Committee") shall assist the Board of Directors of
the Company ("Board") in fulfilling its oversight responsibilities regarding
financial reports and financial controls of the Company. In discharging that
role, the Committee shall review the Company's financial reporting process, its
system of internal controls regarding accounting, legal compliance and ethics
that management or the Board, as the case may be, have established and the
internal and external audit processes of the Company. The Committee will
endeavor to maintain effective working relationships with the Board,
management, and the internal and external auditors. Each Committee member will
maintain an understanding of the requirements of membership which are necessary
to meet and fulfill Committee responsibilities.

Organization

The Board shall arrange that:

1.  The Committee shall be comprised of at least three members of the Board,
    each of whom must meet the independence criteria set forth in the Company's
    Corporate Governance Standards for the Board of Directors at all times
    during his or her tenure on the Committee. All members should possess, at a
    minimum, basic financial literacy, as such qualification is interpreted by
    the Board, or acquire such literacy within a reasonable period of time from
    joining the Committee. At the present time, the Board interprets "financial
    literacy" to mean the ability to read and understand audited and unaudited
    consolidated financial statements (including the related notes) and monthly
    operating statements of the sort released or prepared by the Company, as
    the case may be, in the normal course of its business.

2.  One member of the Committee shall be a financial expert who shall have,
    through education and experience as a public accountant or auditor or a
    principal financial officer, comptroller or principal accounting officer
    (or other position involving the performance of similar functions) of a
    public reporting company:

   .  an understanding of generally accepted accounting principles and
      financial statements;

   .  experience in: (a) the preparation of or auditing of financial statements
      of a generally comparable public reporting company; and (b) the
      application of generally accepted accounting principles in connection
      with the accounting for estimates, accruals and reserves;

   .  experience with internal accounting controls;

   .  an understanding of the audit committee function; and

   .  such other experience as may be required to meet any additional
      requirements promulgated by the Securities and Exchange Commission
      pursuant to Section 407 of the Sarbanes-Oxley Act of 2002.

                                      1

<PAGE>

3.  No member of the Committee may: (a) accept, other than in his or her
    capacity as a member of the Committee, the Board or any other committee of
    the Board, any consulting, advisory or other compensatory fee from the
    Company; or (b) be an affiliated person/1 /of the Company or any of its
    subsidiaries.

4.  No director shall be appointed to the Committee who is currently serving on
    the audit committees of three or more other public companies unless the
    Board determines that such simultaneous service would not impair the
    ability of such member to serve on the Committee and such determination is
    disclosed in the Company's annual proxy statement.

5.  The members of the Committee shall be designated by the Board at the annual
    meeting of the Board to serve until the next annual meeting of the Board or
    until their successors shall be duly elected and qualified. Unless a Chair
    is designated by the Board, the members of the Committee may designate a
    Chairman by majority vote of the Committee membership. The Chair shall be
    available, capable, qualified and competent in dealing with financial and
    related issues.

6.  Committee meetings shall be held not less than quarterly, usually in
    conjunction with the Company's regular quarterly Board meetings. The
    Committee may choose to meet more frequently, if needed.

Roles and Responsibilities

    The Committee's responsibility is oversight, and it and the Board recognize
that the Company's management is responsible for preparing the Company's
financial statements. Additionally, the Committee recognizes that financial
management, the internal audit staff, and the external auditors, have more
knowledge and more detailed information about the Company than do the members
of the Committee. Consequently, in carrying out its oversight responsibilities
the Committee is not providing any expert or special assurance as to the
Company's financial statements or any professional certification of the
financial statements prepared by management or the audit work performed by the
internal or external auditors.

    In this regard, the following functions shall be the common recurring
activities of the Committee in carrying out its oversight function. These
functions are set forth as a guide with the understanding that the Committee
may diverge from this guide as appropriate under any particular set of
circumstances.

Financial Reporting

The Committee shall:

1.  review with management and the external auditors any financial statement
    issues and the results of the audit;

2.  review management's disposition of proposed significant audit adjustments
    as identified by the external auditors;

3.  inquire into the fairness of the statements and disclosures by requesting
    explanations from management and from the internal and external auditors on
    whether:

   .  generally accepted accounting principles have been consistently applied
--------
/1/ To be defined by the Securities and Exchange Commission; however,
    compliance with the independence requirements of the New York Stock
    Exchange should satisfy this requirement.

                                      2

<PAGE>

   .  there are any significant or unusual events or transactions

   .  the Company's financial and operating controls are functioning effectively

   .  the Company's financial statements contain adequate and appropriate
      disclosures

4.  review with the external auditors their views as to the quality of the
    Company's accounting principles and financial reporting practices;

5.  review and discuss with management and the external auditors the Company's
    annual audited financial statements and recommend to the Board the
    inclusion of the Company's audited financial statements in its Annual
    Report on Form 10-K;

6.  prior to the Company's filing of each Form 10-Q, review and discuss with
    management and the external auditors the content of such filing, including
    the disclosures under "Management's Discussion and Analysis of Financial
    Condition and Results of Operations;"

7.  discuss with the external auditors the matters required to be brought to
    the Committee's attention by Statement on Auditing Standards No. 61, as
    well as other matters that should be communicated to the Committee by the
    external auditors; and

8.  discuss with management, prior to their dissemination, earnings, press
    releases, as well as financial information and earnings guidance provided
    to analysts and rating agencies.

  Internal Control

The Committee shall:

1.  review with management, as well as internal and external auditors, the
    Company's business risk management process, including the adequacy of the
    Company's overall control environment and controls in selected areas
    representing significant financial and business risk;

2.  require that the internal and external auditors and management keep the
    Committee informed about any significant fraud, illegal acts, or
    deficiencies in internal control, and similar significant matters;

3.  create an opportunity that significant findings and recommendations made by
    the internal and external auditors can be received and discussed on a
    timely basis;

4.  gain an understanding of whether internal control recommendations made by
    internal and external auditors have been implemented by management; and

5.  inquire as to the extent to which internal and external auditors review
    computer systems and applications and the security of such systems and
    applications.

  Internal Audit

1.  The Committee shall review as often as it deems necessary but at least
    annually:

   .  the annual audit plan, activities and organizational structure of the
      internal audit function;

   .  the qualifications of the internal audit function and, when necessary,
      participate in the appointment, replacement, reassignment, or dismissal
      of the Director of Internal Audit; and

   .  the effectiveness of the internal audit function.

2.  The Committee shall also review periodically as it deems appropriate the
    reports prepared by the internal audit staff and management's responses to
    such reports.

                                      3

<PAGE>

External Audit

1.  The Committee shall review:

   .  the external auditors' proposed audit scope and approach; and

   .  the performance of the external auditors.

2.  The Committee shall have the direct responsibility for and the sole
    authority to engage, compensate, oversee and terminate the Company's
    external auditors (subject, where applicable, to shareholder ratification),
    including the resolution of any disagreements between management and the
    Company's external auditors regarding financial reporting. The Company
    shall provide appropriate funding (as determined by the Committee) for
    payment of compensation to the Company's external auditors.

3.  The Committee, or members of the Committee delegated such authority by the
    Committee, must approve in advance any non-audit services performed by the
    Company's external auditors, including tax services. Notwithstanding the
    foregoing, the Company's external auditors may not provide the following
    services to the Company:

    bookkeeping or other services related to the accounting records or
    financial statements of the Company; financial information systems design
    and implementation; appraisal or valuation services, fairness opinions or
    contribution-in-kind reports; actuarial services; internal audit
    outsourcing services; management functions or human resources; broker or
    dealer, or investment adviser or investment banking services; legal
    services and expert services unrelated to the audit; and any other service
    that the applicable federal oversight regulatory authority determines, by
    regulation, is impermissible. Any non-audit service approved by the
    Committee and performed by the Company's external auditors must be
    disclosed to investors in the Company's reports on Form 10-K and Form 10-Q.

4.  The lead (or coordinating) audit partner and the audit review partner
    associated with the Company's external auditors must be changed at least
    every five years.

5.  The Committee cannot engage external auditors to perform audit services for
    the Company if the Company's Chief Executive Officer, Chief Financial
    Officer, Chief Accounting Officer or any person in an equivalent position
    was employed by such external auditors within one year preceding the
    initiation of the audit.

6.  The Committee shall, at least annually, use its best efforts to obtain and
    review a report from the external auditors addressing: (a) the auditors
    internal quality-control procedures; (b) any material issues raised by the
    most recent internal quality-control review, or peer review, of the
    external auditors; (c) any inquiry or investigation by governmental or
    professional authorities, within the preceding five years, respecting one
    or more independent audits carried out by the external auditors and any
    steps taken to deal with such issues; and (d) the independence of the
    external auditors, including a discussion of any relationships or services
    that may impact their objectivity and independence.

Other Responsibilities

The Committee shall:

1.  meet at least quarterly, with the external auditors, Director of Internal
    Audit, and management in separate executive sessions to discuss any matters
    that the Committee or these groups believe should be discussed privately;


                                      4

<PAGE>

2.  update the Board about Committee activities and make appropriate
    recommendations, as often as the Board deems appropriate;

3.  annually review and assess the continuing adequacy of this Charter and the
    performance of the members of the Committee and, if appropriate, recommend
    changes for the approval of the Board;

4.  prepare a report to shareholders to be included in the Company's proxy
    statements as required by the Securities and Exchange Commission;

5.  perform any other activities consistent with this Charter, the Company's
    Code of By-laws and governing law, as the Committee or the Board deems
    necessary, appropriate or desirable;

6.  as appropriate, obtain advice and assistance from outside legal, accounting
    or other advisors without the necessity for prior authorization by the
    Board; and

7.  establish policies for the hiring by the Company of present or former
    employees of the Company's external auditors.

Ethical and Legal Compliance

The Committee shall:

1.  review and assess at least annually the Company's Code of Business Conduct
    and Ethics (the "Policy Statement"), recommend changes in the Policy
    Statement as conditions warrant and confirm that management has established
    a system to monitor compliance with the Policy Statement by officers and
    relevant employees of the Company;

2.  review management's monitoring of the Company's compliance with the Policy
    Statement, and confirm that management has a review system in place to
    maximize the likelihood that the Company's financial statements, reports
    and other financial information disseminated to governmental organizations
    and the public satisfy applicable legal requirements;

3.  review, with the Company's counsel, legal compliance matters including
    corporate securities trading policies;

4.  review, with the Company's counsel, any legal matter that could have a
    significant impact on the Company's financial statements; and

5.  the Committee shall establish procedures for (a) the receipt, retention and
    treatment of complaints received by the Company regarding accounting,
    internal accounting controls or auditing matters and (b) the confidential,
    anonymous submission by employees of the Company regarding questionable
    accounting or auditing matters.

General Limitations

    The Board recognizes that the members of the Committee will discharge the
foregoing oversight responsibilities by evaluating: (a) reports given to them;
(b) presentations made to the them; and (c) other significant financial
reporting decisions which are reported to them by management, internal auditors
and external auditors. Within the bounds of sound business judgment and
assessment, and to the extent permitted by the Delaware General Corporation
Law, each member of the Committee shall

                                      5

<PAGE>

be entitled to rely on the integrity of the individuals and organizations from
whom they receive such information. In discharging his or her duties as a
member of the Committee, each member is entitled to rely on information,
opinions, reports or statements, including financial statements and other
financial data, that is prepared and presented by either: (a) one or more
officers or employees of the Company who the member reasonably believes to be
reliable and competent in the matters presented; or (b) legal counsel, external
independent auditors or other persons as to the matters the member reasonably
believes are within the person's professional or expert competence. The
Committee may also retain independent counsel, accountants or others, as it
deems appropriate. Furthermore, in fulfilling their responsibilities hereunder,
it is recognized that members of the Committee are not full-time employees of
the Company and are not, and do not hold themselves out to be, accountants or
auditors by profession or experts in the fields of accounting or auditing.

                                      6

<PAGE>

                                                                        Annex G

                   PLAINS EXPLORATION AND PRODUCTION COMPANY
                                (the "Company")

                        CORPORATE GOVERNANCE GUIDELINES
                                      FOR
                              BOARD OF DIRECTORS

    The following corporate governance guidelines established by the Board of
Directors provide a structure within which directors and management can
effectively pursue the Company's objectives for the benefit of its stockholders
and other constituencies. The Company's business and affairs are managed under
the direction of the Board, but the conduct of the Company's business has been
delegated by the Board to the Company's senior management team.

    1.   The Board will consider all major decisions of the Company. The Board
has, however, established the following standing Committees so that certain
important areas can be addressed in more depth than may be possible in a full
Board meeting: Audit Committee, Nominating and Corporate Governance Committee
and Compensation Committee. Each standing Committee has a specific charter that
has been approved by the Board. The charters of the Committees may at any time
be modified or amended by the Board, subject to any applicable disclosure or
other requirements of the Securities Exchange Act of 1934, as amended, the
rules promulgated thereunder and the applicable rules of the New York Stock
Exchange. Each of these Committees is to operate in accordance with its charter
and the applicable rules of the Securities and Exchange Commission and the New
York Stock Exchange. The Board may establish such other committees as it deems
appropriate and delegate to those committees such authority as the Board sees
fit and is permitted under applicable law and the Company's Second Certificate
of Incorporation and Bylaws.

    2.  The Board believes that a majority of its members are independent, as
determined under existing standards. Within two years following the approval by
the Securities and Exchange Commission of the independence requirements for
directors that have been proposed by the New York Stock Exchange, at least a
majority of the directors of the Company shall be independent, as determined
pursuant to numbered paragraph 3 below.

    3.  The Board must affirmatively determine annually, based on a
consideration of all relevant facts and circumstances, whether each director
has any material relationship with the Company (either directly or as a
partner, shareholder or officer of an organization that has a relationship with
the Company) that interferes with a director's exercise of his or her
independent judgment from management and the Company. If a director has such a
relationship, he or she cannot be considered independent. In assessing the
materiality of a director's relationship with the Company and each director's
independence, the Board shall consider the issue of materiality not only from
the standpoint of the director but also from that of the persons or
organizations with which the director has an affiliation. Material
relationships can include, among others, commercial, industrial, banking,
consulting, legal, accounting, charitable and familial relationships. In
assessing a director's independence, the Board shall also consider the
director's ownership, or affiliation with the owner, of a significant amount of
voting securities of the Company. The basis for the Board's determination that
a relationship is not material shall be disclosed in the Company's annual proxy
statement. In this regard, the Board may adopt and disclose categorical
standards to assist it in making determinations of independence. The Board
cannot conclude that a director is independent if he or she falls into one of
the following categories:

   .  the director is an employee of the Company or its subsidiaries or is a
      former employee of the Company or its subsidiaries whose employment ended
      within the last five years (for this purpose, a director who serves as an
      interim Chairman or CEO shall not be considered a "former employee," and
      therefore may be deemed independent for purposes of this requirement
      immediately after his or her service as interim Chairman or CEO);

<PAGE>

   .  the director is, or within the past five years has been, affiliated with
      or employed by the present auditor of the Company (or an affiliate) or a
      firm that within the last five years was an auditor of the Company;

   .  the director is, or within the past five years has been, part of an
      interlocking directorate in which an executive officer of the Company
      serves on the compensation committee of another company that employees
      that director; or

   .  the director has a spouse, parent, child, sibling, mother-in-law,
      father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law
      or other person who shares his or her home (collectively, an "immediate
      family member") that falls into one of the foregoing three categories.

    4.  The Audit Committee, the Nominating and Corporate Governance Committee
and the Compensation Committee of the Board will consist entirely of
independent directors.

    5.  Every year the Board will set the Company's strategic direction and
review and approve a [three-year] strategic framework and a one-year business
plan.

    6.  On an ongoing basis during each year, the Board will monitor the
Company's performance against its annual operating plan and against the
performance of its peers. In this connection, the Board will assess the impact
of emerging political, regulatory and economic trends and developments on the
Company.

    7.  The Board, with the assistance of the Corporate Governance and
Nominating Committee if the Board so requests, will at least annually conduct a
self-evaluation to determine whether it and its various committees are
functioning effectively. In order to make these assessments, the Board shall
solicit annually the opinions of each director regarding the foregoing matters.
On the basis of that self-evaluation, the Board shall consider whether any
changes should be implemented to improve its effectiveness and the
effectiveness of its various Committees.

    8.  Directors are encouraged to own shares of common stock of the Company.

    9.  Directors are encouraged to limit the number of directorships that they
hold in public companies so that they can devote sufficient time to the
discharge of their responsibilities to each public company for which they serve
as a director, including the Company.

    10.  The members of the several Board committees shall be elected by the
Board at the annual meeting of the Board to serve until the next annual meeting
of the Board or until their successors shall be duly elected and qualified. Any
member of a Committee may resign or be removed by the Board from membership on
the Committee. Unless the Chair of any Committee is elected by the Board, the
members of the Committee may designate a Chair by majority vote of the
Committee membership. The Chair of any Committee may be changed by the Board,
or, if the Chair was selected by majority vote of the committee membership, by
majority vote of the committee membership. The several Committee Chairs will
periodically report the Committee's findings and conclusions to the Board.

    11.  Succession planning and management development will be reviewed
annually by the Chief Executive Officer with the Board.

    12.  All executive officers are encouraged to own shares of the Company's
common stock, in addition to any shares of restricted stock and options to
purchase common stock they may hold.

                                      2

<PAGE>

    13.  To the extent required by the applicable rules of the New York Stock
Exchange, stockholders of the Company will be given an opportunity to vote on
the adoption and the material revision of all equity-compensation plans, except
inducement options, plans relating to mergers or acquisitions, and tax
qualified or excess benefit plans. The Board understands that the New York
Stock Exchange will preclude its member organizations from giving a proxy to
vote a customer's shares on any equity compensation plan unless the beneficial
owner of the shares has given voting instructions.

    14.  Directors should exercise their business judgment in a manner they
believe is consistent with their fiduciary duties. Directors should regularly
attend meetings of the Board and of all Board Committees on which they serve.
To prepare for meetings, directors should review the materials that are sent to
them in advance of the meetings.

    15.  Analyses and empirical data that are important to the directors'
understanding of the business to be conducted at a meeting of the Board or any
Committee should be distributed, to the extent practicable, in writing to all
members in advance of the meeting. Management should make every reasonable
effort to assure that this material is both concise and in sufficient detail to
provide a reasonable basis upon which directors may make an informed business
decision. In some cases, significant items requiring Board or Committee
approval may be reviewed in one or more meetings, with the intervening time
being used for clarification and discussion of relevant issues. Outside
directors shall be encouraged to provide input into the development of Board
and Committee meeting agenda.

    16.  The Board of Directors of the Company will schedule regular executive
sessions where non-management directors meet without management participation.
"Non-management" directors are all those who are not Company officers, and
include directors that are not officers but who are not independent. The
non-management directors shall either select one of them to preside at these
meetings, or shall establish a procedure by which the presiding director for
each executive session will be selected. The non-management director so
selected or the procedure so established shall be disclosed in the Company's
annual proxy statement. In order that interested parties may be able to make
their concerns known to the non-management directors, the Board will establish
methods by which such parties may communicate directly with the presiding
director or the non-management directors as a group, and the Board will cause
such methods to be disclosed.

    17.  Directors shall have complete access to the Company's management. It
is assumed that directors will exercise reasonable judgment to assure that
contact of this sort is not distracting to the business operations of the
Company and that any such contact, if in writing, will be copied to the Chief
Executive Officer and the Chairman of the Board. Furthermore, the Board
encourages the Chief Executive Officer to bring managers into Board meetings
from time to time who: (a) can provide additional insight into the items being
discussed because of personal involvement in these areas; or (b) represent
potential members of future senior management that the Chief Executive Officer
believes should be given exposure to the Board.

    18.  While the information needed for the Board's decision making generally
will be found within the Company, from time to time the Board may seek legal or
other expert advise from sources independent of management. Each standing
Committee of the Board shall have the sole authority, without further
authorization from the Board, to engage, compensate, oversee and terminate
external independent consultants, counsel and other advisors as it determines
necessary to carry out its duties. The Company shall provide appropriate
funding (as determined by each committee) for payment of compensation to
advisors engaged by the Committees.

    19.  The Board is responsible for the enactment and approval of changes in
the Company's Code of Business Conduct and Ethics ("Policy Statement"). The
Board's Audit Committee has

                                      3

<PAGE>

responsibility for the oversight of the implementation and administration of
the Policy Statement, the review and assessment at least annually of the
effectiveness of the Policy Statement and the recommendation to the Board of
suggested changes in the Policy Statement.

    20.  The Board is aware that questions as to the independence of
non-management directors may be raised when director's fees and emoluments
exceed what is customary. The Board also is aware that similar concerns as to
the independence of non-management directors may be raised if the Company makes
substantial charitable contributions to organizations in which a non-management
director is affiliated, or enters into of consulting contracts with (or
providing other indirect forms of compensation to) directors. The Board intends
to evaluate these matters when determining the form and amount of director
compensation, and the independence of a director.
    21.  While the Board will review from time to time its compensatory
arrangements with its non-management directors, the Board believes that the
form and amount of the Company's current compensatory arrangements with its
non-management directors summarized below are both customary and appropriate:

   .  an annual retainer of $16,000;

   .  an attendance fee of $2,000 for each board meeting attended (excluding
      telephonic meetings), plus reimbursement for related expenses;

   .  an attendance fee of $500 for each committee meeting or telephonic board
      meeting attended;

   .  an annual fee of $2,000 for serving as a chairman of a board committee;
      and

   .  an annual grant of an option to purchase 10,000 shares of common stock
      for a five-year term at an exercise price equal to the closing price of
      our common stock on the grant date.

    22.  The Chief Executive Officer or other appointed members of the senior
management team shall report to the Compensation Committee annually regarding
the adequacy and suitability of the Company's Board compensation package in
relation to other comparable sized U.S. companies. Changes in Board
compensation, if any, should be suggested by the Compensation Committee and
approved only after a full discussion among the members of the Board.

    23.  The Board's Compensation Committee shall review and propose adoption
by the Board of revisions to the Company's current compensatory arrangements
with its non-officer directors and members of the Board's various committees.

    24.  The Board will consider from time to time its optimum size and will
increase or decrease from time to time, as appropriate, the number of its
members.

    25.  The Board is committed to the orientation and continuing education of
new and incumbent directors at the Board and Committee levels.

    26.  These Corporate Governance Guidelines have been developed and approved
by the Board. The Board will review at least annually the practices
incorporated into these Corporate Governance Guidelines by comparing them and
the Board's experience with them to the evolving needs of the Company and
determine whether these Corporate Governance Guidelines should be updated.
These Corporate Governance Guidelines may be amended, modified or waived by the
Board, subject to the disclosure and other requirements of the Securities
Exchange Act of 1934, the applicable rules promulgated thereunder, and the
applicable rules of the New York Stock Exchange. These Corporate Governance
Guidelines shall be published in the Company's Proxy Statement or Annual Report
to stockholders.

                                      4

<PAGE>

                                    Part II

                    Information Not Required In Prospectus

ITEM 20.  INDEMNIFICATION OF DIRECTORS AND OFFICERS

    The discussion below summarizes the material indemnification provisions of
Plains' certificate of incorporation and bylaws and Section 145 of the Delaware
General Corporation Law.

    Plains' certificate of incorporation provides that Plains must indemnify to
the full extent authorized or permitted by law any person made, or threatened
to be made, a party to any threatened, pending or contemplated action, suit or
proceeding (whether civil, criminal, administrative, arbitrative or
investigative) any appeal in such action, suit or proceeding and any inquiry or
investigation that could lead to such action, suit or proceeding by reason of
fact that he is or was one of Plains' directors or officers or by reason of the
fact that such director or officer, at Plains' request, is or was serving as a
director, officer, partner, venturer, proprietor, trustee, employee, agent or
similar functionary of an enterprise. The rights to indemnification set forth
above are not exclusive of any other rights to which such person may be
entitled under any statute, provision of Plains' certificate of incorporation
or bylaws, agreements, vote of stockholders or disinterested directors or
otherwise.

    Additionally, Plains' certificate of incorporation and bylaws provide for
mandatory indemnification of Plains' officers and directors to at least the
extent specifically allowed by Section 145 of the DGCL. However, under Plains
certificate of incorporation, except for proceedings to enforce right to
indemnification, Plains is not required to indemnify anyone (including his
heirs, executors or representatives) in connection with any action, suit or
proceeding initiated by such person unless it was authorized by or consented to
the Plains' board. Plains' bylaws follow the language of Section 145 of the
DGCL; however, the advancement of expenses by Plains does not extend to
administrative or investigative actions, suits and proceedings.

    Pursuant to Section 145 of the DGCL, Plains generally has the power to
indemnify its current and former directors, officers, employees and agents
against expenses and liabilities that they incur in connection with any suit to
which they are, or are threatened to be made, a party by reason of their
serving in such positions so long as they acted in good faith and in a manner
they reasonably believed to be in, or not opposed to, Plains' best interests,
and with respect to any criminal action, they had no reasonable cause to
believe their conduct was unlawful. The statute expressly provides that the
power to indemnify or advance expenses authorized thereby is not exclusive of
any rights granted under any bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise, both costs actions in such person's
official capacity and as to action in another capacity while holding such
office. Plains also has the power to purchase and maintain insurance for such
directors and officers.

    The merger agreement provides that, for six years after the effective time
of the merger, Plains merger subsidiary will indemnify the present and former
officers and directors of 3TEC and its subsidiaries from liabilities actually
and reasonably incurred by them arising out of actions or omissions in their
capacity as such prior to the effective time of the merger, to the full extent
permitted under Delaware law or Plains' certificate of incorporation, bylaws.
In addition, Plains will maintain 3TEC's directors' and officers' insurance
coverage for six years after the effective time but only to the extent related
to actions or omissions prior to the effective time.

                                     II-1

<PAGE>

ITEM 21.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
Exhibit
  No.                                        Exhibit Description
-------                                      -------------------
<C>     <S>

  2.1   Agreement and Plan of Merger, dated February 2, 2003, between Plains Exploration &
        Production Company and 3TEC Energy Corporation (incorporated by reference to Exhibit
        10.1 to Plains' Current Report on Form 8-K filed on February 3, 2003).

  3.1   Certificate of Incorporation of Plains Exploration & Production Company (incorporated by
        reference to Exhibit 3.1 to Amendment No. 2 to Plains' Registration Statement on Form S-1
        filed on October 3, 2002).

  3.2   By-laws of Plains Exploration & Production Company (incorporated by reference to Exhibit
        3.2 to Amendment No. 2 to Plains' Registration Statement on Form S-1 filed on October 3,
        2002).

  4.1   Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to
        Plains' Form S-1 filed on October 3, 2002, File No. 333-90974).

  4.2   Indenture dated July 3, 2002 among Plains Exploration & Production Company, Plains E&P
        Company, Arguello Inc., Plains Illinois Inc., Plains Resources International Inc., PMCT Inc.,
        and J.P. Morgan Chase Bank, as Trustee (incorporated by reference to Exhibit 4.2 to Plains'
        Amendment No. 1 to Form S-1 filed on August 28, 2002).

  4.3   Form of 8.75% Senior Subordinated Note (incorporated by reference to Exhibit 4.3 to Plains'
        Amendment No. 1 to Form S-1 filed on August 28, 2002).

  5.1** Opinion of Akin Gump Strauss Hauer & Feld LLP.

  8.1** Opinion of Akin Gump Strauss Hauer & Feld LLP regarding tax matters.

  8.2** Opinion of Thompson & Knight LLP regarding tax matters.

 10.1   Master Separation Agreement dated July 3, 2002 between Plains Exploration & Production
        Company and Plains Resources Inc. (incorporated by reference to Exhibit 10.1 to Plains'
        Amendment No. 1 to Form S-1 filed on August 28, 2002).

 10.2   Plains Exploration & Production Company Transition Services Agreement dated July 3,
        2002 between Plains Exploration & Production Company and Plains Resources Inc.
        (incorporated by reference to Exhibit 10.2 to Plains' Amendment No. 1 to Form S-1 filed on
        August 28, 2002).

 10.3*  Extension of Term of Plains Exploration & Production Company Transition Services
        Agreement, dated as of December 18, 2002, between Plains Exploration & Production
        Company and Plains Resources Inc.

 10.4   Plains Resources Inc. Transition Services Agreement dated July 3, 2002 between Plains
        Resources Inc. and Plains Exploration & Production Company (incorporated by reference to
        Exhibit 10.3 to Plains' Amendment No. 1 to Form S-1 filed on August 28, 2002).

 10.5   Second Amended and Restated Tax Allocation Agreement dated November 20, 2002
        between Plains Exploration & Production Company and Plains Resources Inc. (incorporated
        by reference to Exhibit 10.4 to Plains' Amendment No. 1 to Form 10 filed on November 21,
        2002).

 10.6   Technical Services Agreement dated July 3, 2002 between Plains Exploration & Production
        Company and Plains Resources Inc. (incorporated by reference to Exhibit 10.5 to Plains'
        Amendment No. 1 to Form S-1 filed on August 28, 2002).

 10.7   Intellectual Property Agreement dated July 3, 2002 between Plains Exploration & Production
        Company and Plains Resources Inc. (incorporated by reference to Exhibit 10.6 to Plains'
        Amendment No. 1 to Form S-1 filed on August 28, 2002).
</TABLE>

                                     II-2

<PAGE>

<TABLE>
<CAPTION>
Exhibit
  No.                                        Exhibit Description
-------                                      -------------------
<C>      <S>

  10.8   Employee Matters Agreement dated July 3, 2002 between Plains Exploration & Production
         Company and Plains Resources Inc. (incorporated by reference to Exhibit 10.7 to Plains'
         Amendment No. 1 to Form S-1 filed on August 28, 2002).

  10.9   Purchase and Sale Agreement dated June 4, 1999, by and among Plains Resources Inc.,
         Chevron U.S.A., Inc., and Chevron Pipe Line Company (incorporated by reference to Exhibit
         10.7 to Plains' Form S-1 filed on June 21, 2002).

 10.10   Letter Agreement dated as of October 23, 2001 by and between Plains Marketing and
         Stocker Resources, L.P. (incorporated by reference to Exhibit 10.9 to Plains' Form S-1 filed
         on June 21, 2002).

 10.11   Credit Agreement dated July 3, 2002 among Plains Exploration & Production Company,
         JPMorgan Chase Bank, as Administrative Agent, Bank One, NA (Main Office Chicago) and
         Fleet National Bank, as Syndication Agents, BNP Paribas and Fortis Capital Corp., as
         Documentation Agents, and the Lenders party thereto (incorporated by reference to Exhibit
         10.11 to Plains' Amendment No. 1 to Form S-1 filed on August 28, 2002).

 10.12   First Amendment, effective as of July 19, 2002, to Credit Agreement dated as of July 3,
         2002 among Plains Exploration & Production Company, as Borrower, JPMorgan Chase
         Bank, as administrative agent, Bank One, NA and Fleet National Bank, as Syndication
         Agents, BNP Paribas and Fortis Capital Corp., as Documentation Agents and the Lender
         Party thereto (incorporated by reference to Exhibit 10.12 to Plains' Amendment No. 1 to
         Form S-1 filed on August 28, 2002).

 10.13   Employment Agreement, dated as of September 19, 2002, between Plains Exploration &
         Production Company and James C. Flores (incorporated by reference to Exhibit 10.13 to
         Plains' Amendment No. 2 to Form S-1 filed on October 4, 2002).

 10.14   Employment Agreement, dated as of September 19, 2002, between Plains Exploration &
         Production Company and John T. Raymond (incorporated by reference to Exhibit 10.14 to
         Plains' Amendment No. 2 to Form S-1 filed on October 4, 2002).

 10.15   Employment Letter Agreement, dated as of August 20, 2002, between Plains Exploration &
         Production Company and Stephen A. Thorington (incorporated by reference to Exhibit 10.15
         to Plains' Amendment No. 2 to Form S-1 filed on October 4, 2002).

 10.16   Employment Letter Agreement, dated as of September 19, 2002, between Plains
         Exploration & Production Company and Timothy T. Stephens (incorporated by reference to
         Exhibit 10.16 to Plains' Amendment No. 2 to Form S-1 filed on October 4, 2002).

 10.17** Form of Plains Restricted Stock Agreement.

 10.18** Form of Plains Stock Appreciation Rights Agreement.

 10.19   Plains Exploration & Production Company 2002 Stock Incentive Plan (incorporated by
         reference to Exhibit 10.21 to Plains' Amendment No. 2 to Form S-1 filed on October 4,
         2002).

 10.20   Amendment No. 1 to Employee Matters Agreement, dated as of September 18, 2002,
         between Plains Resources Inc. and Plains Exploration & Production Company (incorporated
         by reference to Exhibit 10.22 to Plains' Amendment No. 2 to Form S-1 filed on October 4,
         2002).

 10.21   Amendment No. 1 to Master Separation Agreement, dated as of November 20, 2002,
         between Plains Resources Inc. and Plains Exploration & Production Company (incorporated
         by reference to Exhibit 10.24 to Plains' Amendment No. 1 to Form 10 filed on November 21,
         2002).
</TABLE>

                                     II-3

<PAGE>

<TABLE>
<CAPTION>
Exhibit
  No.                                       Exhibit Description
-------                                     -------------------
<C>     <S>

 10.22  Amendment No. 2 to Employee Matters Agreement, dated as of November 20, 2002,
        between Plains Resources Inc. and Plains Exploration & Production Company (incorporated
        by reference to Exhibit 10.25 to Plains' Amendment No. 1 to Form 10 filed on November 21,
        2002).

 10.23* Amendment No. 3 to Employee Matters Agreement, dated as of December 2, 2002,
        between Plains Exploration & Production Company and Plains Resources Inc.

 10.24  Amendment No. 1 to Employment Agreement, dated as of November 20, 2002, between
        Plains Exploration & Production Company and James C. Flores (incorporated by reference
        to Exhibit 10.26 to Plains' Amendment No. 1 to Form 10 filed on November 21, 2002).

 10.25  Amendment No. 1 to Employment Agreement, dated as of November 20, 2002, between
        Plains Exploration & Production Company and John T. Raymond (incorporated by reference
        to Exhibit 10.27 to Plains' Amendment No. 1 to Form 10 filed on November 21, 2002).

 10.26  Amendment No. 1 to Employment Letter Agreement, dated as of November 20, 2002,
        between Plains Exploration & Production Company and Stephen A. Thorington
        (incorporated by reference to Exhibit 10.28 to Plains' Amendment No. 1 to Form 10 filed on
        November 21, 2002).

 10.27  Plains Exploration & Production Company 2002 Transition Stock Incentive Plan
        (incorporated by reference to Exhibit 10.33 to Plains' Amendment No. 1 to Form 10 filed on
        November 21, 2002).

 10.28  Plains Exploration & Production Company 2002 Rollover Stock Plan (incorporated by
        reference to Exhibit 10.34 to Plains' Amendment No. 1 to Form 10 filed on November 21,
        2002).

 10.29  Voting Agreement dated as of February 2, 2003, by and among Plains Exploration &
        Production Company, 3TEC Energy Corporation, EnCap Energy Acquisition III-B, Inc.,
        EnCap Energy Capital Fund III, L.P., BOCP Energy Partners, L.P., ECIC Corporation, Floyd
        C. Wilson, Stephen W. Herod, and R.A. Walker (incorporated by reference to Exhibit 10.2 to
        Plains' Current Report on Form 8-K filed on February 3, 2003).

 10.30  Voting Agreement dated as of February 2, 2003, by and among Plains Exploration &
        Production Company, 3TEC Energy Corporation, EnCap Energy Capital Fund III-B, L.P.,
        EnCap Energy Capital Fund III, L.P., BOCP Energy Partners, L.P., Energy Capital
        Investment Company PLC, Sable Management, L.P., and James C. Flores (incorporated by
        reference to Exhibit 10.3 to Plains' Current Report on Form 8-K filed on February 3, 2003).

 10.31  Registration Rights Agreement dated February 2, 2003, by and among Plains Exploration &
        Production Company, EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B,
        Inc., BOCP Energy Partners, L.P., ECIC Corporation and EnCap Investments L.L.C.
        (incorporated by reference to Exhibit 10.4 to Plains' Current Report on Form 8-K filed on
        February 3, 2003)

21.1**  List of Subsidiaries of Plains Exploration & Production Company.

23.1**  Consent of Akin Gump Strauss Hauer & Feld LLP (included in the opinions filed as Exhibit
        5.1 and 8.1 to this Registration Statement).

23.2**  Consent of Thompson Knight LLP (included in the opinion filed as Exhibit 8.2 to this
        Registration Statement).

 23.3*  Consent of PricewaterhouseCoopers LLP, Independent Public Accountants for Plains
        Exploration & Production Company.

 23.4*  Consent of KPMG LLP, Independent Public Accountants for 3TEC Energy Corporation.

 23.5*  Consent of Netherland, Sewell & Associates, Inc., Petroleum Engineers for Plains
        Exploration & Production Company.
</TABLE>

                                     II-4

<PAGE>

<TABLE>
<CAPTION>
Exhibit
  No.                                    Exhibit Description
-------                                  -------------------
<C>     <S>

 23.6*  Consent of Ryder Scott Company, L.P., Petroleum Engineers for Plains Exploration &
        Production Company.

 23.7*  Consent of H.J. Gruy & Associates, Inc., Petroleum Engineers for Plains Exploration &
        Production Company.

 23.8*  Consent of Ryder Scott Company, L.P., Petroleum Engineers for 3TEC Energy Corporation.

 24.1*  Power of Attorney (contained in the signature page to this registration statement).

99.1**  Form of Proxy Card for Plains Exploration & Production Company Annual Meeting.

99.2**  Form of Proxy Card for 3TEC Energy Corporation Special Meeting.

99.3**  Consent of 3TEC Nominees to the Plains board.
</TABLE>
--------
*   Filed herewith.
**  To be filed by amendment.

ITEM 22.  UNDERTAKINGS

    Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, or the Securities Act, may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the act and will be governed by the final
adjudication of such issue.

    The undersigned registrant hereby undertakes:

    1. that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form;

    2. that every prospectus: (a) that is filed pursuant to paragraph (1)
immediately preceding, or (b) that purports to meet the requirements of Section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;

    3. to respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of any such request, and to send the incorporated
documents by first class mail or other equally prompt means, including
information contained in documents filed subsequent to the effective date of
this registration statement through the date of responding to the request; and

    4. to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this registration statement when it
became effective.

                                     II-5

<PAGE>

                                  Signatures

    Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on February 12, 2003.

                                              PLAINS EXPLORATION &
                                              PRODUCTIONCOMPANY

                                              By:     /s/  JAMES C. FLORES
                                                  -----------------------------
                                                         James C. Flores
                                                    Chairman of the Board and
                                                     Chief Executive Officer

    KNOW ALL BY THESE PRESENTS, that each of the undersigned directors and
officers of Plains Exploration & Production Company hereby constitutes and
appoints John T. Raymond, Timothy T. Stephens and Stephen A. Thorington, and
each of them, his true and lawful attorney-in-fact and agent, with full power
and in his name, place and stead, in any and all capacities, to sign, execute
and file with the Securities and Exchange Commission and any state securities
regulatory board or commission any documents relating to the proposed issuance
and registration of the securities offered pursuant to this Registration
Statement on Form S-4 under the Securities Act, including any and all
amendments (including post-effective amendments and amendments thereto) to this
Registration Statement on Form S-4 and any registration statement for the same
offering that is to be effective upon filing pursuant to rule 462(b) under the
Securities Act, with all exhibits and any and all documents required to be
filed with respect thereto with any regulatory authority, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all intents
and purposes as he might or could do if personally present, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act, as amended, this
Registration Statement on Form S-4 has been signed by the following persons in
the capacities indicated below.

         Signature                       Title                     Date
         ---------                       -----                     ----

    /s/  JAMES C. FLORES    Chairman and Chief Executive     February 12, 2003
 --------------------------   Officer (Principal Executive
      James C. Flores         Officer)

 /s/  STEPHEN A. THORINGTON Executive Vice President and     February 12, 2003
 --------------------------   Chief Financial Officer
   Stephen A. Thorington      (Principal Financial Officer)

  /s/  CYNTHIA A. FEEBACK   Senior Vice President -          February 12, 2003
 --------------------------   Accounting and Treasurer
     Cynthia A. Feeback       (Principal Accounting Officer)

     /s/  JERRY L. DEES     Director                         February 12, 2003
 --------------------------
       Jerry L. Dees

   /s/  TOM H. DELIMITROS   Director                         February 12, 2003
 --------------------------
     Tom H. Delimitros

    /s/  JOHN H. LOLLAR     Director                         February 12, 2003
 --------------------------
       John H. Lollar

                                     II-6

<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
  No.                                        Exhibit Description
  ---                                        -------------------
<C>     <S>

  2.1   Agreement and Plan of Merger, dated February 2, 2003, between Plains Exploration &
        Production Company and 3TEC Energy Corporation (incorporated by reference to Exhibit
        10.1 to Plains' Current Report on Form 8-K filed on February 3, 2003).

  3.1   Certificate of Incorporation of Plains Exploration & Production Company (incorporated by
        reference to Exhibit 3.1 to Amendment No. 2 to Plains' Registration Statement on Form S-1
        filed on October 3, 2002).

  3.2   By-laws of Plains Exploration & Production Company (incorporated by reference to Exhibit
        3.2 to Amendment No. 2 to Plains' Registration Statement on Form S-1 filed on October 3,
        2002).

  4.1   Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to
        Plains' Form S-1 filed on October 3, 2002, File No. 333-90974).

  4.2   Indenture dated July 3, 2002 among Plains Exploration & Production Company, Plains E&P
        Company, Arguello Inc., Plains Illinois Inc., Plains Resources International Inc., PMCT Inc.,
        and J.P. Morgan Chase Bank, as Trustee (incorporated by reference to Exhibit 4.2 to Plains'
        Amendment No. 1 to Form S-1 filed on August 28, 2002).

  4.3   Form of 8.75% Senior Subordinated Note (incorporated by reference to Exhibit 4.3 to Plains'
        Amendment No. 1 to Form S-1 filed on August 28, 2002).

  5.1** Opinion of Akin Gump Strauss Hauer & Feld LLP.

  8.1** Opinion of Akin Gump Strauss Hauer & Feld LLP regarding tax matters.

  8.2** Opinion of Thompson & Knight LLP regarding tax matters.

 10.1   Master Separation Agreement dated July 3, 2002 between Plains Exploration & Production
        Company and Plains Resources Inc. (incorporated by reference to Exhibit 10.1 to Plains'
        Amendment No. 1 to Form S-1 filed on August 28, 2002).

 10.2   Plains Exploration & Production Company Transition Services Agreement dated July 3,
        2002 between Plains Exploration & Production Company and Plains Resources Inc.
        (incorporated by reference to Exhibit 10.2 to Plains' Amendment No. 1 to Form S-1 filed on
        August 28, 2002).

 10.3*  Extension of Term of Plains Exploration & Production Company Transition Services
        Agreement, dated as of December 18, 2002, between Plains Exploration & Production
        Company and Plains Resources Inc.

 10.4   Plains Resources Inc. Transition Services Agreement dated July 3, 2002 between Plains
        Resources Inc. and Plains Exploration & Production Company (incorporated by reference to
        Exhibit 10.3 to Plains' Amendment No. 1 to Form S-1 filed on August 28, 2002).

 10.5   Second Amended and Restated Tax Allocation Agreement dated November 20, 2002
        between Plains Exploration & Production Company and Plains Resources Inc. (incorporated
        by reference to Exhibit 10.4 to Plains' Amendment No. 1 to Form 10 filed on November 21,
        2002).

 10.6   Technical Services Agreement dated July 3, 2002 between Plains Exploration & Production
        Company and Plains Resources Inc. (incorporated by reference to Exhibit 10.5 to Plains'
        Amendment No. 1 to Form S-1 filed on August 28, 2002).

 10.7   Intellectual Property Agreement dated July 3, 2002 between Plains Exploration & Production
        Company and Plains Resources Inc. (incorporated by reference to Exhibit 10.6 to Plains'
        Amendment No. 1 to Form S-1 filed on August 28, 2002).
</TABLE>

                                     II-7

<PAGE>

<TABLE>
<CAPTION>
Exhibit
  No.                                        Exhibit Description
  ---                                        -------------------
<C>      <S>

  10.8   Employee Matters Agreement dated July 3, 2002 between Plains Exploration & Production
         Company and Plains Resources Inc. (incorporated by reference to Exhibit 10.7 to Plains'
         Amendment No. 1 to Form S-1 filed on August 28, 2002).

  10.9   Purchase and Sale Agreement dated June 4, 1999, by and among Plains Resources Inc.,
         Chevron U.S.A., Inc., and Chevron Pipe Line Company (incorporated by reference to Exhibit
         10.7 to Plains' Form S-1 filed on June 21, 2002).

 10.10   Letter Agreement dated as of October 23, 2001 by and between Plains Marketing and
         Stocker Resources, L.P. (incorporated by reference to Exhibit 10.9 to Plains' Form S-1 filed
         on June 21, 2002).

 10.11   Credit Agreement dated July 3, 2002 among Plains Exploration & Production Company,
         JPMorgan Chase Bank, as Administrative Agent, Bank One, NA (Main Office Chicago) and
         Fleet National Bank, as Syndication Agents, BNP Paribas and Fortis Capital Corp., as
         Documentation Agents, and the Lenders party thereto (incorporated by reference to Exhibit
         10.11 to Plains' Amendment No. 1 to Form S-1 filed on August 28, 2002).

 10.12   First Amendment, effective as of July 19, 2002, to Credit Agreement dated as of July 3,
         2002 among Plains Exploration & Production Company, as Borrower, JPMorgan Chase
         Bank, as administrative agent, Bank One, NA and Fleet National Bank, as Syndication
         Agents, BNP Paribas and Fortis Capital Corp., as Documentation Agents and the Lender
         Party thereto (incorporated by reference to Exhibit 10.12 to Plains' Amendment No. 1 to
         Form S-1 filed on August 28, 2002).

 10.13   Employment Agreement, dated as of September 19, 2002, between Plains Exploration &
         Production Company and James C. Flores (incorporated by reference to Exhibit 10.13 to
         Plains' Amendment No. 2 to Form S-1 filed on October 4, 2002).

 10.14   Employment Agreement, dated as of September 19, 2002, between Plains Exploration &
         Production Company and John T. Raymond (incorporated by reference to Exhibit 10.14 to
         Plains' Amendment No. 2 to Form S-1 filed on October 4, 2002).

 10.15   Employment Letter Agreement, dated as of August 20, 2002, between Plains Exploration &
         Production Company and Stephen A. Thorington (incorporated by reference to Exhibit 10.15
         to Plains' Amendment No. 2 to Form S-1 filed on October 4, 2002).

 10.16   Employment Letter Agreement, dated as of September 19, 2002, between Plains
         Exploration & Production Company and Timothy T. Stephens (incorporated by reference to
         Exhibit 10.16 to Plains' Amendment No. 2 to Form S-1 filed on October 4, 2002).

 10.17** Form of Plains Restricted Stock Agreement.

 10.18** Form of Plains Stock Appreciation Rights Agreement.

 10.19   Plains Exploration & Production Company 2002 Stock Incentive Plan (incorporated by
         reference to Exhibit 10.21 to Plains' Amendment No. 2 to Form S-1 filed on October 4,
         2002).

 10.20   Amendment No. 1 to Employee Matters Agreement, dated as of September 18, 2002,
         between Plains Resources Inc. and Plains Exploration & Production Company (incorporated
         by reference to Exhibit 10.22 to Plains' Amendment No. 2 to Form S-1 filed on October 4,
         2002).

 10.21   Amendment No. 1 to Master Separation Agreement, dated as of November 20, 2002,
         between Plains Resources Inc. and Plains Exploration & Production Company (incorporated
         by reference to Exhibit 10.24 to Plains' Amendment No. 1 to Form 10 filed on November 21,
         2002).
</TABLE>

                                     II-8

<PAGE>

<TABLE>
<CAPTION>
Exhibit
  No.                                        Exhibit Description
  ---                                        -------------------
<C>      <S>

 10.22   Amendment No. 2 to Employee Matters Agreement, dated as of November 20, 2002,
         between Plains Resources Inc. and Plains Exploration & Production Company (incorporated
         by reference to Exhibit 10.25 to Plains' Amendment No. 1 to Form 10 filed on November 21,
         2002).

 10.23*  Amendment No. 3 to Employee Matters Agreement, dated as of December 2, 2002,
         between Plains Exploration & Production Company and Plains Resources Inc.

 10.24   Amendment No. 1 to Employment Agreement, dated as of November 20, 2002, between
         Plains Exploration & Production Company and James C. Flores (incorporated by reference
         to Exhibit 10.26 to Plains' Amendment No. 1 to Form 10 filed on November 21, 2002).

 10.25   Amendment No. 1 to Employment Agreement, dated as of November 20, 2002, between
         Plains Exploration & Production Company and John T. Raymond (incorporated by reference
         to Exhibit 10.27 to Plains' Amendment No. 1 to Form 10 filed on November 21, 2002).

 10.26   Amendment No. 1 to Employment Letter Agreement, dated as of November 20, 2002,
         between Plains Exploration & Production Company and Stephen A. Thorington
         (incorporated by reference to Exhibit 10.28 to Plains' Amendment No. 1 to Form 10 filed on
         November 21, 2002).

 10.27   Plains Exploration & Production Company 2002 Transition Stock Incentive Plan
         (incorporated by reference to Exhibit 10.33 to Plains' Amendment No. 1 to Form 10 filed on
         November 21, 2002).

 10.28   Plains Exploration & Production Company 2002 Rollover Stock Plan (incorporated by
         reference to Exhibit 10.34 to Plains' Amendment No. 1 to Form 10 filed on November 21,
         2002).

 10.29   Voting Agreement dated as of February 2, 2003, by and among Plains Exploration &
         Production Company, 3TEC Energy Corporation, EnCap Energy Acquisition III-B, Inc.,
         EnCap Energy Capital Fund III, L.P., BOCP Energy Partners, L.P., ECIC Corporation, Floyd
         C. Wilson, Stephen W. Herod, and R.A. Walker (incorporated by reference to Exhibit 10.2 to
         Plains' Current Report on Form 8-K filed on February 3, 2003).

 10.30   Voting Agreement dated as of February 2, 2003, by and among Plains Exploration &
         Production Company, 3TEC Energy Corporation, EnCap Energy Capital Fund III-B, L.P.,
         EnCap Energy Capital Fund III, L.P., BOCP Energy Partners, L.P., Energy Capital
         Investment Company PLC, Sable Management, L.P., and James C. Flores (incorporated by
         reference to Exhibit 10.3 to Plains' Current Report on Form 8-K filed on February 3, 2003).

 10.31   Registration Rights Agreement dated February 2, 2003, by and among Plains Exploration &
         Production Company, EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B,
         Inc., BOCP Energy Partners, L.P., ECIC Corporation and EnCap Investments L.L.C.
         (incorporated by reference to Exhibit 10.4 to Plains' Current Report on Form 8-K filed on
         February 3, 2003)

  21.1** List of Subsidiaries of Plains Exploration & Production Company.

  23.1** Consent of Akin Gump Strauss Hauer & Feld LLP (included in the opinions filed as Exhibit
         5.1 and 8.1 to this Registration Statement).

  23.2** Consent of Thompson & Knight LLP (included in the opinion filed as Exhibit 8.2 to this
         Registration Statement).

  23.3*  Consent of PricewaterhouseCoopers LLP, Independent Public Accountants for Plains
         Exploration & Production Company.

  23.4*  Consent of KPMG LLP, Independent Public Accountants for 3TEC Energy Corporation.

  23.5*  Consent of Netherland, Sewell & Associates, Inc., Petroleum Engineers for Plains
         Exploration & Production Company.
</TABLE>

                                     II-9

<PAGE>

<TABLE>
<CAPTION>
Exhibit
  No.                                    Exhibit Description
  ---                                    -------------------
<C>     <S>

 23.6*  Consent of Ryder Scott Company, L.P., Petroleum Engineers for Plains Exploration &
        Production Company.

 23.7*  Consent of H.J. Gruy & Associates, Inc., Petroleum Engineers for Plains Exploration &
        Production Company.

 23.8*  Consent of Ryder Scott Company, L.P., Petroleum Engineers for 3TEC Energy Corporation.

 24.1*  Power of Attorney (contained in the signature page to this registration statement).

 99.1** Form of Proxy Card for Plains Exploration & Production Company Annual Meeting.

 99.2** Form of Proxy Card for 3TEC Energy Corporation Special Meeting.*

 99.3** Consents of 3TEC Nominees to the Plains board.
</TABLE>
--------
*   Filed herewith.
**  To be filed by amendment.

                                     II-10