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                                                                   EXHIBIT 10.42

                                                                  EXECUTION COPY


                             PLAINS RESOURCES INC.
                                  COMBINATION
                          INCENTIVE STOCK OPTION AND
                      NONQUALIFIED STOCK OPTION AGREEMENT


          THIS AGREEMENT, made as of the 7th  day of June, 2001 (the "Grant
Date"), between Plains Resources Inc., a Delaware corporation (the "Company"),
and  Timothy T. Stephens (the "Optionee").

          WHEREAS, the Company has adopted the Plains Resources Inc. 2001 Stock
Incentive Plan (the "Plan") in order to provide additional incentive to certain
employees, officers, consultants and directors of the Company and its
Subsidiaries, Affiliates and Divisions; and

          WHEREAS, the Committee responsible for administration of the Plan has
determined to grant an option to the Optionee as provided herein;

          NOW, THEREFORE, the parties hereto agree as follows:

     1.   Grant of Option.

          1.1  The Company hereby grants to the Optionee the right and option
(the "Option") to purchase all or any part of an aggregate of  166,667 whole
Shares subject to, and in accordance with, the terms and conditions set forth in
this Agreement.

          1.2  The portion of the Option covering eleven thousand eight hundred
and seventy-four (11,874) Shares is intended to qualify as an Incentive Stock
Option within the meaning of Section 422 of the Code and shall be so construed.
Such Shares shall vest ratably in accordance with the vesting schedule set forth
in Section 4 of this Agreement subject to Sections 6 and 7 hereof.
Notwithstanding the foregoing, nothing in this Agreement shall be interpreted as
a representation, guarantee or undertaking on the part of the Company that any
portion Option is or will be determined to be an Incentive Stock Option within
the meaning of Section 422 of the Code.  As noted in the Plan, to the extent
that the aggregate Fair Market Value (determined at the time of grant) of the
Shares with respect to which this Option plus all other Incentive Stock Options
Optionee holds are exercisable for the first time by Optionee during any
calendar year (under all plans of the Company and its Subsidiaries) exceeds one
hundred thousand dollars ($100,000), all or a portion of this Option or any
other Incentive Stock Options held by Participant that exceed such limit
(according to the order in which they were granted) shall be treated as
Nonqualified Stock Options.  In addition, any portion of this Option not
intended to be an Incentive Stock Option shall be treated as a Nonqualified
Stock Option.
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          1.3 The portion of this Option intended to be an Incentive Stock
Option will be taxed as if it were a Nonqualified Stock Option rather than an
Incentive Stock Option if it is not exercised within the following periods (if
earlier than the end of the Exercise Term):

          (a) one day less than three months after the date of severance of
          Optionee's employment with the Company and all Parent or Subsidiary
          corporations for any reason other than death or Disability; or

          (b) on the last day within the one year period commencing on the date
          of the Optionee's severance of employment with the Company and all
          Parent or Subsidiary corporations because of Disability.

          1.4  This Agreement shall be construed in accordance and consistent
with, and subject to, the provisions of the Plan (the provisions of which are
incorporated herein by reference) and, except as otherwise expressly set forth
herein, the capitalized terms used in this Agreement shall have the same
definitions as set forth in the Plan.

     2.   Purchase Price.

          The price at which the Optionee shall be entitled to purchase Shares
upon the exercise of the Option shall be $25.26 per Share, the Fair Market Value
of a Share on the Grant Date.

     3.   Duration of Option.

          The Option shall be exercisable to the extent and in the manner
provided herein for a period of five years from the Grant Date (the "Exercise
Term"); provided, however, that the Option may be earlier terminated as provided
in Section 6 hereof.

     4.   Exercisability of Option.

          Unless otherwise provided in this Agreement or the Plan, the Option
shall entitle the Optionee to purchase, in whole at any time or in part from
time to time, one-third (1/3) of the total number of Shares covered by the
Option after the expiration of one (1) year from the Optionee's first day of
employment by the Company, May 17, 2001 (the "Employment Date"), and an
additional one-third (1/3) of the total number of Shares covered by the Option
after the expiration of each of the second and third anniversaries of the
Employment Date, and each such right of purchase shall be cumulative and shall
continue, unless sooner exercised or terminated as herein provided, during the
remaining period of the Exercise Term. Any fractional number of Shares resulting
from the application of the foregoing percentages shall be rounded to the
nearest whole number of Shares.

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     5.   Manner of Exercise and Payment.

          5.1  Subject to the terms and conditions of this Agreement and the
Plan, the Option may be exercised by delivery in person, by telecopy or by mail
of written notice to the Company, at its principal executive office.  Such
notice shall state that the Optionee is electing to exercise the Option and the
number of Shares in respect of which the Option is being exercised and shall be
signed by the person or persons exercising the Option.  If requested by the
Committee, such person or persons shall (i) deliver this Agreement to the
Secretary of the Company who shall endorse thereon a notation of such exercise
and (ii) provide satisfactory proof as to the right of such person or persons to
exercise the Option.

          5.2  The notice of exercise described in Section 5.1 hereof shall be
accompanied by the full purchase price for the Shares in respect of which the
Option is being exercised in any of the following forms, (i) cash, (ii) the
transfer of Shares to the Company having a Fair Market Value on the day
preceding the date of exercise equal to the cash amount for which such Shares
are substituted and which have been held by the Optionee for at least six (6)
months, or (iii) a combination of cash and the transfer of Shares.

          5.3  Upon receipt of notice of exercise and full payment for the
Shares in respect of which the Option is being exercised, the Company shall,
subject to Section 18 of the Plan, take such action as may be necessary to
effect the transfer to the Optionee of the number of Shares as to which such
exercise was effective.

          5.4  The Optionee shall not be deemed to be the holder of, or to have
any of the rights of a holder with respect to any Shares subject to the Option
until (i) the Option shall have been exercised pursuant to the terms of this
Agreement and the Optionee shall have paid the full purchase price for the
number of Shares in respect of which the Option was exercised, (ii) the Company
shall have issued and delivered the Shares to the Optionee, and (iii) the
Optionee's name shall have been entered as a stockholder of record on the books
of the Company, whereupon the Optionee shall have full voting, dividend and
other ownership rights with respect to such Shares.

     6.   Termination of Employment.

          6.1  Termination of Employment by the Company other than for Cause or
due to Death.  If the Optionee's employment is terminated:  (a) by the Company
other than for Cause (including due to Disability), or (b) due to Optionee's
death, the Option shall become immediately and fully exercisable for the
duration of the Exercise Term.  In the event of the Optionee's death, the Option
shall be exercisable, to the extent provided in the Plan and this Agreement, by
the legatee or legatees under his will, or by his personal representatives or
distributees and such person or persons shall be substituted for the Optionee
each time the Optionee is referred to herein.

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          6.2 Termination for Cause. If the employment of the Optionee is
terminated by the Company for Cause, any unexercised portion of the Option shall
terminate on the date of the Optionee's termination of employment (whether or
not exercisable).

          6.3 Termination by Optionee. If Optionee terminates his employment for
any reason, the Option shall continue to be exercisable in whole or in part (to
the extent exercisable on the date of the such termination of employment) for
the duration of the Exercise Term.

     7.   Effect of Change in Control.

  Notwithstanding anything contained in this Agreement to the contrary, in the
event of a Change in Control, (i) the Option shall become immediately and fully
exercisable, and (ii) the Optionee will be permitted to surrender for
cancellation within ninety (90) days after such Change in Control, the Option or
any portion of the Option to the extent not yet exercised and the Optionee shall
be entitled to receive immediately a cash payment in an amount equal to the
excess, if any, of (A) the Fair Market Value, on the date preceding the date of
the surrender, of the Shares subject to the Option or portion of the Option
surrendered, over (B) the aggregate purchase price for such Shares under the
Option.

     8.   Nontransferability.

          The Option shall not be transferable other than by will or by the laws
of descent and distribution or pursuant to a domestic relations order (as
contemplated by the Plan). The Option shall be exercisable only by the Optionee
or the Optionee's guardian or legal representative during the lifetime of the
Optionee.

     9.   No Right to Continued Employment.

          Nothing in this Agreement or the Plan shall be interpreted or
construed to confer upon the Optionee any right with respect to continuance of
employment by the Company, nor shall this Agreement or the Plan interfere in any
way with the right of the Company to terminate the Optionee's employment at any
time.

     10.  Adjustments.

        In the event of a Change in Capitalization, the Committee may make
appropriate adjustments to the number and class of Shares or other stock or
securities subject to the Option and the purchase price for such Shares or other
stock or securities. The Committee's adjustment shall be made in accordance with
the provisions of Section 12 of the Plan and shall be effective and final,
binding and conclusive for all purposes of the Plan and this Agreement.

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     11.  Effect of a Merger, Consolidation or Liquidation.

          Subject to Section 7 hereof, upon the effective date of (i) the
liquidation or dissolution of the Company or (ii) a merger or consolidation of
the Company (a "Transaction"), the Option shall continue in effect in accordance
with its terms and the Optionee shall be entitled to receive in respect of all
Shares subject to the Option, upon exercise of the Option, the same number and
kind of stock, securities, cash, property or other consideration that each
holder of Shares was entitled to receive in the Transaction.

     12.  Withholding of Taxes.

            The Company shall have the right to deduct from any distribution of
cash to the Optionee an amount equal to the federal, state and local income
taxes and other amounts as may be required by law to be withheld (the
"Withholding Taxes") with respect to the Option. If the Optionee is entitled to
receive Shares upon exercise of the Option, the Optionee shall pay the
Withholding Taxes to the Company in cash prior to the issuance of such Shares.
In satisfaction of the Withholding Taxes, the Optionee may make a written
election (the "Tax Election") to have withheld a portion of the Shares issuable
to him or her upon exercise of the Option, having an aggregate Fair Market
Value, on the date preceding the date of such issuance, equal to the Withholding
Taxes.

     13.  Optionee Bound by the Plan.

          The Optionee hereby acknowledges receipt of a copy of the Plan and
agrees to be bound by all the terms and provisions thereof.

     14.  Modification of Agreement.

          This Agreement may be modified, amended, suspended or terminated, and
any terms or conditions may be waived, but only by a written instrument executed
by the parties hereto.

     15.  Severability.

          Should any provision of this Agreement be held by a court of competent
jurisdiction to be unenforceable or invalid for any reason, the remaining
provisions of this Agreement shall not be affected by such holding and shall
continue in full force in accordance with their terms.

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     16.  Governing Law.

          The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware without giving
effect to the conflicts of laws principles thereof.

     17.  Successors in Interest.

          This Agreement shall inure to the benefit of and be binding upon any
successor to the Company. This Agreement shall inure to the benefit of the
Optionee's legal representatives. All obligations imposed upon the Optionee and
all rights granted to the Company under this Agreement shall be final, binding
and conclusive upon the Optionee's heirs, executors, administrators and
successors.

     18.  Resolution of Disputes.

          Any dispute or disagreement which may arise under, or as a result of,
or in any way relate to, the interpretation, construction or application of this
Agreement shall be determined by the Committee. Any determination made hereunder
shall be final, binding and conclusive on the Optionee and Company for all
purposes.

     19.  Shareholder Approval.

          The effectiveness of this Agreement and of the grant of the Option
pursuant hereto is subject to the approval of the Plan by the stockholders of
the Company in accordance with the terms of the Plan.

                                  PLAINS RESOURCES INC.


                                  By: /s/ James C. Flores
                                      ----------------------------------
                                      James C. Flores
                                      Chief Executive Officer


                                  /s/ Timothy T. Stephens
                                  --------------------------------------
                                  Timothy T. Stephens

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