**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form 10-Q/A**

**AmendmentNo. 1**

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

**Forthe quarterly period ended June 30, 2005**

**or**

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

**CommissionFile Number: 333-123711**

**Venoco, Inc.**

(Exact name of registrantas specified in its charter)

| **Delaware**                              |   | **77-0323555**          |
|-------------------------------------------|--------|-------------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer        |
| incorporation or  organization)           |   | Identification  Number) |
| **370 17th Street, Suite 2950**      |   | ** **              |
| **Denver,  Colorado**                     |   | **80202-1370**          |
| (Address of  principal executive offices) |   | (Zip Code)              |

 

Registrant’s telephonenumber, including area code: **(303) 626-8300**

**N/A**

(Former name or formeraddress, if changed since last report)

Indicate by check mark whether the registrant (1) hasfiled all reports required by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such report(s), and (2) has beensubject to such filing requirements for the past 90 days.

YES**  **x**   **NO  o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES**  **o**   **NO  x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

YES**  **o**   **NO  x

As of June 30, 2005, there were 32,692,500 sharesof the issuer’s common stock, par value $0.01 per share, issued andoutstanding.

 

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**VENOCO, INC.Form 10-Q/A for the Quarterly Period Ended June 30, 2005TABLE OF CONTENTS**
|                   | ** ** | ** **                                                                                                                                                                                 | ** ** | **Page** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I.**  | ** ** | **FINANCIAL  INFORMATION**                                                                                                                                                                 |       |     |   |
| Item  1.          |       | Financial  Statements (Unaudited)                                                                                                                                                          |       |     |   |
|              |       | Condensed Consolidated Balance Sheets  at June 30, 2005 (Successor) and December 31, 2004 (Successor)                                                                            |       | 4        |   |
|              |       | Condensed  Consolidated Statements of Operations  for the Three and Six Months Ended June 30, 2005 (Successor),  and the Three and Six Months Ended June 30, 2004 (Predecessor), |       | 5        |   |
|              |       | Condensed  Consolidated Statements of Cash Flows  for the Six Months Ended June 30, 2005 (Successor)  and the Six Months Ended June 30, 2004 (Predecessor)                  |       | 6        |   |
|              |       | Notes  to Condensed Consolidated Financial Statements                                                                                                                                      |       | 7        |   |
| Item 2.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                |       | 26       |   |
| Item 3.           |       | Quantitative  and Qualitative Disclosures about Market Risk                                                                                                                                |       | 34       |   |
| Item 4.           |       | Controls and Procedures                                                                                                                                                                    |       | 36       |   |
| **PART II.** | ** ** | **OTHER  INFORMATION**                                                                                                                                                                     |       |     |   |
| Item 1.           |       | Legal Proceedings                                                                                                                                                                          |       | 38       |   |
| Item 2.           |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                               |       | 38       |   |
| Item 3.           |       | Defaults  upon Senior Securities                                                                                                                                                           |       | 38       |   |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                                                                                                        |       | 38       |   |
| Item 5.           |       | Other  Information                                                                                                                                                                         |       | 38       |   |
| Item 6.           |       | Exhibits  and Reports on Form 8-K                                                                                                                                                     |       | 38       |   |
| Signatures        |       | 39                                                                                                                                                                                         |       |

 

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**EXPLANATORY NOTE**

This Amendment to the Quarterly Report of Venoco, Inc.(the “Company”) on Form 10-Q/A for the quarterly period ended June 30,2005 is being filed in order to reflect the restatement of the Company’spreviously issued quarterly condensed consolidated financial statements for thethree months ended June 30, 2005, (the “Original Filing”) as discussed inNote 2 to the condensed consolidated financial statements included in Item 1.

For the convenienceof the reader, this Form 10-Q/A sets forth the Original Filing inits entirety. However, this Form 10-Q/A amends and restates only Part Iof the Original Filing and amends and restates that Part solely as a result of,and to reflect, the Restatement, and to add Note 9 to the condensedconsolidated financial statements regarding stock option issuances. Part Ihas not been updated to reflect other events occurring after the OriginalFiling or to modify or update those disclosures affected by subsequent eventsother than the stock split effected on November 8, 2005 and described inNote 1 to the condensed consolidated financial statements. Certaininformation, including forward-looking statements in the Original Filingregarding anticipated production and capital expenditures, have been supercededby disclosures made by the Company since the date of the Original Filing,including in the Company’s current report on Form 8-K dated November 17,2005.  In addition, pursuant to the rules ofthe SEC, Item 6 of Part II of the Original Filing has been amended tocontain currently-dated certifications from our Chief Executive Officer andChief Financial Officer, as required by Sections 302 and 906 of theSarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officerand Chief Financial Officer are attached to this Form 10-Q/A asexhibits 31.1, 31.2, and 32, respectively.

See notes to condensed consolidated financial statements

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**PART I—FINANCIALINFORMATION**

**VENOCO, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATEDBALANCE SHEETS (UNAUDITED)(in thousands, except shares and per share amounts)**

| ** **                                                                                                                                                                          | ** ** | **June 30,**                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **2005**                                     | ** ** | **2004**              | ** ** |
| ** **                                                                                                                                                                          | ** ** | **As restated  (See Note 2)** | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                          |       |                                         |       |                  |       |   |   |   |   |
| CURRENT ASSETS:                                                                                                                                                                     |       |                                         |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                           |       |                                         | $          | 5,661                 |       |   |   | $ | 54,715 |   |   |
| Accounts receivable                                                                                                                                                                 |       |                                         | 27,197     |                  |       |   | 17,755 |   |   |
| Inventories                                                                                                                                                                         |       |                                         | 1,135      |                  |       |   | 1,079 |   |   |
| Income tax receivable                                                                                                                                                               |       |                                         | —     |                  |       |   | 3,906 |   |   |
| Commodity derivatives                                                                                                                                                               |       |                                         | 844        |                  |       |   | 5,300 |   |   |
| Notes receivable—officer                                                                                                                                                       |       |                                         | —     |                  |       |   | 1,420 |   |   |
| Prepaid expenses and  other current assets                                                                                                                                          |       |                                         | 4,781      |                  |       |   | 3,640 |   |   |
| Total current assets                                                                                                                                                                |       |                                         | 39,618     |                  |       |   | 87,815 |   |   |
| CASH RESTRICTED  FOR INVESTMENT IN OIL AND NATURAL GAS PROPERTIES                                                                                                                   |       |                                         | 44,619     |                  |       |   | — |   |   |
| PROPERTY, PLANT AND EQUIPMENT, AT COST:                                                                                                                                             |       |                                         |       |                  |       |   |   |   |   |
| Oil and natural gas  properties (full cost method, of which $1,673 and $3,317 were excluded from amortization  at June 30, 2005 and December 31, 2004, respectively) |       |                                         | 202,340    |                  |       |   | 214,842 |   |   |   |
| Drilling equipment                                                                                                                                                                  |       |                                         | 7,687      |                  |       |   | 7,594 |   |   |   |
| Other property and  equipment                                                                                                                                                       |       |                                         | 26,524     |                  |       |   | 25,857 |   |   |   |
| Total property, plant and  equipment                                                                                                                                                |       |                                         | 236,551    |                  |       |   | 248,293 |   |   |   |
| Less accumulated  depletion, depreciation, amortization and impairment                                                                                                              |       |                                         | 59,223     |                  |       |   | 49,730 |   |   |   |
| Net property, plant and  equipment                                                                                                                                                  |       |                                         | 177,328    |                  |       |   | 198,563 |   |   |   |
| OTHER ASSETS:                                                                                                                                                                       |       |                                         |       |                  |       |   |   |   |   |   |
| Commodity derivatives                                                                                                                                                               |       |                                         | 4,918      |                  |       |   | 4,855 |   |   |   |
| Deferred loan costs                                                                                                                                                                 |       |                                         | 6,174      |                  |       |   | 6,596 |   |   |   |
| Other                                                                                                                                                                               |       |                                         | 1,409      |                  |       |   | 1,053 |   |   |   |
| Total other assets                                                                                                                                                                  |       |                                         | 12,501     |                  |       |   | 12,504 |   |   |   |
| TOTAL ASSETS                                                                                                                                                                        |       |                                         | $          | 274,066               |       |   |   | $ | 298,882 |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                             |       |                                         |       |                  |       |   |   |   |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                |       |                                         |       |                  |       |   |   |   |   |   |
| Accounts payable and  accrued liabilities                                                                                                                                           |       |                                         | $          | 21,956                |       |   |   | $ | 19,385 |   |   |   |
| Undistributed revenue  payable                                                                                                                                                      |       |                                         | 7,902      |                  |       |   | 4,774 |   |   |   |
| Income taxes payable                                                                                                                                                                |       |                                         | 5,332      |                  |       |   | — |   |   |   |
| Current maturities of  long-term debt                                                                                                                                               |       |                                         | 123        |                  |       |   | 127 |   |   |   |
| Commodity derivatives                                                                                                                                                               |       |                                         | 20,665     |                  |       |   | 1,520 |   |   |   |
| Repurchase of common  stock                                                                                                                                                         |       |                                         | 70         |                  |       |   | 5,316 |   |   |   |
| Total current liabilities                                                                                                                                                           |       |                                         | 56,048     |                  |       |   | 31,122 |   |   |   |
| LONG-TERM  DEBT                                                                                                                                                                     |       |                                         | 173,938    |                  |       |   | 163,542 |   |   |   |
| DEFERRED INCOME  TAXES                                                                                                                                                              |       |                                         | 11,906     |                  |       |   | 32,208 |   |   |   |
| ASSET RETIREMENT  OBLIGATIONS                                                                                                                                                       |       |                                         | 23,715     |                  |       |   | 23,184 |   |   |   |
| COMMODITY  DERIVATIVES                                                                                                                                                              |       |                                         | 15,568     |                  |       |   | — |   |   |   |
| Total liabilities                                                                                                                                                                   |       |                                         | 281,175    |                  |       |   | 250,056 |   |   |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                       |       |                                         |       |                  |       |   |   |   |   |   |
| MINORITY INTEREST                                                                                                                                                                   |       |                                         | —     |                  |       |   | 387 |   |   |   |
| STOCKHOLDERS’ EQUITY (DEFICIT):                                                                                                                                                |       |                                         |       |                  |       |   |   |   |   |   |
| Common stock, $.01 par  value (75,000,000 shares authorized; 32,692,500 shares issued and outstanding  at June 30, 2005 and December 31, 2004)                            |       |                                         | 327        |                  |       |   | 327 |   |   |   |
| Additional paid-in  capital                                                                                                                                                         |       |                                         | 21,057     |                  |       |   | 31,085 |   |   |   |
| Retained earnings  (accumulated deficit)                                                                                                                                            |       |                                         | (17,933    | )                     |       |   | 15,104 |   |   |   |
| Accumulated other  comprehensive income (loss)                                                                                                                                      |       |                                         | (10,560    | )                     |       |   | 1,923 |   |   |   |
| Total stockholders’  equity (deficit)                                                                                                                                          |       |                                         | (7,109     | )                     |       |   | 48,439 |   |   |   |
| TOTAL LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)                                                                                                                          |       |                                         | $          | 274,066               |       |   |   | $ | 298,882 |   |   |   |

 

See notes to condensed consolidated financial statements

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**VENOCO, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)(in thousands)**

| ** **                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **(Successor)**                                 | ** ** | **(Predecessor)**                             | ** ** | **(Successor)** | ** ** | **(Predecessor)** | ** ** |
| ** **                                              | ** ** | **(as restated,  see Note 2)**   | ** ** | ** **                                    | ** ** | **(as restated,  see Note 2)** | ** ** | ** ** | ** ** |
| REVENUES:                                               |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas sales                               |       |                                            | $          | 45,352                                        |       |   |   | $ | 32,092 |   |   |   | $ | 87,390 |   |   |   | $ | 62,917 |   |   |
| Commodity derivative losses (realized)                  |       |                                            | (3,590     | )                                             |       |   | (3,754 | ) |   |   | (7,155 | ) |   |   | (6,108 | ) |   |
| Commodity derivative losses (unrealized)                |       |                                            | (2,404     | )                                             |       |   | (433 | ) |   |   | (27,999 | ) |   |   | (841 | ) |   |
| Other                                                   |       |                                            | 1,012      |                                          |       |   | 1,142 |   |   |   | 2,091 |   |   |   | 2,181 |   |   |
| Total revenues                                          |       |                                            | 40,370     |                                          |       |   | 29,047 |   |   |   | 54,327 |   |   |   | 58,149 |   |   |
| EXPENSES:                                               |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas production                          |       |                                            | 12,352     |                                          |       |   | 11,484 |   |   |   | 24,282 |   |   |   | 22,715 |   |   |
| Transportation expense                                  |       |                                            | 536        |                                          |       |   | 691 |   |   |   | 1,216 |   |   |   | 1,439 |   |   |
| Depletion, depreciation, amortization and impairment    |       |                                            | 3,840      |                                          |       |   | 3,360 |   |   |   | 9,493 |   |   |   | 7,381 |   |   |
| Accretion of abandonment liability                      |       |                                            | 576        |                                          |       |   | 360 |   |   |   | 1,018 |   |   |   | 720 |   |   |
| General and administrative, net of amounts  capitalized |       |                                            | 4,583      |                                          |       |   | 3,305 |   |   |   | 7,699 |   |   |   | 5,740 |   |   |
| Amortization of deferred loan costs                     |       |                                            | 676        |                                          |       |   | 61 |   |   |   | 1,021 |   |   |   | 130 |   |   |
| Interest, net                                           |       |                                            | 3,323      |                                          |       |   | 305 |   |   |   | 6,820 |   |   |   | 633 |   |   |
| Total expenses                                          |       |                                            | 25,886     |                                          |       |   | 19,566 |   |   |   | 51,549 |   |   |   | 38,758 |   |   |
| Income before income taxes                              |       |                                            | 14,484     |                                          |       |   | 9,481 |   |   |   | 2,778 |   |   |   | 19,391 |   |   |
| Income tax provision                                    |       |                                            | 5,704      |                                          |       |   | 3,953 |   |   |   | 774 |   |   |   | 8,084 |   |   |
| Income before minority interest                         |       |                                            | 8,780      |                                          |       |   | 5,528 |   |   |   | 2,004 |   |   |   | 11,307 |   |   |
| Minority interest in consolidated subsidiary            |       |                                            | —     |                                          |       |   | — |   |   |   | 42 |   |   |   | — |   |   |
| Net income                                              |       |                                            | 8,780      |                                          |       |   | 5,528 |   |   |   | 1,962 |   |   |   | 11,307 |   |   |
| Preferred stock dividends                               |       |                                            | —     |                                          |       |   | (2,116 | ) |   |   | — |   |   |   | (4,232 | ) |   |
| Net income  applicable to common equity                 |       |                                            | $          | 8,780                                         |       |   |   | $ | 3,412 |   |   |   | $ | 1,962 |   |   |   | $ | 7,075 |   |   |

 

See notes to condensed consolidated financial statements.

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**VENOCO, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)(in thousands)**

| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(Successor)**                               | ** ** | **(Predecessor)** | ** ** |
| ** **                                                                         | ** ** | **(as restated,  see Note 2)** | ** ** | ** ** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                             |       |                                          |       |   |   |   |   |   |   |
| Net income                                                                         |       |                                          | $          | 1,962 |   |   |   | $ | 11,307 |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                          |       |   |   |   |   |   |   |
| Depletion, depreciation, amortization and impairment                               |       |                                          | 9,493      |   |   |   | 7,381 |   |   |
| Accretion of abandonment liability                                                 |       |                                          | 1,018      |   |   |   | 720 |   |   |
| Deferred income taxes                                                              |       |                                          | (5,945     | ) |   |   | 2,366 |   |   |
| Amortization of deferred loan costs and bond  discount                             |       |                                          | 1,106      |   |   |   | 103 |   |   |
| Gain on sale of property and equipment                                             |       |                                          | —     |   |   |   | (84 | ) |   |
| Change in other liabilities                                                        |       |                                          | —     |   |   |   | (352 | ) |   |
| Change in operating assets and liabilities                                         |       |                                          | 2,499      |   |   |   | (3,405 | ) |   |
| Net premiums paid on derivative contracts                                          |       |                                          | (10,715    | ) |   |   | — |   |   |
| Changes in unrealized commodity derivatives                                        |       |                                          | 29,105     |   |   |   | 841 |   |   |
| Minority interest in undistributed earnings of  subsidiary                         |       |                                          | 42         |   |   |   | — |   |   |
| Net cash provided by operating activities                                          |       |                                          | 28,565     |   |   |   | 18,877 |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                                          |       |   |   |   |   |   |   |
| Expenditures for oil and gas properties                                            |       |                                          | (32,050    | ) |   |   | (3,902 | ) |   |
| Acquisition of Marquez Energy, LLC                                                 |       |                                          | (14,628    | ) |   |   | — |   |   |
| Proceeds from sale of oil and gas properties                                       |       |                                          | 44,619     |   |   |   | 1,526 |   |   |
| Increase in cash restricted for investment in  property                            |       |                                          | (44,619    | ) |   |   | — |   |   |
| Notes receivable—officers and employees                                       |       |                                          | 1,390      |   |   |   | 1,406 |   |   |
| Other                                                                              |       |                                          | (1,102     | ) |   |   | 133 |   |   |
| Net cash used in investing activities                                              |       |                                          | (46,390    | ) |   |   | (837 | ) |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                                          |       |   |   |   |   |   |   |
| Proceeds from long-term debt                                                       |       |                                          | 23,000     |   |   |   | — |   |   |
| Principal payments on long-term debt                                               |       |                                          | (12,677    | ) |   |   | (13,167 | ) |   |
| Distribution payments to Marquez Energy member                                     |       |                                          | (707       | ) |   |   | — |   |   |
| Payments of dividends to shareholder                                               |       |                                          | (35,000    | ) |   |   | — |   |   |
| Repurchase of common stock                                                         |       |                                          | (5,246     | ) |   |   | — |   |   |
| Increase in deferred loan costs                                                    |       |                                          | (599       | ) |   |   | (15 | ) |   |
| Net cash used in financing activities                                              |       |                                          | (31,229    | ) |   |   | (13,182 | ) |   |
| Net (decrease)  increase in cash and cash equivalents                              |       |                                          | (49,054    | ) |   |   | 4,858 |   |   |
| Cash and cash  equivalents, beginning of period                                    |       |                                          | 54,715     |   |   |   | 8,417 |   |   |
| Cash and cash  equivalents, end of period                                          |       |                                          | 5,661      |   |   |   | 13,275 |   |   |
| **Supplemental Disclosure of Cash  Flow Information—**                        |       |                                          |       |   |   |   |   |   |   |
| Cash paid during  the year for:                                                    |       |                                          |       |   |   |   |   |   |   |
| Interest                                                                           |       |                                          | $          | 6,979 |   |   |   | $ | 1,066 |   |   |
| Income taxes                                                                       |       |                                          | $          | — |   |   |   | $ | 4,700 |   |   |

 

See notes to condensed consolidated financial statements.

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**VENOCO, INC.AND SUBSIDIARIESNOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTSTHREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)**

**1.**   BASIS OFPRESENTATION

***Interim FinancialStatements******—The***accompanyingcondensed consolidated financial statements of Venoco Inc. for the three andsix months ended June 30, 2005 and 2004 are unaudited. In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements contain all adjustments (consisting only of normal recurring accruals)necessary to present fairly the Company’s financial position at June 30,2005, the results of operations for the three and six months ended June 30,2005 and 2004 and cash flows for the six months ended June 30, 2005 and2004. Certain disclosures have been condensed or omitted from these financialstatements. Accordingly, these financial statements should be read inconjunction with the Company’s audited 2004 financial statements contained inits Registration Statement on Form S-4/1A (Registration No. 333-123711)as filed with the Securities and Exchange Commission on April 20, 2005.The results for interim periods are not necessarily indicative of annualresults.

***Stock Split******—All common share amounts in theaccompanying financial statements have been adjusted for the 1,000- for-onereverse stock split effected on February 10, 2005 and a one-for -7,500stock split approved by the board of directors of the Company on October 13,2005 and effected on November 8, 2005.***

***New Company Basis******—During***2004,the Company’s CEO, Tim Marquez, increased his ownership in the Company from 41%to 100%. As a result of a transaction that closed on July 12, 2004, Mr. Marquezpurchased 53% of the common shares (2,468 common shares) of the Company fromtwo of the Company’s former officers and their respective affiliates. On December 22,2004, the Company merged with a corporation the sole stockholder of which was atrust controlled by Mr. Marquez. This merger had the effect of giving Mr. Marquezthe remaining 6% of the Company’s common stock.

As a result of Mr. Marquez obtaining control ofover 95% of the common stock of the Company on December 22, 2004, SECStaff Accounting Bulletin No. 54 requires the acquisition by Mr. Marquezto be “pushed-down”, meaning the post-transaction condensed consolidatedbalance sheet and the condensed consolidated statements of operations and cashflows of the Company reflect a new basis of accounting (“successor basis”). Thepre-transaction condensed consolidated statements of operations and cash flowsare presented on the historical basis (“predecessor basis”).

***Common Control Merger******—On*** March 21,2005 the Company completed the acquisition of Marquez Energy, LLC, a Coloradolimited liability company (“Marquez Energy”) majority-owned and controlled byTimothy Marquez, the Company’s CEO and sole shareholder. Due to the commoncontrol aspects of the transaction, the financial statements of Marquez Energyhave been combined with the consolidated financial statements of the Companyand its subsidiaries in a manner similar to a pooling-of-interests, since thedate that common control was achieved. Therefore, the Company’s financialstatements since July 12, 2004 were restated to include Marquez Energy’sfinancial results.

**2.   RESTATEMENT**

The Company has restated its consolidated financialstatements for the quarters ended March 31, 2005 and June 30, 2005for the items discussed below. These items resulted in no adjustments to netincome in the quarter ended June 30, 2005. The adjustments reduced netincome by $42 thousand for the six month period ended June 30, 2005. Theyalso resulted in balance sheet adjustments at June 30, 2005 

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which decreased totalassets by $0.4 million, decreased total liabilities by $3.6 million and increasedtotal stockholders equity by $3.2 million.

Subsequent to the issuance of the Company’s condensedconsolidated financial statements for the three months ended March 31,2005, the Company determined that it should have recognized a deferred taxasset related to the difference between the financial accounting and income taxbasis of the assets acquired and liabilities assumed in connection with thecommon control merger with Marquez Energy LLC on March 21, 2005 and thatit should have recognized a minority interest in Marquez Energy which existedprior to the acquisition of Marquez Energy by the Company. As a result, theaccompanying condensed consolidated financial statements as of June 30,2005 and December 31, 2004 and for the three and six months months ended June 30,2005 have been restated from the amounts previously reported to record adeferred tax asset and to recognize a minority interest in Marquez Energy whichexisted prior to the consummation of the acquisition.

Asummary of the significant effects of the restatement on the Company’sconsolidated balance sheet as of December 31, 2004 and June 30, 2005and the Company’s consolidated statements of income for the three and six monthperiods ended June 30, 2005 is as follows (in thousands):

**CondensedConsolidated Balance Sheet Adjustments**

| ** **                                       | ** ** | **As Previously  Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|----------------------|------------|
| **At June 30, 2005**                        |       |                             |       |            |       |                 |       |   |   |   |   |   |   |
| Property and  equipment, net                     |       |                             | 177,695    |            |       |                 | (367       | ) |   |   | 177,328 |   |   |
| Total assets                                     |       |                             | 274,433    |            |       |                 | (367       | ) |   |   | 274,066 |   |   |
| Deferred income  taxes                           |       |                             | 15,510     |            |       |                 | (3,604     | ) |   |   | 11,906 |   |   |
| Total liabilities                                |       |                             | 284,779    |            |       |                 | (3,604     | ) |   |   | 281,175 |   |   |
| Stockholder’s  equity                       |       |                             | (10,346    | )               |       |                 | 3,237      |   |   |   | (7,109 | ) |   |
| Total liabilities  and stockholder’s equity |       |                             | 274,433    |            |       |                 | (367       | ) |   |   | 274,066 |   |   |
| **At  December 31, 2004**                   |       |                             |       |            |       |                 |       |   |   |   |   |   |   |
| Minority Interest                                |       |                             | —     |            |       |                 | 387        |   |   |   | 387 |   |   |
| Stockholder’s equity                        |       |                             | 48,826     |            |       |                 | (387       | ) |   |   | 48,439 |   |   |

 

**CondensedConsolidated Statement of Income Adjustments**

| ** **                                    | ** ** | **As Previously  Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|-----------------|------------|----------------------|------------|
| **Three months ended  June 30, 2005:**   |       |                             |       |            |       |                 |       |   |   |   |   |   |   |
| Total revenues                                |       |                             | $          | 40,201          |       |                 |       | 169 |   |   |   | $ | 40,370 |   |   |
| Total expenses                                |       |                             | 25,717     |            |       |                 | 169        |   |   |   | 25,886 |   |   |
| **Six  months ended June 30, 2005:**     |       |                             |       |            |       |                 |       |   |   |   |   |   |   |
| Total revenues                                |       |                             | $          | 53,806          |       |                 |       | 521 |   |   |   | $ | 54,327 |   |   |
| Total expenses                                |       |                             | 51,028     |            |       |                 | 521        |   |   |   | 51,549 |   |   |
| Minority interest  in consolidated subsidiary |       |                             | —     |            |       |                 | 42         |   |   |   | 42 |   |   |
| Net income                                    |       |                             | 2,004      |            |       |                 | 42         |   |   |   | 1,962 |   |   |

 

The guarantor financialinformation presented in Note 13 which is presented in order to isolate thefinancial information of those subsidiaries which are not guarantors of our 8.75%senior notes as described in Note 6 has also been revised. The financialinformation of those subsidiaries which are not guarantors of the 8.75% seniornotes did not materially change.

8

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**3.**   ACQUISITION OFPROPERTIES

On March 21, 2005,the Company completed the acquisition of Marquez Energy. The transaction addedproved reserves of approximately 2.0 MMBOE as of December 31, 2004, basedon a reserve report prepared by Netherland, Sewell and Associates, Inc.(NSAI). The purchase price for the membership interests in Marquez Energy was$16.6 million. The purchase price was based on the member’s equity on MarquezEnergy’s unaudited December 31, 2004 balance sheet as adjusted to reflectthe value of its oil and natural gas properties (as determined by NSAI as of December 31,2004) and certain other adjustments. For the purpose of calculating thepurchase price, the following values were assigned to Marquez Energy’s provedreserves: (i) $1.75/Mcfe for its proved developed producing reserves, (ii) $1.00/Mcfefor its proved developed non-producing reserves and (iii) $0.75/Mcfe forits proved undeveloped reserves. NSAI or another nationally recognizedengineering firm will conduct supplemental evaluations of the Marquez Energyproperties as of year-end 2005 and 2006. In the event those evaluationsattribute proved reserves to the Marquez Energy properties as of December 31,2004 in excess of those reflected in NSAI’s initial report, additional paymentswill be made to the former holders of interests in Marquez Energy pursuant tothe same formula, subject to a maximum aggregate price, including debtassumption, of $25 million. The Company had paid a deposit of $2 million to themembers of Marquez Energy as of December 31, 2004 and on March 21,2005 paid the remaining $14.6 million to the members of Marquez Energy and$3.2 million to Bank of Oklahoma to repay the existing debt. Because thisentity was owned by the Company’s CEO and sole shareholder, the assets andliabilities on a net basis were recorded at their historical cost. The amountof the purchase price in excess of the historical cost has been chargeddirectly against equity. As discussed in Note 1, for financial reportingpurposes the acquisition was accounted for as a reorganization of entitiesunder common control in a manner similar to a pooling of interests.

**4.**   SALES OF PROPERTIES

In February 2005, the Company entered into apurchase and sale agreement to sell its interest in the Big Mineral Creek field(“BMC”), located in Grayson County, Texas. The sales price was $45 million,subject to adjustments that, among other things, gave economic effect to thetransaction as of February 1, 2005. The closing of the transactionoccurred on March 31, 2005. As of December 31, 2004 the field hadproved reserves of approximately 3.4 MMBOE, according to a report by NSAI.

In order to facilitate a possible like-kind exchangeof the Company’s BMC property under Section 1031 of the Internal RevenueCode, the proceeds of the sale were deposited with a qualified intermediary. Inaddition, the equity interests in Marquez Energy are currently being held by anindependent entity acting on behalf of the Company to allow a portion of theMarquez Energy properties to be potentially used as replacement properties tothe BMC property. The Company has and will at all times continue to maintainbeneficial ownership of the interests, and will assume direct ownership of themwithin 180 days of the closing. The purpose of this structure is to give theCompany the option of effecting a like-kind exchange of the BMC propertypursuant to Section 1031 and thereby deferring a portion of the taxespayable with respect to the sale of the BMC property. The Company hasidentified and is pursuing acquisition opportunities which qualify asreplacement properties. The Company has not recorded a gain on the sale of theBMC property, but has applied the sales proceeds of $44.6 million to reduce thecapitalized cost of oil and natural gas properties and has recorded the cashreceived as “Cash Restricted for Investment in Oil and Natural Gas Properties”on the condensed consolidated balance sheet at June 30, 2005. In the eventthe Company does not acquire qualified replacement properties prior to September 27,2005 it will not be able to utilize the like kind exchange provisions of Section 1031,in which case it may incur an income tax liability on the gain on the sale ofthe BMC property of up to approximately $15.2 million, and the $44.6 millionsales proceeds recorded as “Cash Restricted for Investment in Oil and NaturalGas Properties” would be transferred to the cash account and be available 

9

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for capital expenditures,the acquisition of long-term assets, and, subject to certain limitationspursuant to the covenants of its senior notes, for general corporate purposes.

In February 2004, the Company sold its interestin the North and South Afton, California, gas properties for a net sales priceof approximately $1.5 million. In accordance with its accounting policies, theCompany did not recognize any gain or loss on the transaction, but applied thenet sales proceeds to reduce the capitalized cost of its oil and gasproperties.

In March 2004, theCompany sold its subsidiary, Venoco Patagonia, Ltd., a Bermuda corporation, for$0.2 million. The $0.2 million sales price was comprised of cash of $0.1million and payment of liabilities of $0.1 million.

**5.**   HEDGINGAND DERIVATIVE FINANCIAL INSTRUMENTS

The Company enters into derivative contracts,primarily collars, swaps and option contracts, to hedge future crude oil andnatural gas production in order to mitigate the risk of market pricefluctuations. The objective of the Company’s hedging activities and the use ofderivative financial instruments is to achieve more predictable cash flows.While the use of these derivative instruments limits the downside risk ofadverse price movements, they also limit future revenues from favorable pricemovements. The use of derivatives also involves the risk that the counterparties to such instruments will beunable to meet the financial terms of such contracts.

In order to qualify for hedge accounting, therelationship between the hedging instrument and the hedged item must be highlyeffective in achieving the offset of changes in cash flows attributable to thehedged risk both at the inception of the contract and on an ongoing basis. TheCompany measures effectiveness on a quarterly basis. Hedge accounting isdiscontinued prospectively when a hedge instrument is no longer consideredhighly effective.

All derivative instruments are recorded on the balancesheet at fair value. Fair value is generally determined based on the differencebetween the fixed contract price and the underlying market price at thedetermination date, and/or confirmed by the counterparty. Changes in the fair value of the effectiveportion of the cash flow hedges are recorded as a component of accumulatedother comprehensive income (loss), which is later transferred to the incomestatement as a component of commodity derivative income (loss) when the hedgedtransaction occurs. Changes in the fair value of derivatives which do notqualify as a hedge or are not designated as a hedge, as well as the ineffectiveportion of hedge derivatives, are recorded in commodity derivative income(loss) on the income statement. The Company determines hedgeineffectiveness based on changes during the period in the price differentialsbetween the index price of the derivative contracts (which uses a New YorkMercantile Exchange (“NYMEX”) index in the case of oil hedges, and NYMEX andPG&E Citygate in the case of natural gas hedges) and the contract price forthe point of sale for the cash flow that is being hedged. Hedge ineffectivenessoccurs only if the cumulative gain or loss on the derivative hedging instrumentexceeds the cumulative change in the expected future cash flows on the hedgedtransaction. Ineffectiveness is recorded in earnings to the extent thecumulative changes in fair value of the actual derivative exceed the cumulativechanges in fair value of the hypothetical derivative.

10

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Thecomponents of commodity derivative losses in the condensed consolidated income statementsare as follows (in thousands):

| ** **                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                    | ** ** | **(Successor)**                                 | ** ** | **(Predecessor)**                             | ** ** | **(Successor)** | ** ** | **(Predecessor)** | ** ** |
| Realized commodity  derivative losses                                         |       |                                            | $          | 3,590                                         |       |   |   | $ | 3,754 |   |   |   | $ | 7,155 |   |   |   | $ | 6,108 |   |   |
| Unrealized commodity derivative losses:                                       |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Change in fair value of  derivatives that do not qualify for hedge accounting |       |                                            | 5,340      |                                          |       |   | (190 | ) |   |   | 28,436 |   |   |   | 218 |   |   |
| Ineffective portion of  derivatives qualifying for hedge accounting           |       |                                            | (2,936     | )                                             |       |   | 623 |   |   |   | (437 | ) |   |   | 623 |   |   |
| Unrealized commodity  derivative losses                                       |       |                                            | 2,404      |                                          |       |   | 433 |   |   |   | 27,999 |   |   |   | 841 |   |   |
| Total realized and unrealized commodity derivative  losses                    |       |                                            | $          | 5,994                                         |       |   |   | $ | 4,187 |   |   |   | $ | 35,154 |   |   |   | $ | 6,949 |   |   |

 

Theestimated fair values of derivatives included in the consolidated balancesheets at June 30, 2005 and December 31, 2004 are summarized below.The increase in the net derivative liability from December 31, 2004 to June 30,2005 is primarily attributable to the effect of rising oil and natural gasprices, partially offset by cash settlements of derivatives during the period(in thousands):

| ** **                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| Derivative Assets:               |       |              |       |                  |       |   |   |
| Oil derivative contracts         |       | $                 | 4,900      |                  |       | $ | 6,775 |   |   |
| Gas derivative contracts         |       | 862               |       |                  | 3,380      |   |   |
| Derivative Liabilities:          |       |              |       |                  |       |   |   |
| Oil derivative contracts         |       | (33,530           | )          |                  | (1,383     | ) |   |
| Gas derivative contracts         |       | (2,703            | )          |                  | (137       | ) |   |
| Net derivative asset (liability) |       | $                 | (30,471    | )                     |       | $ | 8,635 |   |   |

 

As of June 30, 2005, an unrealized derivativefair value loss of $17.5 million ($10.6 million after tax), related to cashflow hedges, was recorded in accumulated other comprehensive loss. Based on June 30,2005 mark-to-market prices, the Company expects to reclassify as decreases toearnings $9.7 million ($5.8 million after tax) from accumulated othercomprehensive loss during the next twelve months. The actual reclassificationto earnings will be based on mark-to-market prices at the contract settlementdate.

***Crude Oil Agreements******—As***of June 30,2005, the Company has entered into option, swap and collar agreements toreceive average minimum and maximum New York Mercantile Exchange (NYMEX)West Texas Intermediate (WTI) prices as summarized below. Location andquality differentials attributable to the Company’s properties are not includedin the following prices. The agreements provide for monthly settlement based onthe differential between the agreement price and the actual NYMEX crudeoil price.

| ** **                                              | ** ** | **Minimum**     | ** ** | **Maximum**          | ** ** |
|---------------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| ** **                                              | ** ** | **Barrels/day** | ** ** | **Avg. Prices** | ** ** | **Barrels/day** | ** ** | **Avg. Prices** | ** ** |
| Crude oil hedges at June 30, 2005 for  production: |       |            |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| July 1 – December 31, 2005               |       |            | 9,471      |                 |       |   | $ | 37.73 |   |   |   | 5,471 |   |   |   | $ | 47.17 |   |   |
| January 1 – December 31, 2006            |       |            | 7,000      |                 |       |   | $ | 40.80 |   |   |   | 5,000 |   |   |   | $ | 50.70 |   |   |
| January 1 – December 31, 2007            |       |            | 4,313      |                 |       |   | $ | 43.96 |   |   |   | 4,313 |   |   |   | $ | 68.99 |   |   |
| January 1 – December 31, 2008            |       |            | 2,947      |                 |       |   | $ | 52.00 |   |   |   | 2,947 |   |   |   | $ | 75.00 |   |   |
| January 1 – June 30, 2009                |       |            | 2,170      |                 |       |   | $ | 50.00 |   |   |   | 2,170 |   |   |   | $ | 75.00 |   |   |

 

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***Natural Gas Agreements******—As*** of June 30,2005, the Company has entered into option, swap and collar agreements toreceive average minimum and maximum PG&E Citygate prices as follows: 

| ** **                                                | ** ** | **Minimum**   | ** ** | **Maximum**          | ** ** |
|-----------------------------------------------------------|------------|---------------|------------|----------------------|------------|
| ** **                                                | ** ** | **MMBtu/Day** | ** ** | **Avg. Prices** | ** ** | **MMBtu/Day** | ** ** | **Avg. Prices** | ** ** |
| Natural gas  hedges at June 30, 2005 for production: |       |          |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| July 1 – December 31, 2005                 |       |          | 14,000     |                 |       |   | $ | 6.09 |   |   |   | 4,000 |   |   |   | $ | 6.77 |   |   |
| January 1 – December 31, 2006              |       |          | 15,000     |                 |       |   | $ | 6.28 |   |   |   | 9,000 |   |   |   | $ | 8.40 |   |   |
| January 1 – December 31,  2007             |       |          | 6,000      |                 |       |   | $ | 6.00 |   |   |   | 6,000 |   |   |   | $ | 8.40 |   |   |

 

As of June 30, 2005the Company has entered into a forward sales contract with a gas purchaserunder which it is obligated for physical delivery of specified volumes of gaswith a floor price. As this contract provides for physical delivery of the gasit is not considered a derivative because it has been designated as a normalsale and the transaction will be recorded in the financial statements when theassociated delivery occurs. The Company has contracted for 2,000 MCF per day ata floor price of $4.85 per MCF for the period July 1, 2005 to September 30,2006.

**6.**   LONG-TERM DEBT

Long-termdebt consists of the following (in thousands):

| ** **                                                  | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| 8.75% senior  notes due December 15, 2011              |       | $                       | 149,112    |                        |       | $ | 149,043 |   |   |
| Revolving Credit  Facility due November 4, 2007        |       | 15,000                  |       |                        | —     |   |   |
| Revolving Credit  Facility due August 31, 2006         |       | —                  |       |                        | 4,684      |   |   |
| 5.79% Mortgage on  office building due January 1, 2015 |       | 9,949                   |       |                        | 9,942      |   |   |
| Total long-term  debt                                       |       | 174,061                 |       |                        | 163,669    |   |   |
| Less: current  portion of long-term debt                    |       | (123                    | )          |                        | (127       | ) |   |
| Long-term debt,  net of current portion                     |       | $                       | 173,938    |                        |       | $ | 163,542 |   |   |

 

On December 20, 2004, the Company sold $150million in 8.75% senior notes (“the notes”). The notes were issued at 99.362%of par to yield 8.80% to maturity due December 2011. Interest on the notesis due each June 15 and December 15 beginning June 15, 2005. Thenotes are senior unsecured obligations and contain covenants that, among otherthings, limit the Company’s ability to make investments, incur additional debtor issue preferred stock, create liens and sell assets.

Proceeds from the sale of the notes were used to repayexisting borrowings of $98.7 million against the Company’s $102 million SeniorSecured Facility (“the Senior Facility”) obtained in November 2004. TheCompany also obtained in December 2004 an amended and restated revolvingcredit agreement with an initial borrowing base of $50 million and noassociated term loan facility (“restated Credit Agreement”). The borrowing baseunder the restated Credit Agreement was reduced to $40 million on March 31,2005 due to the sale of BMC. The restated Credit Agreement contains a number ofrestrictive covenants with regard to leverage and current ratios and otherterms customary in a credit facility secured by oil and natural gas properties.At June 30, 2005, there were $15 million of borrowings against therestated Credit Agreement. At June 30, 2005, the average interest rate onthe revolving loans was 5.63 percent. As of June 30, 2005, the Company was incompliance with all of its financial covenants.

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At December 31, 2004, Marquez Energy, nowconsolidated with the Company had a $5.0 million revolving credit facility withthe Bank of Oklahoma. Interest accrued at the JP Morgan Chase Bank prime rateplus 1 percent. The agreement was collateralized by the Company’s oil and gasproperties and was guaranteed by the Company’s principal shareholder andpresident. The credit agreement also contained certain net worth, leverage andratio requirements and limited the payment of distributions. At December 31,2004, the Company had approximately $4.7 million of outstanding borrowingsunder this credit facility. The Company repaid the outstanding borrowings on March 21,2005 of $3.2 million on the credit facility.

In addition, on December 9,2004, the Company purchased an office building in Carpinteria, California secured by a 5.79% $10million promissory note due January 1, 2015. The promissory note providesfor a monthly payment of $58,612 beginning February 1, 2005 and continuingthrough December 1, 2014. The balance of unpaid principal and all accruedbut unpaid interest is due and payable on January 1, 2015.

**7.**   COMPREHENSIVEINCOME (LOSS)

Comprehensiveincome (loss) includes net income and certain items recorded directly toStockholders’ Equity and classified as Accumulated Other Comprehensive Income (“OCI”).The following table reflects comprehensive income for the three and six monthperiods ended June 30, 2005 and 2004.

| ** **                                                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                   | ** ** | **(Successor)**                                 | ** ** | **(Predecessor)**                             | ** ** | **(Successor)** | ** ** | **(Predecessor)** | ** ** |
| ** **                                                                   | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | **As restated  (See Note 2)** | ** ** | ** ** | ** ** |
| Net income                                                                   |       |                                            | $          | 8,780                                         |       |   |   | $ | 5,528 |   |   |   | $ | 1,962 |   |   |   | $ | 11,307 |   |   |
| OTHER  COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAX:                       |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Hedging  activities:                                                         |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Reclassification adjustments for settled contracts                           |       |                                            | —     |                                          |       |   | 264 |   |   |   | 161 |   |   |   | 615 |   |   |
| Changes in fair value of effective portion of  outstanding hedging positions |       |                                            | (997       | )                                             |       |   | (233 | ) |   |   | (12,644 | ) |   |   | (2,055 | ) |   |
| Other  comprehensive loss                                                    |       |                                            | (997       | )                                             |       |   | 31 |   |   |   | (12,483 | ) |   |   | (1,440 | ) |   |
| Comprehensive income  (loss)                                                 |       |                                            | $          | 7,783                                         |       |   |   | $ | 5,559 |   |   |   | $ | (10,521 | ) |   |   | $ | 9,867 |   |   |

 

**8.**   LITIGATION

***Beverly Hills Litigation***

Six lawsuits have been filed against the Company andcertain other energy companies in Los Angeles County Superior Court by personswho attended Beverly Hills High School or who are citizens of BeverlyHills/Century City or visitors to that area from the time period running fromthe 1930s to date. There are approximately 1,000 plaintiffs (includingplaintiffs in two related lawsuits in which the Company has not been named) whoclaim to be suffering from various forms of cancer or some other illnesses,fear they may suffer from such maladies in the future, or are related in somemanner to persons who have suffered from cancer or other illnesses. Plaintiffsallege that exposure to substances in the air, soil and water which derive fromeither oil field or other operations in the area are the cause of the cancersand other maladies. The Company has owned an oil and gas facility adjacent tothe school since 1995. For the majority of the plaintiffs, their allegedexposures occurred before the Company owned the facility. It is anticipatedthat 

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additional plaintiffs maybe added to the litigation over time. All cases have been consolidated beforeone judge. The judge has ordered that all of the cases be stayed except for aninitial trial group consisting of twelve “representative”plaintiffs. Discovery relating to the initial trial group is ongoing, witha trial set for March 2006. Management believes that the claims made inthe suits are without merit and the Company intends to defend against theclaims vigorously. However, the Company cannot predict, at this time, theoutcome of the suits. The Company also has defense and indemnityobligations to certain other defendants in the actions. The Company cannotpredict the cost of defense and indemnity obligations, if any, at the presenttime.

In accordance withStatement of Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies, theCompany has not accrued for a loss contingency relating to the Beverly Hillslitigation because it believes that, although unfavorable outcomes in theproceedings may be reasonably possible, they are not considered by managementto be probable or reasonably estimable. If one or more of these matters areresolved in a manner adverse to the Company, and if insurance coverage isdetermined to not be applicable, their impact on the Company’s results ofoperations, financial position and/or liquidity could be material.

***Litigation by former directors and former preferredstockholders***

In December 2004, alawsuit was filed against the Company by two of its former directors and theformer preferred shareholders. The claim is for indemnification of attorneys’fees and expenses incurred in defending the former directors in litigationfiled by the former CEO in connection with the termination of his employmentfrom Venoco. Fees incurred in the defense total approximately $1,000,000. On July 28, 2005 the Company enteredinto a settlement agreement with the former directors and the former preferredshareholder and settled the litigation for amounts which did not differmaterially from the amount previously accrued.

***Former Chief Operating Officer (COO) Litigation***

In December 2004, aformer COO of the Company filed a lawsuit against the Company and its CEO inSanta Barbara County Superior Court, claiming that the Company breached hisemployment agreement and wrongfully failed to pay him wages due, primarily inconnection with stock bonuses. The Company believes that he was entitled toapproximately 45,000 shares (approximately 7,000 of which were previouslyissued) and that the Company has the right to repurchase those shares at netbook value as of January 1, 2004 ($.53/share). The former COO is allegingthat he is entitled to a cash bonus of approximately $24,000 plus interest andapproximately 68,700 shares in total. The Company believes that the plaintiff’scontentions are without merit. In August 2005, the Company and the formerCOO agreed to settle the lawsuit for amounts accrued as of June 30, 2005in the financial statements. The Company expects that the lawsuits will bedismissed.

**9.   STOCK OPTION PLANS**

During2005, the Company entered into non-qualified stock option agreements withcertain employees and officers of the Company other than Mr. Marquez. Totaloptions granted in 2005 through June 30, 2005 were 3,556,161 at a weightedaverage exercise price of $6.47 ($6.00 to $8.67). The options vest over a fouryear period, with 20% vesting on the grant date and 20% vesting on eachsubsequent anniversary of the grant date. The non-qualified stock optionagreements provide that all options will become immediately vested following achange in control of the Company. The agreements provide that all options willbecome immediately vested if the Company terminates the option holder’semployment unless the termination is for specific types of misconduct. TheCompany has previously recorded stock compensation pursuant to the intrinsicvalue method under Accounting Principles Board (“APB”) Opinion No. 25,whereby no compensation was recognized for these stock option rewards. Hadcompensation 

14

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expense for the options granted to our employees and officersbeen determined based on the fair value at the grant date for the options,consistent with the provisions of SFAS No. 123R, the Company’s net income(loss) for the three and six months ended June 30, 2005 and 2004 wouldhave been increased to the pro forma amounts listed below:

| ** **                                                                                                                       | ** ** | **Three Months Ended  June 30,**          | ** ** | **Six Months Ended  June 30,**            | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income as  reported                                                                                                          |       |                                                     | $          | 8,780                                                    |       |   |   | $ | 5,528 |   |   | $ | 1,962 |   | $ | 11,307 |   |
| Add:                                                                                                                             |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Stock-based  compensation expense included in the income statement, net of related tax  effects                                  |       |                                                     | 0          |                                                     |       |   | 0 |   |   | 0 |   | 0 |   |
| Deduct:                                                                                                                          |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Total stock based  compensation expense determined under the fair value method for all  awards, net of related tax  effects |       |                                                     | (357       | )                                                        |       |   | 0 |   |   | (1,320 | ) | 0 |   |
| Pro forma net income                                                                                                             |       |                                                     | $          | 8,423                                                    |       |   |   | $ | 5,528 |   |   | $ | 642 |   | $ | 11,370 |   |

 

**10.**   SHAREHOLDERS’EQUITY

On June 1, 2004 an agreement was reached betweencertain shareholders of the Company that ultimately resulted in the acquisitionof 53.5% of the outstanding common shares in the Company in a transaction thatclosed on July 12, 2004. The terms of the transaction were contained in aprivate agreement among Timothy Marquez and the selling shareholders (the “securitiespurchase agreement”). On June 2, 2004 Timothy Marquez was elected Chairmanof the Board and CEO of the Company and the selling shareholders resigned fromthe Board of Directors.

On January 3, 2005, adividend of $35 million was paid to a trust controlled by the Company’s soleshareholder and CEO from the proceeds of the senior notes.

**11.**   ASSET RETIREMENTOBLIGATIONS

The Company adopted SFAS No. 143, *Accounting for Asset Retirement Obligations*as of January 1, 2003. Under SFAS No. 143, liabilities are accretedto their present value each period and the capitalized asset retirement costsare depleted over the productive life of the related assets. Changes resulting fromrevisions to the timing or the amount of the original estimate of undiscountedcashflows are recognized as an increase or decrease in the asset retirementobligation (“ARO”) and the related capitalized asset retirement costs.

TheCompany’s asset retirement obligations represent expected future costsassociated with site reclamation, facilities dismantlement, and plugging andabandonment of wells. The following is a summary of the asset retirementobligation activity (in thousands):

| ** **                                                      | ** ** | **2005**        | ** ** | **2004**          | ** ** |
|-----------------------------------------------------------------|------------|-----------------|------------|-------------------|------------|
| ** **                                                      | ** ** | **(Successor)** | ** ** | **(Predecessor)** | ** ** |
| Balance of ARO as  of January 1,                           |       |            | $          | 23,390            |       |   |   | $ | 19,248 |   |   |
| Revisions in  estimated cashflows                               |       |            | —     |              |       |   | — |   |   |
| Liabilities  incurred during the six months ended June 30, |       |            | 53         |              |       |   | — |   |   |
| Liabilities  settled during the six months ended June 30,  |       |            | (547       | )                 |       |   | (30 | ) |   |
| Accretion expense                                               |       |            | 1,018      |              |       |   | 720 |   |   |
| Balance of ARO as of  June 30,                             |       |            | $          | 23,914            |       |   |   | $ | 19,938 |   |   |

 

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Of the liability for assetretirement obligations balance at June 30, 2005, $0.2 million isclassified as current and included in accrued liabilities in the accompanyingconsolidated balance sheet. The balance of ARO as of June 30, 2005represents The Company’s estimate of the present value of its aggregate assetretirement obligations as of that date. The discount rates used to calculate thepresent value varied depending on the estimated timing of the obligation, buttypically ranged between 6% and 8%.

**12.**   RECENTACCOUNTING PRONOUNCEMENTS

In December 2004 the Financial AccountingStandards Board (“FASB”) issued SFAS No.123R (revised 2004), “*Share-Based Payments*” which requires that the compensationrelating to all stock-based awards, including stock options, be recognized inthe financial statements. This pronouncement replaces SFAS No. 123, “*Accounting for Stock-Based Compensation*,” and supersedes APBOpinion No. 25, “*Accounting for StockIssued to Employees*.” In April 2005, the Securities andExchange Commission postponed the required implementation date for this newstatement to annual periods beginning after June 15, 2005. The Company currentlyplans to adopt SFAS No. 123R as of January 1, 2006. The Company haspreviously recorded stock compensation pursuant to the intrinsic value methodunder APB Opinion No. 25, wherby no compensation was recognized for moststock option awards. The Company expects that stock option grants will continueto be a significant part of employee compensation, and, therefore, SFAS No. 123Rwill have a significant impact on its financial statements. For the pro formaeffect of recording compensation for all stock awards at fair value, using theBlack-Sholes method, see Note 9 to our condensed consolidated financialstatements. The Company has not yet completed its evaluation, but expects theadoption of SFAS No. 123R to have an effect on the financial statementssimilar to the pro forma effects. The Company is currently consideringalternative valuation methods to determine the fair value of stock optionsgranted after December 31, 2005.

SFAS No. 123R permits companies to adopt itsrequirements using either a “modified prospective” method, or a “modifiedretrospective” method. Under the “modified prospective” method, compensationexpense is recognized in the financial statements beginning with the effectivedate, based on the requirements of SFAS 123R for all share-based paymentsgranted after that date, and based on the requirements of SFAS No. 123Rfor all unvested awards granted prior to the effective date of SFAS No. 123R.Under the “modified retrospective” method, the requirements are the same asunder the “modified prospective” method, but also permits entities to restatefinancial statements of previous periods, either for all periods presented orto the beginning of the fiscal year in which the statement is adopted, based onprevious pro forma disclosures made in accordance with SFAS No. 123. TheCompany has not yet determined which of the methods it will use upon adoption.

In March 2005, the FASB issued FASBInterpretation (“FIN”) No. 47, *Accountingfor Conditional Asset Retirement Obligations*. This Interpretationclarifies the definition and treatment of conditional asset retirementobligations as discussed in FASB Statement No. 143, *Accounting for Asset Retirement Obligations*.A conditional asset retirement obligation is defined as an asset retirement activityin which the timing and/or method of settlement are dependent on future eventsthat may be outside the control of a company. FIN 47 states that a company mustrecord a liability when incurred for conditional asset retirement obligationsif the fair value of the obligation is reasonably estimable. ThisInterpretation is intended to provide more information about long-lived assets,more information about future cash outflows for these obligations and moreconsistent recognition of these liabilities. FIN 47 is effective for fiscalyears ending after December 15, 2005. The Company does not believe thatits financial position, results of operations or cash flows will be impacted bythis Interpretation.

In June 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*,which replaces APB Opinion No. 20, *AccountingChanges*, and SFAS No. 3, *ReportingAccounting Changes in Interim Financial Statements*. Statement 154changes the requirements for the accounting and reporting of a change in accountingprinciple. APB Opinion No. 20 previously required that most voluntarychanges in 

16

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an accounting principle berecognized by including the cumulative effect of the new accounting principlein net income of the period of the change. SFAS No. 154 now requiresretrospective application of changes in an accounting principle to prior periodfinancial statements, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. The Statementis effective for fiscal years beginning after December 15, 2005. We do notexpect the adoption of this statement will have a material impact on ourfinancial statements.

In October 2005, theFASB issued FSP FAS No. 13-1, *Accountingfor Rental Costs Incurred during a Construction Period*, which iseffective for reporting periods beginning after December 15, 2005. ThisPosition requires that rental costs associated with ground or buildingoperating leases that are incurred during a construction period be recognizedas rental expense. We do not expect the adoption of FSP No. 13-1to have an impact on our financial statements.

**13.**   GUARANTORFINANCIAL INFORMATION

In connection with the issuance of the senior notes inDecember 2004, BMC, Ltd., Whittier Pipeline Corp. and 217 StateStreet, Inc. (“Guarantors”) have fully and unconditionally guaranteed, ona joint and several basis, the Company’s obligations under the senior notes(the “Guarantees”). On March 31, 2005 Marquez Energy became a Guarantor ofthe notes. Each Guarantee is a general unsecured obligation of the Guarantor,senior in right of payment to all existing and future subordinated indebtednessof that Guarantor, pari passu in right of payment with any existing and futuresenior unsecured indebtedness of that Guarantor and effectively junior in rightof payment to that Guarantor’s existing and future secured indebtedness, includingits guarantee of indebtedness under the senior secured credit facility, to theextent of the value of the collateral securing that facility. All Guarantorsare 100% owned by the Company.

The following is condensed consolidating financialinformation for the three and six months ended June 30, 2005 and 2004 andas of June 30, 2005 and December 31, 2004.

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**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS INFORMATIONTHREE MONTHS ENDED JUNE 30, 2005(Successor)(in thousands)**

**(As restated, SeeNote 2)**

| ** **                                                   | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| REVENUES:                                                    |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas sales                                    |       |                  | $          | 43,692                      |       |                            |       | $                | 1,660      |             |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 45,352 |   |   |
| Commodity derivative losses (realized)                  |       |                  | (3,590     | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (3,590 | ) |   |
| Commodity derivative losses (unrealized)                     |       |                  | (2,404     | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (2,404 | ) |   |
| Other                                                        |       |                  | 903        |                        |       |                            | 4          |             |       |             | 1,695      |   |   |   | (1,590 | ) |   |   | 1,012 |   |   |
| Total revenues                                               |       |                  | 38,601     |                        |       |                            | 1,664      |             |       |             | 1,695      |   |   |   | (1,590 | ) |   |   | 40,370 |   |   |
| EXPENSES:                                                    |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas production                               |       |                  | 11,837     |                        |       |                            | 251        |             |       |             | 264        |   |   |   | — |   |   |   | 12,352 |   |   |
| Transportation expense                                       |       |                  | 1,821      |                        |       |                            | (123       | )                |       |             | —     |   |   |   | (1,162 | ) |   |   | 536 |   |   |
| Depletion, depreciation, amortization and  impairment   |       |                  | 3,737      |                        |       |                            | 22         |             |       |             | 81         |   |   |   | — |   |   |   | 3,840 |   |   |
| Accretion of abandonment liability                           |       |                  | 546        |                        |       |                            | 25         |             |       |             | 5          |   |   |   | — |   |   |   | 576 |   |   |
| General and administrative, net of amounts  capitalized |       |                  | 4,701      |                        |       |                            | 153        |             |       |             | 157        |   |   |   | (428 | ) |   |   | 4,583 |   |   |
| Amortization of deferred loan costs                          |       |                  | 676        |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 676 |   |   |
| Interest, net                                                |       |                  | 3,625      |                        |       |                            | —     |             |       |             | (302       | ) |   |   | — |   |   |   | 3,323 |   |   |
| Total expenses                                               |       |                  | 26,943     |                        |       |                            | 328        |             |       |             | 205        |   |   |   | (1,590 | ) |   |   | 25,886 |   |   |
| Equity in  subsidiary income                                 |       |                  | 2,609      |                        |       |                            | —     |             |       |             | —     |   |   |   | (2,609 | ) |   |   | — |   |   |
| Income (loss)  before income taxes                           |       |                  | 14,267     |                        |       |                            | 1,336      |             |       |             | 1,490      |   |   |   | (2,609 | ) |   |   | 14,484 |   |   |
| Income tax  provision (benefit)                              |       |                  | 5,487      |                        |       |                            | 521        |             |       |             | 581        |   |   |   | (885 | ) |   |   | 5,704 |   |   |
| Net income (loss)                                            |       |                  | $          | 8,780                       |       |                            |       | $                | 815        |             |       |   | $ | 909 |   |   |   | $ | (1,724 | ) |   |   | $ | 8,780 |   |   |
| Net income (loss)  as previously reported (see Note 2)  |       |                  | $          | 11,594                      |       |                            |       | $                | 6,383      |             |       |   | $ | 1,236 |   |   |   | $ | (10,433 | ) |   |   | $ | 8,780 |   |   |

 

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**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONSINFORMATIONTHREE MONTHS ENDED JUNE 30, 2004(Predecessor)(in thousands)**

**(Asrestated, See Note 2)**

| ** **                                                   | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| REVENUES:                                                    |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas sales                                    |       |                  | $          | 29,866                      |       |                            |       | $                | 2,226      |             |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 32,092 |   |   |
| Commodity derivative losses (realized)                       |       |                  | (3,754     | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (3,754 | ) |   |
| Commodity derivative losses (unrealized)                     |       |                  | (433       | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (433 | ) |   |
| Other                                                        |       |                  | 840        |                        |       |                            | 15         |             |       |             | 1,784      |   |   |   | (1,497 | ) |   |   | 1,142 |   |   |
| Total revenues                                               |       |                  | 26,519     |                        |       |                            | 2,241      |             |       |             | 1,784      |   |   |   | (1,497 | ) |   |   | 29,047 |   |   |
| EXPENSES:                                                    |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas production                               |       |                  | 10,605     |                        |       |                            | 530        |             |       |             | 349        |   |   |   | — |   |   |   | 11,484 |   |   |
| Transportation expense                                       |       |                  | 2,122      |                        |       |                            | —     |             |       |             | —     |   |   |   | (1,431 | ) |   |   | 691 |   |   |
| Depletion, depreciation, amortization and  impairment   |       |                  | 3,157      |                        |       |                            | 182        |             |       |             | 21         |   |   |   | — |   |   |   | 3,360 |   |   |
| Accretion of abandonment liability                           |       |                  | 337        |                        |       |                            | 17         |             |       |             | 6          |   |   |   | — |   |   |   | 360 |   |   |
| General and administrative, net of amounts  capitalized |       |                  | 3,112      |                        |       |                            | 193        |             |       |             | 66         |   |   |   | (66 | ) |   |   | 3,305 |   |   |
| Amortization of deferred loan costs                          |       |                  | 61         |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 61 |   |   |
| Interest, net                                                |       |                  | 651        |                        |       |                            | —     |             |       |             | (346       | ) |   |   | — |   |   |   | 305 |   |   |
| Total expenses                                               |       |                  | 20,045     |                        |       |                            | 922        |             |       |             | 96         |   |   |   | (1,497 | ) |   |   | 19,566 |   |   |
| Equity in  subsidiary income                                 |       |                  | 1,753      |                        |       |                            | —     |             |       |             | —     |   |   |   | (1,753 | ) |   |   | — |   |   |
| Income (loss)  before income taxes                           |       |                  | 8,227      |                        |       |                            | 1,319      |             |       |             | 1,688      |   |   |   | (1,753 | ) |   |   | 9,481 |   |   |
| Income tax  provision (benefit)                              |       |                  | 2,699      |                        |       |                            | 550        |             |       |             | 704        |   |   |   | — |   |   |   | 3,953 |   |   |
| Net income (loss)                                            |       |                  | $          | 5,528                       |       |                            |       | $                | 769        |             |       |   | $ | 984 |   |   |   | $ | (1,753 | ) |   |   | $ | 5,528 |   |   |
| Net income (loss)  as previously reported (see Note 2)  |       |                  | $          | 4,325                       |       |                            |       | $                | 1,073      |             |       |   | $ | 984 |   |   |   | $ | (854 | ) |   |   | $ | 5,528 |   |   |

 

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**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS INFORMATIONSIX MONTHS ENDED JUNE 30, 2005(Successor)(in thousands)**

**(As restated, SeeNote 2)**

| ** **                                                  | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| REVENUES:                                                   |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas sales                                   |       |                  | $          | 81,764                      |       |                            |       | $                | 5,626      |             |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 87,390 |   |   |
| Commodity derivative losses (realized)                 |       |                  | (7,155     | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (7,155 | ) |   |
| Commodity derivative losses (unrealized)                    |       |                  | (27,999    | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (27,999 | ) |   |
| Other                                                       |       |                  | 1,684      |                        |       |                            | 21,678     |             |       |             | 3,742      |   |   |   | (25,013 | ) |   |   | 2,091 |   |   |
| Total revenues                                              |       |                  | 48,294     |                        |       |                            | 27,304     |             |       |             | 3,742      |   |   |   | (25,013 | ) |   |   | 54,327 |   |   |
| EXPENSES:                                                   |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas production                              |       |                  | 22,400     |                        |       |                            | 1,215      |             |       |             | 667        |   |   |   | — |   |   |   | 24,282 |   |   |
| Transportation expense                                      |       |                  | 3,795      |                        |       |                            | (103       | )                |       |             | —     |   |   |   | (2,476 | ) |   |   | 1,216 |   |   |
| Depletion, depreciation, amortization and  impairment  |       |                  | 9,018      |                        |       |                            | 319        |             |       |             | 156        |   |   |   | — |   |   |   | 9,493 |   |   |
| Accretion of abandonment liability                          |       |                  | 949        |                        |       |                            | 58         |             |       |             | 11         |   |   |   | — |   |   |   | 1,018 |   |   |
| General and administrative, net of amounts capitalized      |       |                  | 7,804      |                        |       |                            | 747        |             |       |             | 287        |   |   |   | (1,139 | ) |   |   | 7,699 |   |   |
| Amortization of deferred loan costs                         |       |                  | 1,017      |                        |       |                            | 4          |             |       |             | —     |   |   |   | — |   |   |   | 1,021 |   |   |
| Interest, net                                               |       |                  | 7,355      |                        |       |                            | 48         |             |       |             | (583       | ) |   |   | — |   |   |   | 6,820 |   |   |
| Total expenses                                              |       |                  | 52,338     |                        |       |                            | 2,288      |             |       |             | 538        |   |   |   | (3,615 | ) |   |   | 51,549 |   |   |
| Equity in  subsidiary income                                |       |                  | 4,880      |                        |       |                            | —     |             |       |             | —     |   |   |   | (4,880 | ) |   |   | — |   |   |
| Income (loss)  before income taxes                          |       |                  | 836        |                        |       |                            | 25,016     |             |       |             | 3,204      |   |   |   | (26,278 | ) |   |   | 2,778 |   |   |
| Income tax  provision (benefit)                             |       |                  | (1,126     | )                           |       |                            | 10,494     |             |       |             | 1,303      |   |   |   | (9,897 | ) |   |   | 774 |   |   |
| Income (loss)  before minority interest                     |       |                  | 1,962      |                        |       |                            | 14,522     |             |       |             | 1,901      |   |   |   | (16,381 | ) |   |   | 2,004 |   |   |
| Minority interest  in consolidated subsidiary income        |       |                  | —     |                        |       |                            | 42         |             |       |             | —     |   |   |   | — |   |   |   | 42 |   |   |
| Net income (loss)                                           |       |                  | $          | 1,962                       |       |                            |       | $                | 14,480     |             |       |   | $ | 1,901 |   |   |   | $ | (16,381 | ) |   |   | $ | 1,962 |   |   |
| Net income (loss)  as previously reported (see Note 2) |       |                  | $          | 8,015                       |       |                            |       | $                | 29,155     |             |       |   | $ | 2,272 |   |   |   | $ | (37,438 | ) |   |   | $ | 2,004 |   |   |

 

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**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS INFORMATIONSIX MONTHS ENDED JUNE 30, 2004(Predecessor)(in thousands)**

**(Asrestated, See Note 2)**

| ** **                                                   | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| REVENUES:                                                    |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas sales                                    |       |                  | $          | 58,833                      |       |                            |       | $                | 4,084      |             |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 62,917 |   |   |
| Commodity derivative losses  (realized)                      |       |                  | (6,108     | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (6,108 | ) |   |
| Commodity derivative losses (unrealized)                     |       |                  | (841       | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (841 | ) |   |
| Other                                                        |       |                  | 1,436      |                        |       |                            | 30         |             |       |             | 3,427      |   |   |   | (2,712 | ) |   |   | 2,181 |   |   |
| Total revenues                                               |       |                  | 53,320     |                        |       |                            | 4,114      |             |       |             | 3,427      |   |   |   | (2,712 | ) |   |   | 58,149 |   |   |
| EXPENSES:                                                    |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas production                               |       |                  | 21,081     |                        |       |                            | 1,041      |             |       |             | 593        |   |   |   | — |   |   |   | 22,715 |   |   |
| Transportation expense                                       |       |                  | 4,019      |                        |       |                            | —     |             |       |             | —     |   |   |   | (2,580 | ) |   |   | 1,439 |   |   |
| Depletion, depreciation, amortization and impairment         |       |                  | 6,876      |                        |       |                            | 373        |             |       |             | 132        |   |   |   | — |   |   |   | 7,381 |   |   |
| Accretion of abandonment liability                           |       |                  | 674        |                        |       |                            | 35         |             |       |             | 11         |   |   |   | — |   |   |   | 720 |   |   |
| General and administrative, net of amounts  capitalized |       |                  | 5,390      |                        |       |                            | 340        |             |       |             | 142        |   |   |   | (132 | ) |   |   | 5,740 |   |   |
| Amortization of deferred loan costs                          |       |                  | 130        |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 130 |   |   |
| Interest, net                                                |       |                  | 1,294      |                        |       |                            | —     |             |       |             | (661       | ) |   |   | — |   |   |   | 633 |   |   |
| Total expenses                                               |       |                  | 39,464     |                        |       |                            | 1,789      |             |       |             | 217        |   |   |   | (2,712 | ) |   |   | 38,758 |   |   |
| Equity in  subsidiary income                                 |       |                  | 3,228      |                        |       |                            | —     |             |       |             | —     |   |   |   | (3,228 | ) |   |   | — |   |   |
| Income (loss)  before income taxes                           |       |                  | 17,084     |                        |       |                            | 2,325      |             |       |             | 3,210      |   |   |   | (3,228 | ) |   |   | 19,391 |   |   |
| Income tax  provision (benefit)                              |       |                  | 5,777      |                        |       |                            | 969        |             |       |             | 1,338      |   |   |   | — |   |   |   | 8,084 |   |   |
| Net income (loss)                                            |       |                  | $          | 11,307                      |       |                            |       | $                | 1,356      |             |       |   | $ | 1,872 |   |   |   | $ | (3,228 | ) |   |   | $ | 11,307 |   |   |
| Net income (loss)  as previously reported (see Note 2)       |       |                  | $          | 9,699                       |       |                            |       | $                | 1,927      |             |       |   | $ | 1,872 |   |   |   | $ | (2,191 | ) |   |   | $ | 11,307 |   |   |

 

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**CONDENSEDCONSOLIDATING BALANCE SHEET INFORMATIONAT JUNE 30, 2005(Successor)(in thousands)**

**(Asrestated, See Note 2)**

| ** **                                                        | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                        |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| CURRENT ASSETS:                                                   |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                         |       |                  | $          | 3,458                       |       |                            |       | $                | 1,945      |             |       |   | $ | 258 |   |   |   | $ | — |   |   |   | $ | 5,661 |   |   |
| Accounts receivable                                               |       |                  | 26,365     |                        |       |                            | 1,224      |             |       |             | 162        |   |   |   | (554 | ) |   |   | 27,197 |   |   |
| Inventories                                                       |       |                  | 1,135      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 1,135 |   |   |
| Commodity derivatives                                             |       |                  | 844        |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 844 |   |   |
| Prepaid expenses and other current assets                         |       |                  | 4,063      |                        |       |                            | 277        |             |       |             | 441        |   |   |   | — |   |   |   | 4,781 |   |   |
| TOTAL CURRENT ASSETS                                              |       |                  | 35,865     |                        |       |                            | 3,446      |             |       |             | 861        |   |   |   | (554 | ) |   |   | 39,618 |   |   |
| CASH RESTRICTED FOR INVESTMENT IN OIL AND NATURAL GAS  PROPERTIES |       |                  | —     |                        |       |                            | 44,619     |             |       |             | —     |   |   |   | — |   |   |   | 44,619 |   |   |
| PROPERTY, PLANT & EQUIPMENT, NET(*)                 |       |                  | 171,020    |                        |       |                            | 12,959     |             |       |             | 15,012     |   |   |   | (21,663 | ) |   |   | 177,328 |   |   |
| COMMODITY DERIVATIVES                                             |       |                  | 4,918      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 4,918 |   |   |
| INVESTMENTS IN AFFILIATES(*)                                      |       |                  | 80,065     |                        |       |                            | —     |             |       |             | —     |   |   |   | (80,065 | ) |   |   | — |   |   |
| OTHER                                                             |       |                  | 7,537      |                        |       |                            | 46         |             |       |             | —     |   |   |   | — |   |   |   | 7,583 |   |   |
| TOTAL ASSETS(*)                                                   |       |                  | $          | 299,405                     |       |                            |       | $                | 61,070     |             |       |   | $ | 15,873 |   |   |   | $ | (102,282 | ) |   |   | $ | 274,066 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIT)**          |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| CURRENT LIABILITIES:                                              |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued liabilities                          |       |                  | $          | 21,901                      |       |                            |       | $                | 811        |             |       |   | $ | 64 |   |   |   | $ | (820 | ) |   |   | $ | 21,956 |   |   |
| Undistributed revenue payable                                     |       |                  | 7,084      |                        |       |                            | 818        |             |       |             | —     |   |   |   | — |   |   |   | 7,902 |   |   |
| Income taxes payable                                              |       |                  | 5,332      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 5,332 |   |   |
| Current maturities of long-term debt                              |       |                  | —     |                        |       |                            | —     |             |       |             | 123        |   |   |   | — |   |   |   | 123 |   |   |
| Commodity derivatives                                             |       |                  | 20,665     |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 20,665 |   |   |
| Repurchase of common sock                                         |       |                  | 70         |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 70 |   |   |
| TOTAL CURRENT LIABILITIES(*)                                      |       |                  | 55,052     |                        |       |                            | 1,629      |             |       |             | 187        |   |   |   | (820 | ) |   |   | 56,048 |   |   |
| LONG-TERM DEBT                                                    |       |                  | 164,111    |                        |       |                            | —     |             |       |             | 9,827      |   |   |   | — |   |   |   | 173,938 |   |   |
| DEFERRED INCOME TAXES(*)                                          |       |                  | 15,511     |                        |       |                            | (3,605     | )                |       |             | —     |   |   |   | — |   |   |   | 11,906 |   |   |
| ASSET RETIREMENT OBLIGATIONS                                      |       |                  | 21,759     |                        |       |                            | 1,522      |             |       |             | 434        |   |   |   | — |   |   |   | 23,715 |   |   |
| INTERCOMPANY PAYABLES  (RECEIVABLES)                              |       |                  | 34,513     |                        |       |                            | (17,978    | )                |       |             | (16,535    | ) |   |   | — |   |   |   | — |   |   |
| COMMODITY DERIVATES                                               |       |                  | 15,568     |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 15,568 |   |   |
| TOTAL LIABILITIES(*)                                              |       |                  | 306,514    |                        |       |                            | (18,432    | )                |       |             | (6,087     | ) |   |   | (820 | ) |   |   | 281,175 |   |   |
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)(*)                      |       |                  | (7,109     | )                           |       |                            | 79,502     |             |       |             | 21,960     |   |   |   | (101,462 | ) |   |   | (7,109 | ) |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)(*)     |       |                  | $          | 299,405                     |       |                            |       | $                | 61,070     |             |       |   | $ | 15,873 |   |   |   | $ | (102,282 | ) |   |   | $ | 274,066 |   |   |
|                                                                   |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| (*) As previously  reported (see Note 2):                         |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Property, plant and equipment, net                                |       |                  | 170,698    |                        |       |                            | 13,326     |             |       |             | 15,012     |   |   |   | (21,341 | ) |   |   | 177,695 |   |   |
| Investment in affiliates                                          |       |                  | 76,473     |                        |       |                            | 32,849     |             |       |             | —     |   |   |   | (109,322 | ) |   |   | — |   |   |
| Total Assets                                                      |       |                  | 295,490    |                        |       |                            | 94,286     |             |       |             | 15,873     |   |   |   | (131,216 | ) |   |   | 274,433 |   |   |
| Total Current Liabilities                                         |       |                  | 55,053     |                        |       |                            | 1,629      |             |       |             | 186        |   |   |   | (820 | ) |   |   | 56,048 |   |   |
| Deferred income taxes                                             |       |                  | 15,510     |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 15,510 |   |   |
| Total Liabilities                                                 |       |                  | 306,191    |                        |       |                            | (14,827    | )                |       |             | (6,088     | ) |   |   | (497 | ) |   |   | 284,779 |   |   |
| Total Stockholders’ Equity (Decicit)                         |       |                  | (10,701    | )                           |       |                            | 109,113    |             |       |             | 21,961     |   |   |   | (130,719 | ) |   |   | (10,346 | ) |   |
| Total Liabilities  and Stockholders’ Equity (Deficit)        |       |                  | 295,490    |                        |       |                            | 94,286     |             |       |             | 15,873     |   |   |   | (131,216 | ) |   |   | 274,433 |   |   |

 

22

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**CONDENSEDCONSOLIDATING BALANCE SHEET INFORMATIONAT DECEMBER 31, 2004(Successor)(in thousands)**

**(As restated, See Note 2)**

| ** **                                                    | ** ** | **Venoco, Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-----------------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                    |       |                  |       |                              |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| CURRENT ASSETS:                                               |       |                  |       |                              |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                    |       |                  | $          | 53,075                            |       |                            |       | $                | 1,590      |             |       |   | $ | 50 |   |   |   | $ | — |   |   |   | $ | 54,715 |   |   |
| Accounts  receivable                                          |       |                  | 16,306     |                              |       |                            | 904        |             |       |             | 545        |   |   |   | — |   |   |   | 17,755 |   |   |
| Inventories                                                   |       |                  | 1,079      |                              |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 1,079 |   |   |
| Commodity  derivatives                                        |       |                  | 5,300      |                              |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 5,300 |   |   |
| Notes  receivable—officer                                |       |                  | —     |                              |       |                            | 1,420      |             |       |             | —     |   |   |   | — |   |   |   | 1,420 |   |   |
| Prepaid expenses  and other current assets                    |       |                  | 7,249      |                              |       |                            | 110        |             |       |             | 187        |   |   |   | — |   |   |   | 7,546 |   |   |
| TOTAL CURRENT  ASSETS                                         |       |                  | 83,009     |                              |       |                            | 4,024      |             |       |             | 782        |   |   |   | — |   |   |   | 87,815 |   |   |
| PROPERTY,  PLANT & EQUIPMENT, NET               |       |                  | 151,242    |                              |       |                            | 32,166     |             |       |             | 15,155     |   |   |   | — |   |   |   | 198,563 |   |   |
| COMMODITY  DERIVATIVES                                        |       |                  | 4,855      |                              |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 4,855 |   |   |
| INVESTMENTS IN  AFFILIATES(*)                                 |       |                  | 63,449     |                              |       |                            | —     |             |       |             | —     |   |   |   | (63,449 | ) |   |   | — |   |   |
| OTHER                                                         |       |                  | 7,613      |                              |       |                            | 36         |             |       |             | —     |   |   |   | — |   |   |   | 7,649 |   |   |
| TOTAL ASSETS(*)                                               |       |                  | $          | 310,168                           |       |                            |       | $                | 36,226     |             |       |   | $ | 15,937 |   |   |   | $ | (63,449 | ) |   |   | $ | 298,882 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                 |       |                  |       |                              |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| CURRENT LIABILITIES:                                          |       |                  |       |                              |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable  and accrued liabilities                     |       |                  | $          | 18,326                            |       |                            |       | $                | 712        |             |       |   | $ | 347 |   |   |   | $ | — |   |   |   | $ | 19,385 |   |   |
| Undistributed  revenue payable                                |       |                  | 4,053      |                              |       |                            | 721        |             |       |             | —     |   |   |   | — |   |   |   | 4,774 |   |   |
| Current maturities  of long-term debt                         |       |                  | —     |                              |       |                            | —     |             |       |             | 127        |   |   |   | — |   |   |   | 127 |   |   |
| Commodity  derivatives                                        |       |                  | 1,520      |                              |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 1,520 |   |   |
| Repurchase of  common stock                                   |       |                  | 5,316      |                              |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 5,316 |   |   |
| TOTAL CURRENT  LIABILITIES                                    |       |                  | 29,215     |                              |       |                            | 1,433      |             |       |             | 474        |   |   |   | — |   |   |   | 31,122 |   |   |
| LONG-TERM  DEBT                                               |       |                  | 149,043    |                              |       |                            | 4,684      |             |       |             | 9,815      |   |   |   | — |   |   |   | 163,542 |   |   |
| DEFERRED INCOME  TAXES                                        |       |                  | 32,208     |                              |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 32,208 |   |   |
| ASSET RETIREMENT OBLIGATIONS                                  |       |                  | 20,750     |                              |       |                            | 2,012      |             |       |             | 422        |   |   |   | — |   |   |   | 23,184 |   |   |
| INTERCOMPANY  PAYABLES (RECEIVABLES)                          |       |                  | 30,513     |                              |       |                            | (16,982    | )                |       |             | (13,531    | ) |   |   | — |   |   |   | — |   |   |
| TOTAL LIABILITIES                                             |       |                  | 261,729    |                              |       |                            | (8,853     | )                |       |             | (2,820     | ) |   |   | — |   |   |   | 250,056 |   |   |
| MINORITY  INTEREST(*)                                         |       |                  | —     |                              |       |                            | 387        |             |       |             | —     |   |   |   | — |   |   |   | 387 |   |   |
| TOTAL  STOCKHOLDERS’ EQUITY(*)                           |       |                  | 48,439     |                              |       |                            | 44,692     |             |       |             | 18,757     |   |   |   | (63,449 | ) |   |   | 48,439 |   |   |
| TOTAL LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)(*) |       |                  | $          | 310,168                           |       |                            |       | $                | 36,226     |             |       |   | $ | 15,937 |   |   |   | $ | (63,449 | ) |   |   | $ | 298,882 |   |   |

----

(*)        As previously reported (see Note 2)

| Investment in affiliates                        |   |   | 41,293  |   |   |   | 16,761 |   |   |   | — |   |   |   | (58,054 | )      |   |   | —  |   |   |
|-------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
| Total Assets                                    |   |   | 287,862 |   |   |   | 52,987 |   |   |   | 15,937 |   |   |   | (57,904 | )      |   |   | 298,882 |   |   |
| Minority interest                               |   |   | —  |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | —  |   |   |
| Total  Stockholders’ Equity                |   |   | 26,133  |   |   |   | 61,840 |   |   |   | 18,757 |   |   |   | (57,904 | )      |   |   | 48,826  |   |   |
| Total Liabilities and Stockholders’ Equity |   |   | 287,862 |   |   |   | 52,987 |   |   |   | 15,937 |   |   |   | (57,904 | )      |   |   | 298,882 |   |   |

 

23

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**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWINFORMATIONFOR THE SIX MONTHS ENDED JUNE 30, 2005(Successor)(in thousands)**

**(Asrestated, See Note 2)**

| ** **                                                 | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| OPERATING ACTIVITIES                                       |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities             |       |                  | $          | 19,405                      |       |                            |       | $                | 5,955      |             |       |   | $ | 3,205 |   |   |   | $ | — |   |   |   | $ | 28,565 |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                     |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Expenditures for oil and gas properties                    |       |                  | (31,410    | )                           |       |                            | (640       | )                |       |             | —     |   |   |   | — |   |   |   | (32,050 | ) |   |
| Acquisition of Marquez Energy, LLC                    |       |                  | (14,628    | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (14,628 | ) |   |
| Proceeds from sale of oil and gas properties          |       |                  | —     |                        |       |                            | 44,619     |             |       |             | —     |   |   |   | — |   |   |   | 44,619 |   |   |
| Increase in cash restricted for investment in  property    |       |                  | —     |                        |       |                            | (44,619    | )                |       |             | —     |   |   |   | — |   |   |   | (44,619 | ) |   |
| Notes receivable—officers and employees               |       |                  | (30        | )                           |       |                            | 1,420      |             |       |             | —     |   |   |   | — |   |   |   | 1,390 |   |   |
| Other                                                      |       |                  | (1,087     | )                           |       |                            | (15        | )                |       |             | —     |   |   |   | — |   |   |   | (1,102 | ) |   |
| Net cash (used in) provided by investing  activities  |       |                  | (47,155    | )                           |       |                            | 765        |             |       |             | —     |   |   |   | — |   |   |   | (46,390 | ) |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                     |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Net proceeds from (repayments of) intercompany  borrowings |       |                  | 3,978      |                        |       |                            | (974       | )                |       |             | (3,004     | ) |   |   | — |   |   |   | — |   |   |
| Proceeds from long-term debt                               |       |                  | 23,000     |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 23,000 |   |   |
| Principal payments on long-term debt                  |       |                  | (8,000     | )                           |       |                            | (4,684     | )                |       |             | 7          |   |   |   | — |   |   |   | (12,677 | ) |   |
| Distribution payments to Marquez Energy member        |       |                  | —     |                        |       |                            | (707       | )                |       |             | —     |   |   |   | — |   |   |   | (707 | ) |   |
| Payments of dividends                                      |       |                  | (35,000    | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (35,000 | ) |   |
| Repurchase common stock                                    |       |                  | (5,246     | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (5,246 | ) |   |
| Increase in deferred loan costs                            |       |                  | (599       | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (599 | ) |   |
| Net cash used in financing activities                      |       |                  | (21,867    | )                           |       |                            | (6,365     | )                |       |             | (2,997     | ) |   |   | — |   |   |   | (31,229 | ) |   |
| Net (decrease)  increase in cash and cash equivalents |       |                  | (49,617    | )                           |       |                            | 355        |             |       |             | 208        |   |   |   | — |   |   |   | (49,054 | ) |   |
| Cash and cash  equivalents, beginning of period       |       |                  | 53,075     |                        |       |                            | 1,590      |             |       |             | 50         |   |   |   | — |   |   |   | 54,715 |   |   |
| Cash and cash  equivalents, end of period                  |       |                  | $          | 3,458                       |       |                            |       | $                | 1,945      |             |       |   | $ | 258 |   |   |   | $ | — |   |   |   | $ | 5,661 |   |   |

 

24

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**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOW INFORMATIONFOR THE SIX MONTHS ENDED JUNE 30, 2004(Predecessor)(in thousands)**

| ** **                                                 | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| OPERATING ACTIVITIES                                       |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities                  |       |                  | $          | 13,794                      |       |                            |       | $                | 2,607      |             |       |   | $ | 2,476 |   |   |   | $ | — |   |   |   | $ | 18,877 |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                     |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Expenditures for oil and gas properties               |       |                  | (3,568     | )                           |       |                            | (150       | )                |       |             | (184       | ) |   |   | — |   |   |   | (3,902 | ) |   |
| Proceeds from sale of oil and gas properties               |       |                  | 1,526      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 1,526 |   |   |
| Notes receivable—officers and employees               |       |                  | 1,406      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 1,406 |   |   |
| Other                                                      |       |                  | (95        | )                           |       |                            | —     |             |       |             | 228        |   |   |   | — |   |   |   | 133 |   |   |
| Net cash (used in) provided by investing activities        |       |                  | (731       | )                           |       |                            | (150       | )                |       |             | 44         |   |   |   | — |   |   |   | (837 | ) |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                     |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Net proceeds from (repayments of) intercompany  borrowings |       |                  | 5,022      |                        |       |                            | (2,457     | )                |       |             | (2,565     | ) |   |   | — |   |   |   | — |   |   |
| Principal payments on long-term  debt                      |       |                  | (13,167    | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (13,167 | ) |   |
| Increase in deferred loan costs                            |       |                  | (15        | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (15 | ) |   |
| Net cash used in financing  activities                     |       |                  | (8,160     | )                           |       |                            | (2,457     | )                |       |             | (2,565     | ) |   |   | — |   |   |   | (13,182 | ) |   |
| Net (decrease)  increase in cash and cash equivalents |       |                  | 4,903      |                        |       |                            | —     |             |       |             | (45        | ) |   |   | — |   |   |   | 4,858 |   |   |
| Cash and cash  equivalents, beginning of period       |       |                  | 8,372      |                        |       |                            | —     |             |       |             | 45         |   |   |   | — |   |   |   | 8,417 |   |   |
| Cash and cash  equivalents, end of period                  |       |                  | $          | 13,275                      |       |                            |       | $                | —     |             |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 13,275 |   |   |

 

25

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

The followingmanagement ‘s discussion and analysis of financial condition and results ofoperations gives effect to the restatement of our condensed consolidatedfinancial statements as discussed in Note 2 to the condensed consolidatedfinancial statements included in Item 1.

The following discussionand analysis should be read in conjunction with management’s discussion andanalysis contained in our Registration Statement on Form S-4 1A(Registration No. 333-123711) as filed with the Securities andExchange Commission on April 20, 2005, as well as with the financialstatements and related notes and the other information appearing elsewhere inthis quarterly report. As used in this quarterly report, unless the contextotherwise indicates, references to “we,” “our,” “ours,” and “us” refer toVenoco, Inc. and its subsidiaries collectively.

***Overview***

We are an independent energy company primarily engagedin the acquisition, exploitation and development of oil and natural gasproperties. We focus on properties offshore and onshore California and are oneof the largest independent oil and natural gas companies operating in the statebased on production volumes. Our strategy is to acquire properties withlow-risk exploitation and development opportunities at attractive prices and toexpand reserves and production from these properties, thereby reducing unitoperating costs. We also conduct limited, relatively low-risk explorationactivities.

We have benefited from strong oil and natural gasprices over the past two years and from increases in oil and natural gasproduction. First and second quarter 2005 oil and natural gas productionvolumes are up over the comparable periods in 2004. The trends of bothincreasing production and increasing prices have led to increased oil andnatural gas sales in 2005 compared to 2004. Second quarter 2005 productionvolumes of 11,513 barrels of oil equivalent per day (“BOE/D”) were however down10% as compared with first quarter 2005 volumes of 12,857 BOE/D. This reductionwas primarily due to the sale of our interest in the Big Mineral Creek Field onMarch 31, 2005. The Big Mineral Creek field contributed 547 BOE/D to ourproduction in the first quarter. We also encountered downhole mechanicalproblems during a routine workover on the 3242-18 well in the SouthEllwood Field, which caused the well’s average net production to dropapproximately 970 net BOE/D during the quarter. Since that time we havereworked and tested the well at rates sufficient to restore 40 to 50% of thelost production. We are conducting further tests and analysis to determine ifwe can re-establish the full production rates prior to the workover. The wellis expected to return to production in the third quarter of 2005. We expectthat capital projects currently underway will allow the Company to achievefurther increases in production by the fourth quarter of 2005. Such increaseswill result in reductions in our operating costs and general and administrativecosts on a per barrel of oil equivalent (“BOE”) basis.

Since our June 2004 management changes we haveincreased our production from 10,183 barrels of oil equivalent per day (“BOE/d”)in the second quarter of 2004 to 11,513 BOE/D in the second quarter of 2005. Weexpect to average over 12,000 BOE/D in 2005 from our existing portfolio ofproperties. While we continue to aggressively pursue additional acquisitionopportunities, we believe we are positioned to continue to increase ourproduction and proven reserves for the next several years through the continueddevelopment and exploitation of our currently owned project inventory.

After the change in our management that took place in June 2004,we increased our exploitation and development activities in a manner consistentwith the strategy we pursued from inception through mid-2002. From June throughDecember 2004, we reworked or recompleted 30 wells, drilled five new wellsand installed an electric submersible pump on a well in the South Ellwoodfield. During the first quarter of 2005 we drilled seven new wells to totaldepth and we reworked or recompleted eighteen additional wells. In the secondquarter of 2005 we drilled four new wells to total depth and we reworked orrecompleted ten additional wells. The totals include two significant offshorerework projects commenced in the quarter 

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which will not return toproduction until the third quarter, including the previously discussed 3242-18well. The increased production volumes in 2005 have combined with increasedproduct prices to result in continuing improvement in our financialperformance. Total revenues for second quarter 2005 were $40.2 million,and included the effect of both $3.0 million of realized and $3.0 million ofunrealized commodity derivative losses in the quarter. The unrealized commodityderivative losses are recognized pursuant to FAS 133. Net income for thequarter was $8.8 million.

While we remain optimisticabout future commodity pricing, we have continued with our strategy of layeringon hedges to minimize future financial volatility. We have added to our hedgepositions with regard to our oil and natural gas production through June of2009. See “—Qualitative and Quantitative Disclosures about Market Risk.” Ourdisciplined hedging strategy, which includes the use of collars, swaps andpurchased floors, has allowed us to lock in minimum future floor prices weconsider attractive on substantial production volumes through June of2009, while often allowing significant upside participation. Rising oil andnatural gas prices have created substantial unrealized commodity derivativelosses in both the first and second quarters of 2005 which have served tosuppress earnings reported in the period. In the first quarter of 2005 theseunrealized losses resulting from mark-to-market valuations for non-highlyeffective or ineffective portions of our derivative positions included incommodity derivative losses in the income statement totaled $26.1 million, andin the second quarter they totaled $3.0 million. Any payments actually due tocounterparties in the future on these derivatives will ultimately be funded byhigher prices received from the sale of our production.

***Development, Acquisitions and Divestitures***

In 2005, we established an aggregate capitalexpenditures budget which totaled approximately $103 million. Including ouracquisition of Marquez Energy we have incurred $45.3 million in capitalspending in the first six months of the year. In the first six months of 2005we spent $22.7 million on drilling and rework activities, $6.5 million onfacilities and $1.5 million on exploration. We also spent $14.6 million in thefirst half of 2005 for the acquisition of Marquez Energy including the paymentof related debt. During the first six months of 2005, we drilled eleven newwells to total depth and recompleted twenty-eight additional wells.

Total exploitation and development projects executedin the first six months of 2005 include two offshore oil wells that weredrilled to total depth, and three that were recompleted. Substantialexpenditures were also incurred on projects which were not completed at June 30.Onshore, we drilled nine new wells in the Sacramento Basin to total depth inthe first six months of 2005. Eight wells were completed as commercial wellsand one was a dry hole. We also recompleted twenty-five wells in the SacramentoBasin in the quarter. As a result of the drilling and recompletion projects inthe Sacramento Basin, we increased our net gas production 20% from December 2004to June 2005, or approximately 1,980 MCF/D not including the additions tonatural gas production attributable to the acquisition of Marquez Energy.

In the first quarter of 2005, we expanded our fieldwork regarding the return to production of Platform Grace in the Santa ClaraUnit. In March 2003, we granted an option to Crystal Energy LLC to leaseor purchase platform Grace for use in accepting, vaporizing, transporting andselling liquid natural gas delivered to the platform by tanker. On April 18,2005, Crystal Energy informed us that it intends to exercise the option topurchase the platform for $10 million. It is unclear at this time whateffect, if any, the notice of purchase will have on the potential return of theplatform to production. The purchase is contingent upon, among other things,the execution of a mutually acceptable purchase agreement and the receipt ofregulatory approvals We expect to achieve a resolution of these issues thisyear.

On March 31, 2005, we completed the sale of ourBig Mineral Creek field, located in Grayson County, Texas, to BlackWell EnergyGroup, LLC for $44.6 million, an amount that has been adjusted to give 

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economic effect to thetransaction as of February 1, 2005. As of December 31, 2004, thefield had proved reserves of approximately 3.4 MMBOE, according to a report byNetherland Sewell and Associates, Inc. (“NSAI”), most of which wascomprised of oil. Average net production at the field was approximately 547BOE/d in the first quarter of 2005. On March 21, 2005, we completed ouracquisition of Marquez Energy, LLC. The transaction added proved reserves ofapproximately 2.0 MMBOE as of December 31, 2004 according to NSAI,substantially all of which consisted of natural gas. In order to facilitate apossible like-kind exchange of our Big Mineral Creek property under Section 1031of the Internal Revenue Code, the equity interests in Marquez Energy arecurrently being held by an independent entity acting on our behalf. We have andwill at all times maintain beneficial ownership of the interests, and willassume direct ownership of them within 180 days of the closing. Thepurpose of this structure is to give us the option of effecting a like-kindexchange of our Big Mineral Creek property pursuant to Section 1031 andthereby deferring a portion of the taxes payable with respect to the sale ofthe Big Mineral Creek property. We are currently pursuing acquisitionopportunities in this regard. In the event we do not acquire qualifiedreplacement properties prior to September 27, 2005, we will not be able toutilize the like-kind exchange provisions of Section 1031, in which casewe may incur an income tax liability on the gain on the sale of the BMCproperty of up to approximately $ 15.2 million. In that event the $44.6 millionsales proceeds currently held in the account “Cash Restricted for Investment inOil and Natural Gas Properties” would be transferred to the cash account and beavailable for capital expenditures, the acquisition of long-term assets, and,subject to certain limitations pursuant to the covenants of our senior notes,for general corporate purposes.

During 2004, our CEO, Tim Marquez, increased hisownership in our Company from 41% to 100%. As a result of a transaction thatclosed on July 12, 2004, Mr. Marquez purchased 53% of the commonshares (2,468 common shares) of our Company from two of its former officers andtheir respective affiliates. On December 22, 2004, the Company merged witha corporation the sole stockholder of which was a trust controlled by Mr. Marquez.This merger had the effect of giving Mr. Marquez the remaining 6% of ourCompany’s common stock.

As a result of Mr. Marquez obtaining control ofover 95% of the common stock of our Company on December 22, 2004, SECStaff Accounting Bulletin No. 54 requires the acquisition by Mr. Marquezto be “pushed-down”, meaning the post-transaction condensed consolidatedbalance sheet and the condensed consolidated statements of operations and cashflows of our Company reflect a new basis of accounting (“successor basis”). Thepre-transaction condensed consolidated statements of operations and cash flowsare presented on the historical basis (“predecessor basis”).

By purchasing Marquez Energy, we acquired natural gasproperties in the Sacramento Basin in California that we believe possesssignificant exploitation, development and exploration potential. Marquez Energy’saverage net production in the first quarter of 2005 was approximately 500BOE/d. Because Marquez Energy was a company under common control since July 12,2004, our financial statements and production information for the first andsecond quarters of 2005 include Marquez Energy. For the same reason theacquisition was accounted for similar to a pooling of interests whereby thehistorical results of Marquez Energy have been combined with Venoco’s financialresults since July 12, 2004. Accordingly, only $3.6 million of the cost ofthe acquisition was booked as an increase in property, which was the historicalbasis of Marquez Energy’s equity, and the balance of $13.0 million was recordedas a reduction in equity. See Notes 1 and 2 to our interim condensedconsolidated financial statements.

We expect to continue ourprogram of aggressive drilling and rework activity on our existing projectsthrough 2005 while continuing to actively pursue acquisition opportunities.

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***Oil and GasProduction and Prices***

| ** **                                       | ** ** | **Three Months Ended June 30,(1)** | ** ** | **Six Months Ended June 30,(1)** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                               | ** ** | **2004**                                             | ** ** | **Increase  (Decrease)** | ** ** | **2005** | ** ** | **2004** | ** ** | **Increase  (Decrease)** | ** ** |
| **Production Volume**                            |       |                                                   |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Natural Gas  (Mcf/d)                             |       | 1,846,322                                              |       | 1,217,032                                            |       |   | 52 | % |   | 3,731,898 |   | 2,573,015 |   |   | 45 | % |   |
| Oil (Bbls/d)                                     |       | 739,993                                                |       | 723,799                                              |       |   | 2 | % |   | 1,582,838 |   | 1,526,717 |   |   | 4 | % |   |
| BOE                                              |       | 1,047,713                                              |       | 926,638                                              |       |   | 13 | % |   | 2,204,821 |   | 1,955,553 |   |   | 13 | % |   |
| **Daily Average Production Volume**              |       |                                                   |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Natural Gas  (Mcf/d)                             |       | 20,289                                                 |       | 13,374                                               |       |   | 52 | % |   | 20,618 |   | 14,137 |   |   | 46 | % |   |
| Oil (Bbls/d)                                     |       | 8,132                                                  |       | 7,954                                                |       |   | 2 | % |   | 8,745 |   | 8,389 |   |   | 4 | % |   |
| BOE/d                                            |       | 11,513                                                 |       | 10,183                                               |       |   | 13 | % |   | 12,181 |   | 10,745 |   |   | 13 | % |   |
| **Oil  Price per Barrel Produced (in dollars)**  |       |                                                   |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Realized price  before hedging loss              |       | $                                                      | 41.10      |                                                 | $          | 32.78 |   |   | 25 | % |   | $ | 40.45 |   | $ | 31.55 |   |   | 28 | % |   |
| Realized hedging  loss                           |       | (4.57                                                  | )          | (5.02                                                | )          |   | (9 | )% |   | (4.28 | ) | (3.63 | ) |   | 18 | % |   |
| Net realized                                     |       | $                                                      | 36.53      |                                                 | $          | 27.76 |   |   | 32 | % |   | $ | 36.17 |   | $ | 27.92 |   |   | 31 | % |   |
| **Natural  Gas Price per Mcf (in dollars)** |       |                                                   |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Realized price  before hedging loss              |       | $                                                      | 6.39       |                                                 | $          | 5.75 |   |   | 11 | % |   | $ | 6.22 |   | $ | 5.59 |   |   | 11 | % |   |
| Realized hedging  loss                           |       | (.11                                                   | )          | (.10                                                 | )          |   | (10 | )% |   | (.10 | ) | (.22 | ) |   | (55 | )% |   |
| Net realized                                     |       | $                                                      | 6.28       |                                                 | $          | 5.65 |   |   | 11 | % |   | $ | 6.12 |   | $ | 5.37 |   |   | 14 | % |   |
| Average Sales Price per BOE                      |       | $                                                      | 36.11      |                                                 | $          | 29.91 |   |   | 22 | % |   | $ | 35.87 |   | $ | 29.47 |   |   | 23 | % |   |

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(1)          Production in both thefirst and second quarters of 2005 includes Marquez Energy which was acquired inMarch of 2005. Inclusion in the first quarter is due to the application ofrequirements for reporting combined statements for companies under commoncontrol.

*Bbl—Barrel*

*Mcf—Thousand cubicfeet*

*BOE—Barrel of oilequivalent (computed on an energy equivalent basis of six MCF equals one Bbl)*

Oil and gas production increased in both the secondquarter and the first six months of 2005 over the comparable periods of 2004primarily because of our resumed focus on project exploitation and developmentactivities. Average daily production net to our Company’s interest increasedfrom 10,183 BOE/D in the second quarter of 2004 to 11,513 BOE/D in the secondquarter of 2005, and from 10,745 BOE/D in the first six months of 2004 to12,181 BOE/D in the first six months of 2005.

We use price hedging arrangements to reduce price riskon a portion of our oil and gas production. We have hedged a portion of ourexposure to variability in future cash flows from natural gas and oil salesthrough June 2009; see Note 4 to our interim condensed consolidatedfinancial statements. During the second quarter of 2005, our realized netlosses on hedging activities decreased oil revenue by $3.4 million, or $4.57 perBbl. and decreased gas revenue by $0.2 million, or $0.11 per Mcf.During the second quarter 2004, our realized net losses on hedging activitiesdecreased oil revenue by $3.6 million, or $5.02 per Bbl. and gas revenue by$0.1 million, or $ 0.10 per Mcf.

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Prices to be realized for hedged production are likelyto be less than NYMEX or hedged prices. The price we receive for our gasproduction is generally less than the NYMEX price because of adjustments fordelivery location (“basis”), relative quality and other factors. Prices to berealized for our hedged oil production are expected to be significantly lessthan the NYMEX price because of location, quality and other adjustments.

Thefollowing table sets forth our costs and expenses on a barrel of oil equivalentbasis for the first quarters of 2005 and 2004.

| ** **                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **Increase/  Decrease** | ** ** | **2005** | ** ** | **2004** | ** ** | **Increase/  Decrease** | ** ** |
| ** **                                            | ** ** | **(Successor)**                                 | ** ** | **(Predecessor)**                             | ** ** | ** ** | ** ** | **(Successor)** | ** ** | **(Predecessor)** | ** ** | ** ** | ** ** |
| **Expense per BOE**                                   |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Production  expenses(1)                               |       |                                            | $          | 11.79                                         |       |   |   | $ | 12.39 |   |   |   | (5 | )% |   |   | $ | 11.01 |   |   |   | $ | 11.62 |   |   |   | (5 | )% |   |
| Transportation  expenses                              |       |                                            | .51        |                                          |       |   | .75 |   |   |   | (32 | )% |   |   | .55 |   |   |   | .74 |   |   |   | (25 | )% |   |
| Depreciation,  depletion, amortization and impairment |       |                                            | 3.67       |                                          |       |   | 3.63 |   |   |   | 1 | % |   |   | 4.31 |   |   |   | 3.77 |   |   |   | 14 | % |   |
| General and  administrative expense(2)                |       |                                            | 4.37       |                                          |       |   | 3.57 |   |   |   | 22 | % |   |   | 3.49 |   |   |   | 2.94 |   |   |   | 19 | % |   |
| Interest expense, net                                 |       |                                            | 3.17       |                                          |       |   | .33 |   |   |   | 861 | % |   |   | 3.09 |   |   |   | .32 |   |   |   | 866 | % |   |
|                                                       |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Production expenses aredefined as oil and natural gas production expenses and production taxes.

(2)          Netof amounts capitalized.

***Results of Operations***

***Quarter Ended June 30, 2005 Compared with QuarterEnded June 30, 2004***

Net income for the second quarter 2005 was $8.8million compared to $5.5 million for the second quarter of 2004. The secondquarter 2005 earnings include a $6.0 million commodity derivative loss($3.6 million realized) versus a $4.2 million commodity derivative loss($3.8 million realized) in the second quarter of 2004. In addition, due to increaseddebt levels, net interest expense totaled $3.3 million in the second quarter of2005 versus $0.3 million in the second quarter of 2004.

Oil and gas sales were $45.4 million, a 41% increasefrom the second quarter of 2004 oil and gas sales of $32.1 million. Oil salesincreased $8.4 million (34%) because of a 25% increase in realized oil pricesas well as a 2% increase in oil production volumes. Natural gas sales increased$4.8 million (69%) because of an increase in sales quantities of 52% as well asan increase in prices received for gas sales of 11%. Revenues were reduced byboth the realized and unrealized components of commodity derivative losses asdescribed above. Other revenues decreased $0.1 million.

Expenses for the secondquarter 2005 increased $6.3 million or 32% to $25.9 million compared to $19.6million in the second quarter of 2004. Interest expense increased $3.0 millionor 990% due to increased debt levels from our $150 million senior notes issuedin December 2004**.**Oil andnatural gas production expenses increased $0.9 million (8%) due to increasedfield activities compared to the second quarter of 2004. General andadministrative expenses increased $1.3 million (39%) due to Marquez Energyexpenses which were not combined with Venoco for the second quarter of 2004,increases in technical staff, payment of larger prior year performance bonuses,and higher professional fees related to accounting and information technologysystem conversion and enhancement costs incurred in the quarter and an accrualfor the settlement of certain litigation. Depletion, depreciation, amortizationand 

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impairmentexpenses increased due to increased production volumes. Amortization ofdeferred loan costs increased $0.6 million due to amortization of costsassociated with the senior notes (see Note 6 to our interim condensedconsolidated financial statements) and a write-off of deferred loan costrelated to a reduction in the available borrowing base on the revolving creditfacility from $50 million to $40 million.

***Six Months Ended June 30, 2005 Compared with SixMonths Ended June 30, 2004***

Net income for the six months ended June 30, 2005was $2.0 million compared to $11.3 million for the six months ended June 30,2004. The two largest factors causing the change were the substantial increasein unrealized derivative losses in 2005 and the increased levels of debt.Earnings for the first six months of 2005 include a $35.2 million commodityderivative loss ($7.2 million realized) compared to $6.9 million commodityderivative loss ($6.1 million realized) for the six months ended June 30,2004. Net interest expense totaled $6.8 million for the first half of 2005compared to $0.6 for the first half of 2004.

Oil and gas sales for the six months ended June 30,2005 were $87.4 million, a 39% increase from oil and gas sales for the firstsix months of 2004 of $62.9 million. Oil sales increased $15.6 million (32%)because of a 4% increase in oil production volumes as well as a 28% increase inrealized oil prices. Natural gas sales increased $8.9 million (62%) because ofan increase in sales quantities of 45% as well as an increase in pricesreceived for gas sales of 11%. Commodity derivative losses increased $28.2million in the period in 2005 due to a $27.2 million increase in unrealizedcommodity derivative losses as compared to the same period in 2004. Otherrevenues decreased $0.1 million.

Expenses for the firsthalf of 2005 increased $12.8 million or 33% to $51.5 million compared to$38.8 million in the first six months of 2004. Interest expense increased$6.2 million or 977% due to increased debt levels from our $150 million seniornotes issued in December 2004**.**Oil andnatural gas production expenses increased $1.6 million (7%) due to theincreased field activity in 2005. General and administrative expenses increased$2.0 million (34%) due to Marquez Energy expenses not incurred in 2004,increases in technical staff, and higher professional fees related toaccounting and information technology systems conversions and enhancements andan accrual for the settlement of certain litigation. Depletion, depreciation,amortization and impairment expenses increased on a per unit basis due to anincrease in estimated future development costs and a decrease in reserves at December 31,2004, thereby increasing the depletion rate per unit and also due to increasedproduction volumes. Amortization of deferred loan costs increased $0.9 milliondue to amortization of costs associated with the senior notes (see Note 5 toour interim condensed consolidated financial statements) and a write-off ofdeferred loan cost related to a reduction in the available borrowing base onthe revolving credit facility from $50 million to $40 million.

**Liquidity and Capital Resources**

***Cash Flows***

| ** **                             | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **(in thousands)**                            | ** ** |
| Cash provided by  operating activities |       | $                                             | 28,565     |   | $ | 18,877 |   |
| Cash used in  investing activities     |       | (46,390                                       | )          | (837 | ) |
| Cash used in financing  activities     |       | (31,229                                       | )          | (13,182 | ) |
|                                        |            |                                               |            |  |  |  |  |

 

Net cash provided by operating activities was $28.6million for the first six months of 2005, compared with $18.9 million in thefirst six months of 2004. Cash flows from operating activities as compared tothe prior years first six months were favorably impacted primarily by higherrevenues from oil and natural gas sales of $24.5 million partially offset byincreased oil and natural gas production expenses of $1.6 million. 

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Oil and natural gas salesincreased due to increased production from development activity, theacquisition of Marquez Energy and increased prices. The production increaseswere partially offset in the second quarter by the loss of production from theBig Mineral Creek field that was sold on March 31, 2005. Cash flows fromoperating activities as compared to the prior years first six months werenegatively impacted primarily by payments of net premiums on derivativecontracts of $10.7 million and increases in general and administrative expensesof $2.0 million.

Net cash used in investing activities was $46.4million in the first six months of 2005 and consisted primarily of $14.6million in expenditures to acquire Marquez Energy and $30.7 million incosts incurred for oil and gas properties adjusted by a $1.4 millionreduction in accrued amounts payable at June 30, 2005 as compared toDecember 31, 2004.

Net cash used in financingactivities was $31.2 million and $13.2 million in the first six months of 2005and 2004, respectively. Net cash used in the first six months of 2005 resultedfrom the payment of a $35 million dividend to our sole stockholder,principal payments on long-term debt of $12.7 million, $5.2 million paidto purchase the interests of minority shareholders and other uses of cash fromfinancing activities of $1.3 million, partially offset by $23 million in newborrowings.

***Capital Resources and Requirements***

We plan to make substantial capital expenditures inthe future for the acquisition, exploitation, development and exploration ofoil and natural gas properties. For the year 2005 we expect to make aggregatecapital expenditures of approximately $103 million, of which amounts, wehad spent approximately $14.6 million for the acquisition of Marquez Energy and$30.7 million through June 30, 2005, primarily on drilling and reworkactivity and facilities offshore on platforms Holly and Gail and onshore in theSacramento Basin area. As discussed above (See “—Development, Acquisitions andDivestitures”) the timing of approximately $8.6 million of budgeted 2005expenditures regarding the return to production of platform Grace is beingreviewed. Success in negotiating and closing significant new acquisitions wouldresult in increasing the aggregate 2005 capital expenditures.

Additional cash was utilized in the first quarter forpayment of a dividend of $35 million to the Company’s sole stockholder, a trustcontrolled by Timothy Marquez, our chief executive officer and chairman.Additional cash dividends are not currently anticipated to be paid in 2005.

Our bank credit facility currently has a borrowingbase of $40 million, and the facility will mature on November 4, 2007.Revolving loans made under the restated Credit Agreement are designated, at ouroption, as either “Base Rate Loans” or “LIBO Rate Loans”. Base Rate Loans bearinterest at a floating rate equal to (i) the greater of Bank of Montreal’sannounced base rate and the overnight federal funds rate plus one-half of 1.00%plus (ii) an applicable margin ranging from 0.25% to 1.00%, based uponamounts borrowed under the restated Credit Agreement. LIBO Rate Loans bearinterest at (i) LIBOR plus (ii) an applicable margin ranging from1.75% to 2.50%, based also upon amounts borrowed. At August 10, 2005,there was $20 million outstanding under the facility. A commitment fee of 0.50%per annum is payable with respect to unused borrowing availability under thecredit facility. The restated Credit Agreement contains a number of restrictivecovenants with regard to leverage and current ratios and other terms customaryin a credit facility secured by oil and natural gas properties. As of June 30,2005 we were in compliance with all of our debt covenants.

In December 2004, we sold $150.0 million inaggregate principal amount of the 8.75% senior notes due in 2011 in a privateplacement. In connection with the issuance of the notes, we entered into aregistration rights agreement with the initial purchasers pursuant to which weagreed to file and to use our reasonable best efforts to cause to be declaredeffective by the SEC a registration statement with respect to the exchange ofthe old notes for the new notes. We did so and our Registration Statement on Form S-4;became effective on April 20, 2005. The exchange offer commenced on April 25,2005 and expired on 

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May 27, 2005. We didnot receive any proceeds from the exchange offer which we made to fulfill ourobligations under the registration rights agreement. Pursuant to the exchangeoffer, we issued the new notes in exchange for the previously outstandingnotes. The terms of the new notes are identical in all material respects tothose of the old notes, except that the new notes (i) have been registeredunder the Securities Act and therefore are not subject to certain restrictionson transfer applicable to the old notes and (ii) do not have registrationrights or provide for any additional interest related to the obligation toregister. All of the old notes were exchanged for new notes.

To date, we have financed our 2005 capitalexpenditures with a portion of the proceeds of the offering of our notes soldin December of 2004, cash on hand and short-term borrowings under our bankcredit facility. We anticipate funding the remainder of our capital program andmeeting our other needs for liquidity primarily with cash flow from operationsand from cash on hand. Our bank credit facility has undrawn funds availabilityof $20 million but we do not currently expect to use those funds to finance ourcapital expenditures except with respect to short term working capital needs.As of August 10, 2005, $20 million of indebtedness was outstandingunder the credit facility, a substantial portion of which related to short-termfinancing for the Marquez Energy acquisition. We also received proceeds ofapproximately $45 million upon the sale of the Big Mineral Creek property.However, we have placed those proceeds in escrow pending their potential usefor the acquisition of other oil and gas properties in connection with alike-kind exchange under Section 1031 of the Internal Revenue Code. As aresult, other than for certain new acquisitions we do not expect those proceedsto be available to fund our planned capital expenditures in 2005. To the extentwe do not complete a tax free exchange, the escrow funds would be available forgeneral corporate purposes and we would incur income tax obligations applicableto the gain on the sale of the properties.

If cash flow fromoperations does not meet our expectations, we may reduce the expected level ofcapital expenditures and/or fund a larger than expected portion of theexpenditures using borrowings under the Credit Agreement. We may also makeacquisitions that will require additional capital resources. We may seek suchadditional capital through a combination of funding sources that may includetraditional reserve base borrowings, joint venture partnerships, productionpayment financings, asset sales and offerings of debt and equity securities andother sources. We cannot assure you that needed capital will be available onacceptable terms or at all. If we are unable to obtain funds when needed or onacceptable terms, we may not be able to complete acquisitions that may befavorable to us or finance the capital expenditures necessary to replace ourreserves.

***Forward-Looking Statements***

Certain informationincluded in this quarterly report and other materials filed or to be filed bythe Company with the Securities and Exchange Commission, as well as informationincluded in oral statements or other written statements made or to be made bythe Company, contain projections and forward-looking statements within themeaning of Section 21E of the Securities Exchange Act of 1934, as amended,and Section 27A of the Securities Act of 1933, as amended, relating to theCompany and the oil and gas industry. Such forward-looking statements may be ormay concern, among other things, capital expenditures, cash flow, drillingactivity, drilling locations, acquisition and development activities andfunding thereof, pricing differentials, production and reserve growth, reservepotential, operating costs, operating margins, production activities, oil, gasand natural gas liquids reserves and prices, hedging activities and the resultsthereof, liquidity, debt repayment, regulatory matters and competition. Suchforward-looking statements are based on management’s current plans,expectations, assumptions, projections and estimates and are identified bywords such as “expects,” “intends,” “plans,” “projects,” “predicts,”“anticipates,” “believes,” “estimates,” “goal,” “should,” “could,” “assume,”and similar words that convey the uncertainty of future events. Thesestatements are not guarantees of future performance and involve certain risks,uncertainties and assumptions that are difficult to predict. In particular, the

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factorsdiscussed in our Registration Statement on Form S-4 filed onApril 20, 2004 could affect our actual results and cause our actualresults to differ materially from expectations, estimates, or assumptionsexpressed in, forecasted in, or implied in such forward-looking statements. Thecautionary statements contained in our Registration Statement on Form S-4filed on April 20, 2004 are incorporated herein by reference.

**Item 3.**                        Qualitativeand Quantitative Disclosures About Market Risk

The discussion in this section provides informationabout derivative financial instruments we use to manage commodity pricevolatility. To the extent we borrow amounts under our credit agreement, we aresubject to interest rate risk because such amounts bear interest at variablerates. At August 10, 2005, $20 million of indebtedness wasoutstanding under the credit agreement. A 1% change in interest rates would nothave a significant effect on our financial statements.

Due to the historical volatility of crude oil andnatural gas prices, we have implemented a hedging strategy aimed at reducingthe variability of the prices we receive for our production and providing aminimum revenue stream. Currently, we use options and fixed price swaps forhedging commodity prices. All contracts are settled with cash and do notrequire the delivery of a physical quantity to satisfy settlement. While thishedging strategy may result in us having lower revenues than we would have ifwe were unhedged in times of higher oil and natural gas prices, managementbelieves that the stabilization of prices and protection afforded us byproviding a revenue floor is beneficial. We had hedging contracts (excludingfloors) in place for 67 % of our oil production and 20 % of our natural gasproduction during the quarter ended June 30, 2005.

As ofJune 30, 2005, the Company has entered into option, swap and collaragreements to receive average minimum and maximum New York Mercantile Exchange(NYMEX) West Texas Intermediate (WTI) prices as summarized below. Location andquality differentials attributable to the Company’s properties are not includedin the following prices. The agreements provide for monthly settlement based onthe differential between the agreement price and the actual NYMEX crude oilprice.

| ** **                                              | ** ** | **Minimum**     | ** ** | **Maximum**          | ** ** |
|---------------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| ** **                                              | ** ** | **Barrels/day** | ** ** | **Avg. Prices** | ** ** | **Barrels/day** | ** ** | **Avg. Prices** | ** ** |
| Crude oil hedges at  June 30, 2005 for production: |       |            |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| July 1 – December 31, 2005               |       |            | 9,471      |                 |       |   | $ | 37.73 |   |   |   | 5,471 |   |   |   | $ | 47.17 |   |   |
| January 1 – December 31, 2006            |       |            | 7,000      |                 |       |   | $ | 40.80 |   |   |   | 5,000 |   |   |   | $ | 50.70 |   |   |
| January 1 – December 31, 2007            |       |            | 4,313      |                 |       |   | $ | 43.96 |   |   |   | 4,313 |   |   |   | $ | 68.99 |   |   |
| January 1 – December 31, 2008            |       |            | 2,946      |                 |       |   | $ | 52.00 |   |   |   | 2,946 |   |   |   | $ | 75.00 |   |   |
| January 1 – December 31,  2009           |       |            | 2,170      |                 |       |   | $ | 50.00 |   |   |   | 2,170 |   |   |   | $ | 75.00 |   |   |

 

As of June 30, 2005,the Company has entered into option, swap and collar agreements to receiveaverage minimum and maximum PG&E Citygate prices as follows: 

| ** **                                                | ** ** | **Minimum**   | ** ** | **Maximum**          | ** ** |
|-----------------------------------------------------------|------------|---------------|------------|----------------------|------------|
| ** **                                                | ** ** | **MMBtu/Day** | ** ** | **Avg. Prices** | ** ** | **MMBtu/Day** | ** ** | **Avg. Prices** | ** ** |
| Natural gas hedges at  June 30, 2005 for production: |       |          |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| July 1 – December 31, 2005                 |       |          | 14,000     |                 |       |   | $ | 6.09 |   |   |   | 4,000 |   |   |   | $ | 6.77 |   |   |
| January 1 – December 31, 2006              |       |          | 15,000     |                 |       |   | $ | 6.28 |   |   |   | 9,000 |   |   |   | $ | 8.40 |   |   |
| January 1 – December 31,  2007             |       |          | 6,000      |                 |       |   | $ | 6.00 |   |   |   | 6,000 |   |   |   | $ | 8.40 |   |   |

 

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Our portfolio of commodity derivative transactions asof June 30, 2005 is summarized below:

**Crude Oil**

| **Type of Contract** | ** ** | ** ** | ** ** | **Basis** | ** ** | **Quantity  (Bbl/d)** | ** ** | **Strike Price  ($/Bbl)** | ** ** | **Term**                    | ** ** |
|--------------------------------|------------|------------|------------|-----------|------------|-----------------------|------------|--------------------------------|------------|-----------------------------|------------|
| Collar                         |       | NYMEX      |       |      | 4,471      |                  |       | $38.00 – $47.10           |       | Jan 1, 05 – Dec 31, 05 |       |
| Collar                         |       | NYMEX      |       |      | 1,000      |                  |       | $38.00 – $47.50           |       | Jan 1, 05 – Dec 31, 05 |       |
| Put                            |       | NYMEX      |       |      | 2,000      |                  |       | $36.00 Floor                   |       | Jan 1, 05 – Dec 31, 05 |       |
| Put                            |       | NYMEX      |       |      | 2,000      |                  |       | $38.70 Floor                   |       | Jan 1, 05 – Dec 31, 05 |       |
| Swap                           |       | NYMEX      |       |      | 1,000      |                  |       | $42.70 Fixed                   |       | Jan 1, 06 – Dec 31, 06 |       |
| Collar                         |       | NYMEX      |       |      | 2,000      |                  |       | $40.00 – $51.00           |       | Jan 1, 06 – Dec 31, 06 |       |
| Collar                         |       | NYMEX      |       |      | 1,000      |                  |       | $40.00 – $51.05           |       | Jan 1, 06 – Dec 31, 06 |       |
| Collar                         |       | NYMEX      |       |      | 1,000      |                  |       | $40.00 – $57.75           |       | Jan 1, 06 – Dec 31, 06 |       |
| Put                            |       | NYMEX      |       |      | 1,000      |                  |       | $40.00 Floor                   |       | Jan 1, 06 – Dec 31, 06 |       |
| Put                            |       | NYMEX      |       |      | 1,000      |                  |       | $42.90 Floor                   |       | Jan 1, 06 – Dec 31, 06 |       |
| Collar                         |       | NYMEX      |       |      | 2,000      |                  |       | $40.00 – $65.80           |       | Jan 1, 07 – Dec 31, 07 |       |
| Collar                         |       | NYMEX      |       |      | 1,000      |                  |       | $40.00 – $67.50           |       | Jan 1, 07 – Dec 31, 07 |       |
| Collar                         |       | NYMEX      |       |      | 1,600      |                  |       | $53.00 – $75.00           |       | Jan 1, 07 – Jun 30, 07 |       |
| Collar                         |       | NYMEX      |       |      | 1,030      |                  |       | $53.00 – $75.00           |       | Jul 1, 07 – Dec 31, 07 |       |
| Collar                         |       | NYMEX      |       |      | 3,450      |                  |       | $52.00 – $75.00           |       | Jan 1, 08 – Jun 30, 08 |       |
| Collar                         |       | NYMEX      |       |      | 2,450      |                  |       | $52.00 – $75.00           |       | Jul 1, 08 – Dec 31, 08 |       |
| Collar                         |       | NYMEX      |       |      | 2,170      |                  |       | $50.00 – $75.00           |       | Jan 1, 09 – Jun 30, 09 |       |

 

**Natural Gas**

| **Type of Contract** | ** ** | ** **         | ** ** | **Basis** | ** ** | **Quantity  (MMBtu/d)** | ** ** | **Strike Price  ($/Mcf)** | ** ** | **Term**                    | ** ** |
|--------------------------------|------------|--------------------|------------|-----------|------------|-------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| Physical Sale                  |       | SoCal              |       |      | 2,000      |                    |       | $4.85 Floor(1)                 |       | Apr 1, 05 – Sep 30, 06 |       |
| Put                            |       | NYMEX              |       |      | 5,000      |                    |       | $5.80 Floor                    |       | Jan 1, 05 – Dec 31, 05 |       |
| Basis Swap                     |       | PG&E  Citygate |       |      | 5,000      |                    |       | $(0.150)(2)                    |       | Jan 1, 05 – Dec 31, 05 |       |
| Put                            |       | PG&E  Citygate |       |      | 5,000      |                    |       | $6.00 Floor                    |       | Jan 1, 05 – Dec 31, 05 |       |
| Swap                           |       | PG&E  Citygate |       |      | 4,000      |                    |       | $6.765 Fixed                   |       | Apr 1, 05 – Dec 31, 05 |       |
| Swap                           |       | NYMEX              |       |      | 2,000      |                    |       | $6.71 Fixed                    |       | Jan 1, 06 – Dec 31, 06 |       |
| Collar                         |       | NYMEX              |       |      | 4,000      |                    |       | $6.00 – $8.50             |       | Jan 1, 06 – Dec 31, 06 |       |
| Basis Swap                     |       | PG&E  Citygate |       |      | 6,000      |                    |       | $(0.035)(3)                    |       | Jan 1, 06 – Dec 31, 06 |       |
| Put                            |       | PG&E  Citygate |       |      | 6,000      |                    |       | $6.00 Floor                    |       | Jan 1, 06 – Dec 31, 06 |       |
| Collar                         |       | PG&E  Citygate |       |      | 3,000      |                    |       | $7.00 – $9.45             |       | Jan 1, 06 – Dec 31, 06 |       |
| Collar                         |       | NYMEX              |       |      | 6,000      |                    |       | $6.00 – $8.40             |       | Jan 1, 07 – Dec 31, 07 |       |

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(1)          The price of thiscontract is the monthly NGI SoCal Border Index less $0.10 per MMBtu, with afloor of $4.85.

(2)          This basis swap locksthe $5.80 NYMEX put into a $5.65 floor with a PG&E Citygate location for2005.

(3)          This basis swap locksthe $6.71 NYMEX swap into a $6.675 PG&E Citygate location swap and the$6.00-$8.50 collar into a $5.965 – $8.465 collar with a PG&E Citygatelocation for 2006.

Since June 30, 2005 and through August 10,2005 we have not entered into any additional commodity price hedging contracts.

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*Changes in FairValue*

Thefair value of outstanding crude oil and natural gas commodity derivativeinstruments and the change in fair value that would be expected from a $5.00per barrel increase in the price of oil and a $1.00 per MMBtu increase in the price of natural gas are shown in thetable below (in millions):

| ** **                                                                                                                    | ** ** | **June 30, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                    | ** ** | **Fair  Value**             | ** ** | **Effect of  $5.00/Bbl and  $1.00/MMbtu  Price  Increases** | ** ** |
| Effective portion  of derivatives designated as cash flow hedges                                                              |       | $                           | (14.4      | ) |   | $ | (13.0 | ) |   |
| Derivatives not  designated as hedging instruments and the ineffective portion of derivatives  designated as cash flow hedges |       | (17.2                       | )          |   | (22.6 | ) |   |
|                                                                                                                               |            |                             |            |  |  |  |  |  |  |

 

The fair value of the swaps and option contracts areestimated based on quoted prices from independent reporting services comparedto the contract price of the agreement, and approximate the cash gain or lossthat would have been realized if the contracts had been closed out at periodend. 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 across-the-board increasesin price of $5.00 per barrel for oil and $1.00 per MMBtu for natural gasregardless of term or historical relationships between the contractual price ofthe instruments and the underlying commodity price. In the event of actualchanges in prompt month prices equal to the assumptions, the fair value of ourderivative portfolio would typically change less than that shown in the tabledue to lower volatility in out-month prices. In the event of actual changes inall months equal to the assumptions, the fair value of our derivative portfoliowould typically change less then that shown in the table due to the fact thatmany of such changes would be within the range of our derivative collars wherethe movement in fair value would typically be less then the changes incommodity prices.

We have NYMEX put options with a weighted averagestrike price of $37.35 per barrel on 4,000 barrels of oil per day in 2005 and$41.45 per barrel on 2,000 barrels of oil per day in 2006. We also have putoptions with a weighted average strike price of $5.91 per MMBtu on 11,000MMBtus of natural gas per day in 2005 and $6.00 per MMBtul on 6,000 MMBtus ofnatural gas per day in 2006. These put options cost an average of $1.33 per barreland $0.28 per MMBtu for 2005 and $2.71 per barrel and $0.46 per MMBtu for2006 (a total of $6.0 million), which was paid when the  put options were contracted. Such amount isnot included in the fair value of derivatives in the foregoing table.

**CriticalAccounting Policies and Estimates**

We refer you to thecorresponding section in Management’s Discussion and Analysis of FinancialCondition and Results of Operations included in our Registration Statement on Form S-4/A(Registration no. 333-1237111) as filed with the Securities andExchange Commission on April 20, 2005 (the “Registration Statement”) andNote 2, Summary of Significant Accounting Policies, included in the notes tothe financial statements in the Registration Statement, and in the notes to thefinancial statements included in Item 1 of this Form 10-Q for adescription of critical accounting policies and estimates.

**Item 4.**                        Controlsand Procedures

Under the supervision and with the participation ofour management, including the Chief Executive Officer and Chief FinancialOfficer, we have conducted an evaluation of the effectiveness of the design andoperation of our disclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2005 (the“Evaluation Date”). There are inherent limitations to the effectiveness of anysystem of 

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disclosure controls andprocedures, including the possibility of human error and the circumvention oroverriding of the controls and procedures. Accordingly, even effectivedisclosure controls and procedures can only provide reasonable assurance ofachieving their control objectives. Based on such evaluation, the ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theEvaluation Date, our disclosure controls and procedures were effective inalerting them on a timely basis to material information relating to us requiredto be included in our reports filed or submitted under the Exchange Act.

In connection with the restatement and the filing ofthis Form 10-Q/A, management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, re-evaluated the effectiveness ofour disclosure controls and procedures as of the Evaluation Date. Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the EvaluationDate.

In concluding that our disclosure controls andprocedures were effective as of June 30, 2005, our management considered,among other things, the circumstances that resulted in the restatement of ourpreviously issued financial statements. We also considered the materiality ofthe restatement adjustments on our consolidated balance sheet and statement ofoperations (as more fully set forth in Note 2, “Restatement,” to theaccompanying condensed consolidated financial statements) and that thesenon-cash adjustments have no effect on historical or future cash flows and haveno material effect on our net income. In order to enhance our disclosurecontrols and procedures, particularly with respect to accounting and financialreporting, we have also commenced, and are currently engaged in, a review ofthe adequacy of our current levels of accounting staff with a view towardspotentially adding additional staff.

There was no change in our internal control overfinancial reporting during the quarter ended June 30, 2005, 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

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**PART II—OTHER INFORMATION**

**Item 1.**                        LegalProceedings

See Notes 7 and 11 to ourinterim condensed consolidated financial statements.

**Item 2.**                        UnregisteredSales of Equity Securities and Use of Proceeds

Not applicable

**Item 3.**                        DefaultsUpon Senior Securities

Not Applicable

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

Not Applicable

**Item 5.**                        OtherInformation

Not Applicable

**Item 6.**                        Exhibitsand Reports on Form 8-K

a.                 Exhibits
| Exhibit  Number  | ** **                                                                                                                                     | ** ** | **Exhibit** |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|
|   31.1 | Certification of the  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                 |
|   31.2 | Certification of  the Chief Financial Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                 |
|   32   | Certification of the  Chief Executive Officer and the Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

b.                Reports on Form 8-K

The Company filed the following reports on Form 8-Kduring the quarter ended June 30, 2005 and through August 12, 2005:

On April 4, 2005, we filed a report on Form 8-Kdated April 4, 2005 announcing the closing of the sale of our property inBig Mineral Creek, Texas.

On May 9, 2005, we filed a report on Form 8-Kdated May 4, 2005 announcing that we entered into employment agreementswith the following officers of the company: (i) Timothy Marquez, ChiefExecutive Officer, (ii) David Christofferson, Chief Financial Officer, (iii) GregSchrage, Vice President, Northern Assets, (iv) Roger Hamson, VicePresident, Southern Assets and (v) Terry Anderson, General Counsel.

On May 17, 2005, we filed a report on Form 8-Kannouncing our first quarter 2005 operating results.

On May 17, 2005, we filed a report on Form 8-Kannouncing revised production guidance for the second quarter 2005 and the year2005.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
| November 21, 2005 | VENOCO, INC. |
|------------------------|-------------------|
|                   | By:               | /s/ TIMOTHY M. MARQUEZ |   |
|                   | Name:             | Timothy M. Marquez |
|                   | Title:            | *Chairman and Chief Executive Officer* |
|                   | By:               | /s/ DAVID B. CHRISTOFFERSON |   |
|                   | Name:             | David B. Christofferson |
|                   | Title:            | *Chief Financial Officer* |
|                        |                   |  |  |  |

 

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