**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form 10-Q**

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

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

**or**

**o        TRANSITION REPORT PURSUANT TO SECTION 13OR 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  incorporation or organization) |       | (I.R.S. Employer  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 markwhether the registrant (1) has filed all reports required by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch report(s), and (2) has been subject to such filing requirements forthe past 90 days.

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

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

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

As of June 30, 2005, there were 4,359 shares ofthe issuer’s common stock, par value $0.01 per share, issued and outstanding.

 

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**VENOCO, INC.Form 10-Q 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 and December 31, 2004                                                                                            |     | 3 |   |
|              |       | Condensed Consolidated  Income Statements  for the Three and Six Months Ended June 30, 2005 (Successor),  and the Three and Six Months Ended June 30, 2004 (Predecessor), |     | 4 |   |
|              |       | Condensed Consolidated  Statements of Cash Flows  for the Six Months Ended June 30, 2005 (Successor) and  the Six Months Ended June 30, 2004 (Predecessor)                |     | 5 |   |
|              |       | Notes to Condensed  Consolidated Financial Statements                                                                                                                               |     | 6 |   |
| Item  2.          |       | Management’s Discussion and  Analysis of Financial Condition and Results of  Operations                                                                                        |     | 22 |   |
| Item  3.          |       | Quantitative and Qualitative  Disclosures about Market Risk                                                                                                                         |     | 30 |   |
| Item  4.          |       | Controls and Procedures                                                                                                                                                             |     | 32 |   |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                                                                               |     |   |   |
| Item 1.           |       | Legal Proceedings                                                                                                                                                                   |     | 33 |   |
| Item  2.          |       | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                                                                        |     | 33 |   |
| Item  3.          |       | Defaults upon Senior  Securities                                                                                                                                                    |     | 33 |   |
| Item  4.          |       | Submission of Matters to a  Vote of Security Holders                                                                                                                                |     | 33 |   |
| Item 5.           |       | Other Information                                                                                                                                                                   |     | 33 |   |
| Item  6.          |       | Exhibits and Reports on  Form 8-K                                                                                                                                              |     | 33 |   |
| Signatures        |       | 34                                                                                                                                                                                  |     |
|                   |            |                                                                                                                                                                                     |          |  |  |  |

 

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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**              | ** ** |
| **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) |       | 202,707           |       |                  | 214,842    |   |   |
| Drilling equipment                                                                                                                                                              |       | 7,687             |       |                  | 7,594      |   |   |
| Other property and  equipment                                                                                                                                                   |       | 26,524            |       |                  | 25,857     |   |   |
| Total property,  plant and equipment                                                                                                                                            |       | 236,918           |       |                  | 248,293    |   |   |
| Less accumulated  depletion, depreciation, amortization and impairment                                                                                                          |       | 59,223            |       |                  | 49,730     |   |   |
| Net property,  plant and equipment                                                                                                                                              |       | 177,695           |       |                  | 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     |   |   |
|                                                                                                                                                                            |       | $                 | 274,433    |                  |       | $ | 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      |   |   |
| Minority interest  purchase accrued                                                                                                                                             |       | 70                |       |                  | 5,316      |   |   |
| Total current  liabilities                                                                                                                                                      |       | 56,048            |       |                  | 31,122     |   |   |
| LONG-TERM  DEBT                                                                                                                                                                 |       | 173,938           |       |                  | 163,542    |   |   |
| DEFERRED INCOME  TAXES                                                                                                                                                          |       | 15,510            |       |                  | 32,208     |   |   |
| ASSET RETIREMENT  OBLIGATIONS                                                                                                                                                   |       | 23,715            |       |                  | 23,184     |   |   |
| COMMODITY  DERIVATIVES                                                                                                                                                          |       | 15,568            |       |                  | —     |   |   |
| Total liabilities                                                                                                                                                               |       | 284,779           |       |                  | 250,056    |   |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                  |       |              |       |                  |       |   |   |
| STOCKHOLDERS’ EQUITY  (DEFICIT):                                                                                                                                           |       |              |       |                  |       |   |   |
| Common stock, $.01  par value (10,000 shares authorized; 4,359 shares issued and outstanding at  June 30, 2005 and December 31, 2004)                                 |       | —            |       |                  | —     |   |   |
| Additional paid-in  capital                                                                                                                                                     |       | 17,883            |       |                  | 31,576     |   |   |
| Retained earnings  (accumulated deficit)                                                                                                                                        |       | (17,669           | )          |                  | 15,327     |   |   |
| Accumulated other  comprehensive income (loss)                                                                                                                                  |       | (10,560           | )          |                  | 1,923      |   |   |
| Total  stockholders’ equity (deficit)                                                                                                                                      |       | (10,346           | )          |                  | 48,826     |   |   |
|                                                                                                                                                                            |       | $                 | 274,433    |                  |       | $ | 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) ** | ** ** |
| REVENUES:                                               |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas sales                               |       |                                            | $          | 45,352                                        |       |   |   | $ | 32,092 |   |   |   | $ | 87,390 |   |   |   | $ | 62,917 |   |   |
| Commodity derivative losses (realized)                  |       |                                            | (3,037     | )                                             |       |   | (3,754 | ) |   |   | (6,049 | ) |   |   | (6,108 | ) |   |
| Commodity derivative losses (unrealized)                |       |                                            | (2,957     | )                                             |       |   | (433 | ) |   |   | (29,105 | ) |   |   | (841 | ) |   |
| Other                                                   |       |                                            | 843        |                                          |       |   | 748 |   |   |   | 1,570 |   |   |   | 1,417 |   |   |
| Total revenues                                          |       |                                            | 40,201     |                                          |       |   | 28,653 |   |   |   | 53,806 |   |   |   | 57,385 |   |   |
| EXPENSES:                                               |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas production                          |       |                                            | 12,352     |                                          |       |   | 11,484 |   |   |   | 24,282 |   |   |   | 22,715 |   |   |
| Transportation expense                                  |       |                                            | 367        |                                          |       |   | 297 |   |   |   | 695 |   |   |   | 675 |   |   |
| 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                                          |       |                                            | 25,717     |                                          |       |   | 19,172 |   |   |   | 51,028 |   |   |   | 37,994 |   |   |
| Income (loss) before income taxes                       |       |                                            | 14,484     |                                          |       |   | 9,481 |   |   |   | 2,778 |   |   |   | 19,391 |   |   |
| Income tax provision (benefit)                          |       |                                            | 5,704      |                                          |       |   | 3,953 |   |   |   | 774 |   |   |   | 8,084 |   |   |
| Net income (loss)                                       |       |                                            | 8,780      |                                          |       |   | 5,528 |   |   |   | 2,004 |   |   |   | 11,307 |   |   |
| Preferred stock dividends                               |       |                                            | —     |                                          |       |   | (2,116 | ) |   |   | — |   |   |   | (4,232 | ) |   |
| Net income (loss)  applicable to common  equity         |       |                                            | $          | 8,780                                         |       |   |   | $ | 3,412 |   |   |   | $ | 2,004 |   |   |   | $ | 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)** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                                          |       |   |   |   |   |
| Net income                                                                         |       | $                                             | 2,004      |   |   | $ | 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                                         |       | 1,108                                         |       |   | (3,405 | ) |   |
| Net premiums paid on derivative contracts                                          |       | (10,715                                       | )          |   | — |   |   |
| Changes in unrealized commodity derivatives                                        |       | 29,105                                        |       |   | 841 |   |   |
| Net cash provided by operating activities                                          |       | 27,174                                        |       |   | 18,877 |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                                          |       |   |   |   |   |
| Expenditures for oil and gas properties                                            |       | (30,659                                       | )          |   | (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) provided by investing activities                                |       | (44,999                                       | )          |   | (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                                       | )          |   | — |   |   |
| Purchase of minority interest shares                                               |       | (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.**   BASISOF PRESENTATION

***InterimFinancial Statements***—The accompanying condensedconsolidated financial statements of Venoco Inc. for the three and six monthsended June 30, 2005 and 2004 are unaudited. In the opinion of management,the accompanying unaudited condensed consolidated financial statements containall adjustments (consisting of normal recurring accruals only) necessary topresent fairly the Company’s financial position at June 30, 2005, theresults of operations for the three and six months ended June 30, 2005 and2004 and cash flows for the six months ended June 30, 2005 and 2004. Certaindisclosures have been condensed or omitted from these financial statements. Accordingly,these financial statements should be read in conjunction with our audited 2004financial statements contained in our Registration Statement on Form S-4/1A(Registration No. 333-123711) as filed with the Securities and ExchangeCommission on April 20, 2005. The results for interim periods are notnecessarily indicative of annual results.

***New Company Basis***—During2004, the Company’s CEO, Tim Marquez, increased his ownership in the Companyfrom 41% to 100%. As a result of a transaction that closed on July 12,2004, Mr. Marquez purchased 53% of the common shares (2,468 common shares)of the Company from two of the Company’s former officers and their respectiveaffiliates. On December 22, 2004, the Company merged with a corporationthe sole stockholder of which was a trust controlled by Mr. Marquez. Thismerger had the effect of giving Mr. Marquez the remaining 6% of theCompany’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 ControlMerger***—On March 21, 2005 the Company completed theacquisition of Marquez Energy, LLC, a Colorado limited liability company (“MarquezEnergy”) majority-owned and controlled by Timothy Marquez, the Company’s CEOand sole shareholder. Due to the common control aspects of the transaction, thefinancial statements of Marquez Energy have been combined with the consolidatedfinancial statements of the Company and its subsidiaries in a manner similar toa pooling-of-interests, since the date that common control was achieved. Therefore,the Company’s financial statements since July 12, 2004 were restated toinclude Marquez Energy’s financial results.

**2.**   ACQUISITIONOF PROPERTIES

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 $16.6million. The purchase price was based on the member’s equity on Marquez Energy’sunaudited December 31, 2004 balance sheet as adjusted to reflect the valueof 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 

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anothernationally recognized engineering firm will conduct supplemental evaluations ofthe Marquez Energy properties as of year-end 2005 and 2006. In the event thoseevaluations attribute 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.

**3.**   SALESOF 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. We have identified andare pursuing acquisition opportunities which qualify as replacement properties.The Company has not recorded a gain on the sale of the BMC property, but hasapplied the sales proceeds of $44.6 million to reduce the capitalized cost ofoil and natural gas properties and has recorded the cash received in theaccount “Cash Restricted for Investment in Oil and Natural Gas Properties” onthe 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 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 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.

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**4.**   HEDGING AND DERIVATIVE FINANCIALINSTRUMENTS

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. Whilethe use of these derivative instruments limits the downside risk of adverseprice movements, they also limit future revenues from favorable price movements.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.

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                                         |       |                                            | $          | 3,037                                         |       |   |   | $ | 3,754 |   |   |   | $ | 6,049 |   |   |   | $ | 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 |   |   |
| Amortized portion of  premiums paid on derivative contracts                   |       |                                            | 553        |                                          |       |   | — |   |   |   | 1,106 |   |   |   | — |   |   |
| Unrealized commodity  derivative losses                                       |       |                                            | 2,957      |                                          |       |   | 433 |   |   |   | 29,105 |   |   |   | 841 |   |   |
| Total realized and unrealized commodity derivative  losses                    |       |                                            | $          | 5,994                                         |       |   |   | $ | 4,187 |   |   |   | $ | 35,154 |   |   |   | $ | 6,949 |   |   |

 

8

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Theestimated fair values of derivatives included in the consolidated balancesheets at June 30, 2005 and December 31, 2004 are summarized below. Theincrease 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 |   |   |

 

***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, 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.

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**5.**   LONG-TERMDEBT

Ourlong term debt 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.

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.

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**6.   COMPREHENSIVE INCOME (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)** | ** ** |
| Net income                                              |       |                                            | $          | 8,780                                         |       |   |   | $ | 5,528 |   |   |   | $ | 2,004 |   |   |   | $ | 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  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 |   |   |   | $ | (10,479 | ) |   |   | $ | 9,867 |   |   |

 

**7.   LITIGATION**

***Beverly HillsLitigation***

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 additional plaintiffs may be added to the litigation over time. All caseshave been consolidated before one judge. The judge has ordered that all of thecases be stayed except for an initial 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 with SFAS No. 5,Accounting for Contingencies,the Company has not accrued for a loss contingency relating to the BeverlyHills litigation 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 

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defendingthe former directors in litigation filed by the former CEO in connection withthe termination of his employment from Venoco. Fees incurred in the defensetotal approximately $1,000,000. On July 28,2005 the Company entered into a settlement agreement with the former directorsand the former preferred shareholder and settled the litigation for amountswhich did not differ materially 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.

**8.   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, a dividend of $35 million waspaid to a trust controlled by the Company’s sole shareholder and CEO from theproceeds of the senior notes.

All common and preferredshare amounts in the accompanying financial statements have been adjusted forthe one thousand-for-one reverse stock split affected on February 10,2005.

**9.   ASSET RETIREMENT OBLIGATIONS**

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 resultingfrom revisions to the timing or the amount of the original estimate ofundiscounted cashflows are recognized as an increase or decrease in the assetretirement obligation (“ARO”) and the related capitalized asset retirementcosts.

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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 |   |   |

 

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 our estimate of the present value of our aggregate asset retirementobligations as of that date. The discount rates used to calculate the presentvalue varied depending on the estimated timing of the obligation, but typicallyranged between 6% and 8%.

**10.   RECENTACCOUNTING PRONOUNCEMENTS**

In December 2004 theFASB issued SFAS No.123R (revised 2004), “*Share-Based Payment*”(“SFAS 123R”). SFAS 123R requires that the compensation cost relating toshare-based payment transactions be recognized in financial statements. Thatcost will be measured based on the fair value of the equity or liabilityinstruments issued. SFAS No. 123R covers a wide range of share-basedcompensation arrangements including stock options, restricted stock plans,performance-based awards, stock appreciation rights, and employee stockpurchase plans. SFAS 123R replaces FASB Statement No. 123, “Accounting forStock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” Public entities (other than those filing assmall business issuers) were originally required to apply SFAS 123R as of thefirst interim or annual reporting period that begins after June 15, 2005.On April 14, 2005 the SEC announced the adoption of a new rule thatamends the compliance dates for SFAS 123R. The Commission’s new rule allowsregistrants to implement SFAS 123R at the beginning of their next fiscal year,instead of the next reporting period, that begins after June 15, 2005.Accordingly, we will adopt SFAS 123R effective January 1, 2006. We are inthe process of determining how the new method of valuing stock-basedcompensation as prescribed in SFAS 123R will be applied to valuing stock-basedawards and the impact the recognition of compensation expense related to suchawards will have on our financial statements.

**11.   GUARANTORFINANCIAL INFORMATION**

In connection with theissuance of the senior notes in December 2004, BMC, Ltd., WhittierPipeline Corp. and 217 State Street, Inc. (“Guarantors”) have fullyand unconditionally guaranteed, on a joint and several basis, the Company’sobligations under the senior notes (the “Guarantees”). On March 31, 2005Marquez Energy became a Guarantor of the notes. Each Guarantee is a generalunsecured obligation of the Guarantor, senior in right of payment to allexisting and future subordinated indebtedness of that Guarantor, pari passu inright of payment with any existing and future senior unsecured indebtedness ofthat Guarantor and effectively junior in right of payment to that Guarantor’sexisting and future secured indebtedness, including its guarantee ofindebtedness under the senior secured credit facility, to the extent of thevalue of the collateral securing that facility. All Guarantors are 100% ownedby the Company.

Thefollowing are condensed consolidating statements of operations for the Companyfor the three and six months ended June 30, 2005 and 2004 and condensedconsolidating balance sheets as of June 30, 2005 and December 31,2004; and condensed consolidating statements of cash flows for the six monthsended June 30, 2005 and 2004.

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**CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)THREE MONTHS ENDED JUNE 30, 2005(Successor)(in thousands)**
| ** **                                                   | ** ** | **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)                       |       |                  | (3,037     | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (3,037 | ) |   |
| Commodity derivative losses (unrealized)                     |       |                  | (2,957     | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (2,957 | ) |   |
| Other                                                        |       |                  | 903        |                        |       |                            | 4          |             |       |             | 1,695      |   |   |   | (1,759 | ) |   |   | 843 |   |   |
| Total revenues                                               |       |                  | 38,601     |                        |       |                            | 1,664      |             |       |             | 1,695      |   |   |   | (1,759 | ) |   |   | 40,201 |   |   |
| EXPENSES:                                                    |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas production                               |       |                  | 11,837     |                        |       |                            | 251        |             |       |             | 264        |   |   |   | — |   |   |   | 12,352 |   |   |
| Transportation expense                                       |       |                  | 1,822      |                        |       |                            | (124       | )                |       |             | —     |   |   |   | (1,331 | ) |   |   | 367 |   |   |
| Depletion, depreciation, amortization and impairment         |       |                  | 3,759      |                        |       |                            | 21         |             |       |             | 81         |   |   |   | (21 | ) |   |   | 3,840 |   |   |
| Accretion of abandonment liability                      |       |                  | 545        |                        |       |                            | 25         |             |       |             | 6          |   |   |   | — |   |   |   | 576 |   |   |
| General and administrative, net of amounts  capitalized |       |                  | 4,701      |                        |       |                            | 154        |             |       |             | 156        |   |   |   | (428 | ) |   |   | 4,583 |   |   |
| Amortization of deferred loan costs                     |       |                  | 676        |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 676 |   |   |
| Interest, net                                                |       |                  | 3,625      |                        |       |                            | —     |             |       |             | (302       | ) |   |   | — |   |   |   | 3,323 |   |   |
| Total expenses                                               |       |                  | 26,965     |                        |       |                            | 327        |             |       |             | 205        |   |   |   | (1,780 | ) |   |   | 25,717 |   |   |
| Equity in  subsidiary income                                 |       |                  | 5,714      |                        |       |                            | 2,386      |             |       |             | —     |   |   |   | (8,100 | ) |   |   | — |   |   |
| Income (loss)  before income taxes                           |       |                  | 17,350     |                        |       |                            | 3,723      |             |       |             | 1,490      |   |   |   | (8,079 | ) |   |   | 14,484 |   |   |
| Income tax  provision (benefit)                              |       |                  | 5,756      |                        |       |                            | (2,660     | )                |       |             | 254        |   |   |   | 2,354 |   |   |   | 5,704 |   |   |
| Net income (loss)                                            |       |                  | $          | 11,594                      |       |                            |       | $                | 6,383      |             |       |   | $ | 1,236 |   |   |   | $ | (10,433 | ) |   |   | $ | 8,780 |   |   |

 

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**CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)THREE MONTHS ENDED JUNE 30, 2004(Predecessor)(in thousands)**
| ** **                                                   | ** ** | **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      |   |   |   | (1,891 | ) |   |   | 748 |   |   |
| Total revenues                                               |       |                  | 26,519     |                        |       |                            | 2,241      |             |       |             | 1,784      |   |   |   | (1,891 | ) |   |   | 28,653 |   |   |
| EXPENSES:                                                    |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas production                               |       |                  | 10,605     |                        |       |                            | 530        |             |       |             | 349        |   |   |   | — |   |   |   | 11,484 |   |   |
| Transportation expense                                       |       |                  | 2,122      |                        |       |                            | —     |             |       |             | —     |   |   |   | (1,825 | ) |   |   | 297 |   |   |
| Depletion, depreciation, amortization and impairment         |       |                  | 3,178      |                        |       |                            | 182        |             |       |             | 21         |   |   |   | (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                                               |       |                  | 20,066     |                        |       |                            | 922        |             |       |             | 96         |   |   |   | (1,912 | ) |   |   | 19,172 |   |   |
| Equity in  subsidiary income                                 |       |                  | 965        |                        |       |                            | 521        |             |       |             | —     |   |   |   | (1,486 | ) |   |   | — |   |   |
| Income (loss)  before income taxes                           |       |                  | 7,418      |                        |       |                            | 1,840      |             |       |             | 1,688      |   |   |   | (1,465 | ) |   |   | 9,481 |   |   |
| Income tax  provision (benefit)                              |       |                  | 3,093      |                        |       |                            | 767        |             |       |             | 704        |   |   |   | (611 | ) |   |   | 3,953 |   |   |
| Net income (loss)                                            |       |                  | $          | 4,325                       |       |                            |       | $                | 1,073      |             |       |   | $ | 984 |   |   |   | $ | (854 | ) |   |   | $ | 5,528 |   |   |

 

15

----

**CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)SIX MONTHS ENDED JUNE 30, 2005(Successor)(in thousands)**
| ** **                                              | ** ** | **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)                  |       |                  | (6,049     | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (6,049 | ) |   |
| Commodity derivative losses (unrealized)                |       |                  | (29,105    | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (29,105 | ) |   |
| Other                                                   |       |                  | 1,684      |                        |       |                            | 21,678     |             |       |             | 3,742      |   |   |   | (25,534 | ) |   |   | 1,570 |   |   |
| Total revenues                                          |       |                  | 48,294     |                        |       |                            | 27,304     |             |       |             | 3,742      |   |   |   | (25,534 | ) |   |   | 53,806 |   |   |
| EXPENSES:                                               |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas production                          |       |                  | 22,400     |                        |       |                            | 1,215      |             |       |             | 667        |   |   |   | — |   |   |   | 24,282 |   |   |
| Transportation expense                                  |       |                  | 3,796      |                        |       |                            | (103       | )                |       |             | —     |   |   |   | (2,998 | ) |   |   | 695 |   |   |
| Depletion, depreciation, amortization and impairment    |       |                  | 9,060      |                        |       |                            | 319        |             |       |             | 156        |   |   |   | (42 | ) |   |   | 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                                          |       |                  | 52,381     |                        |       |                            | 2,288      |             |       |             | 538        |   |   |   | (4,179 | ) |   |   | 51,028 |   |   |
| Equity in  subsidiary income                            |       |                  | 15,339     |                        |       |                            | 16,088     |             |       |             | —     |   |   |   | (31,427 | ) |   |   | — |   |   |
| Income (loss)  before income taxes                      |       |                  | 11,252     |                        |       |                            | 41,104     |             |       |             | 3,204      |   |   |   | (52,782 | ) |   |   | 2,778 |   |   |
| Income tax  provision (benefit)                         |       |                  | 3,237      |                        |       |                            | 11,949     |             |       |             | 932        |   |   |   | (15,344 | ) |   |   | 774 |   |   |
| Net income (loss)                                       |       |                  | $          | 8,015                       |       |                            |       | $                | 29,155     |             |       |   | $ | 2,272 |   |   |   | $ | (37,438 | ) |   |   | $ | 2,004 |   |   |

 

16

----

**CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)SIX MONTHS ENDED JUNE 30, 2004(Predecessor)(in thousands)**
| ** **                                                   | ** ** | **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      |   |   |   | (3,476 | ) |   |   | 1,417 |   |   |
| Total revenues                                               |       |                  | 53,320     |                        |       |                            | 4,114      |             |       |             | 3,427      |   |   |   | (3,476 | ) |   |   | 57,385 |   |   |
| EXPENSES:                                                    |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas production                               |       |                  | 21,081     |                        |       |                            | 1,041      |             |       |             | 593        |   |   |   | — |   |   |   | 22,715 |   |   |
| Transportation expense                                       |       |                  | 4,019      |                        |       |                            | —     |             |       |             | —     |   |   |   | (3,344 | ) |   |   | 675 |   |   |
| Depletion, depreciation, amortization and impairment         |       |                  | 6,917      |                        |       |                            | 373        |             |       |             | 132        |   |   |   | (41 | ) |   |   | 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                                               |       |                  | 39,505     |                        |       |                            | 1,789      |             |       |             | 217        |   |   |   | (3,517 | ) |   |   | 37,994 |   |   |
| Equity in  subsidiary income                                 |       |                  | 2,819      |                        |       |                            | 979        |             |       |             | —     |   |   |   | (3,798 | ) |   |   | — |   |   |
| Income (loss)  before income taxes                           |       |                  | 16,634     |                        |       |                            | 3,304      |             |       |             | 3,210      |   |   |   | (3,757 | ) |   |   | 19,391 |   |   |
| Income tax  provision (benefit)                              |       |                  | 6,935      |                        |       |                            | 1,377      |             |       |             | 1,338      |   |   |   | (1,566 | ) |   |   | 8,084 |   |   |
| Net income (loss)                                            |       |                  | $          | 9,699                       |       |                            |       | $                | 1,927      |             |       |   | $ | 1,872 |   |   |   | $ | (2,191 | ) |   |   | $ | 11,307 |   |   |

 

17

----

**CONDENSEDCONSOLIDATING BALANCE SHEETS (UNAUDITED)AT JUNE 30, 2005(Successor)(in thousands)**
| ** **                                                        | ** ** | ** 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                                               |       |                              | 26,364     |                        |       |                            | 1,224      |             |       |             | 162        |   |   |   | (553 | ) |   |   | 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                                             |       |                              | 35,864     |                        |       |                            | 3,446      |             |       |             | 861        |   |   |   | (553 | ) |   |   | 39,618 |   |   |
| CASH RESTRICTED FOR INVESTMENT IN OIL AND NATURAL GAS  PROPERTIES |       |                              | —     |                        |       |                            | 44,619     |             |       |             | —     |   |   |   | — |   |   |   | 44,619 |   |   |
| PROPERTY, PLANT & EQUIPMENT, NET                         |       |                              | 170,698    |                        |       |                            | 13,326     |             |       |             | 15,012     |   |   |   | (21,341 | ) |   |   | 177,695 |   |   |
| COMMODITY DERIVATIVES                                             |       |                              | 4,918      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 4,918 |   |   |
| INVESTMENTS IN AFFILIATES                                         |       |                              | 76,473     |                        |       |                            | 32,849     |             |       |             | —     |   |   |   | (109,322 | ) |   |   | — |   |   |
| OTHER                                                             |       |                              | 7,537      |                        |       |                            | 46         |             |       |             | —     |   |   |   | — |   |   |   | 7,583 |   |   |
| TOTAL ASSETS                                                      |       |                              | $          | 295,490                     |       |                            |       | $                | 94,286     |             |       |   | $ | 15,873 |   |   |   | $ | (131,216 | ) |   |   | $ | 274,433 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**          |       |                              |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| CURRENT  LIABILITIES:                                             |       |                              |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued liabilities                          |       |                              | $          | 21,902                      |       |                            |       | $                | 811        |             |       |   | $ | 63 |   |   |   | $ | (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 |   |   |
| Minority interest purchase                                        |       |                              | 70         |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 70 |   |   |
| TOTAL CURRENT  LIABILITIES                                        |       |                              | 55,053     |                        |       |                            | 1,629      |             |       |             | 186        |   |   |   | (820 | ) |   |   | 56,048 |   |   |
| LONG-TERM  DEBT                                                   |       |                              | 164,111    |                        |       |                            | —     |             |       |             | 9,827      |   |   |   | — |   |   |   | 173,938 |   |   |
| DEFERRED INCOME  TAXES                                            |       |                              | 15,510     |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 15,510 |   |   |
| ASSET RETIREMENT  OBLIGATIONS                                     |       |                              | 21,759     |                        |       |                            | 1,522      |             |       |             | 434        |   |   |   | — |   |   |   | 23,715 |   |   |
| INTERCOMPANY  PAYABLES (RECEIVABLES)                              |       |                              | 34,190     |                        |       |                            | (17,978    | )                |       |             | (16,535    | ) |   |   | 323 |   |   |   | — |   |   |
| COMMODITY  DERIVATES                                              |       |                              | 15,568     |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 15,568 |   |   |
| TOTAL LIABILITIES                                                 |       |                              | 306,191    |                        |       |                            | (14,827    | )                |       |             | (6,088     | ) |   |   | (497 | ) |   |   | 284,779 |   |   |
| TOTAL  STOCKHOLDERS’ EQUITY (DEFICIT)                        |       |                              | (10,701    | )                           |       |                            | 109,113    |             |       |             | 21,961     |   |   |   | (130,719 | ) |   |   | (19,346 | ) |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY (DEFICIT)        |       |                              | $          | 295,490                     |       |                            |       | $                | 94,286     |             |       |   | $ | 15,873 |   |   |   | $ | (131,216 | ) |   |   | $ | 274,433 |   |   |

 

18

----

**CONDENSEDCONSOLIDATING BALANCE SHEETSAT DECEMBER 31, 2004(Successor)(in thousands)**
| ** **                                                 | ** ** | ** 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                  |       |                              | 151,092    |                                    |       |                            | 32,166     |             |       |             | 15,155     |   |   |   | 150 |   |   |   | 198,563 |   |   |
| COMMODITY DERIVATIVES                                      |       |                              | 4,855      |                                    |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 4,855 |   |   |
| INVESTMENTS IN AFFILIATES                                  |       |                              | 41,293     |                                    |       |                            | 16,761     |             |       |             | —     |   |   |   | (58,054 | ) |   |   | — |   |   |
| OTHER                                                      |       |                              | 7,613      |                                    |       |                            | 36         |             |       |             | —     |   |   |   | — |   |   |   | 7,649 |   |   |
| TOTAL ASSETS                                               |       |                              | $          | 287,862                                 |       |                            |       | $                | 52,987     |             |       |   | $ | 15,937 |   |   |   | $ | (57,904 | ) |   |   | $ | 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 |   |   |
| Minority interest purchase                                 |       |                              | 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 |   |   |
| TOTAL  STOCKHOLDERS’ EQUITY                           |       |                              | 26,133     |                                    |       |                            | 61,840     |             |       |             | 18,757     |   |   |   | (57,904 | ) |   |   | 48,826 |   |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY (DEFICIT) |       |                              | $          | 287,862                                 |       |                            |       | $                | 52,987     |             |       |   | $ | 15,937 |   |   |   | $ | (57,904 | ) |   |   | $ | 298,882 |   |   |

 

19

----

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS(UNAUDITED)FOR THE SIX MONTHS ENDED JUNE 30, 2005(Successor)(in thousands)**
| ** **                                                 | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| OPERATING  ACTIVITIES                                      |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities             |       |                  | $          | 18,014                      |       |                            |       | $                | 5,955      |             |       |   | $ | 3,205 |   |   |   | $ | — |   |   |   | $ | 27,174 |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                     |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Expenditures for oil and gas properties                    |       |                  | (30,019    | )                           |       |                            | (640       | )                |       |             | —     |   |   |   | — |   |   |   | (30,659 | ) |   |
| 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  |       |                  | (45,764    | )                           |       |                            | 765        |             |       |             | —     |   |   |   | — |   |   |   | (44,999 | ) |   |
| 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 | ) |   |
| Purchase of minority interest shares                  |       |                  | (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 |   |   |

 

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**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)FOR 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 |   |   |
|                                                            |            |                       |            |                             |            |                                 |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

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 and ExchangeCommission on April 20, 2005, as well as with the financial statements andrelated notes and the other information appearing elsewhere in this quarterlyreport. As used in this quarterly report, unless the context otherwiseindicates, references to “we,” “our,” “ours,” and “us” refer to Venoco, 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 South EllwoodField, which caused the well’s average net production to drop approximately 970net BOE/D during the quarter. Since that time we have reworked and tested thewell at rates sufficient to restore 40 to 50% of the lost production. We areconducting further tests and analysis to determine if we can re-establish thefull production rates prior to the workover. The well is expected to return toproduction in the third quarter of 2005. We expect that capital projectscurrently underway will allow the Company to achieve further increases in productionby the fourth quarter of 2005. Such increases will result in reductions in ouroperating costs and general and administrative costs on a per barrel of oilequivalent (“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 which will not return to productionuntil the third quarter, including the previously discussed 3242-18 well. Theincreased production volumes in 2005 have combined with increased productprices to result in continuing improvement in our financial performance. Totalrevenues for second quarter 2005 were 

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$40.2 million, andincluded 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 the quarterwas $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 the firsthalf of 2005 for the acquisition of Marquez Energy including the payment ofrelated debt. During the first six months of 2005, we drilled eleven new wellsto 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 giveeconomic effect to the transaction as of February 1, 2005. As of December 31,2004, the field had proved reserves of approximately 3.4 MMBOE, according to areport by Netherland Sewell and Associates, Inc. (“NSAI”), most of whichwas comprised of oil. Average net production at the field was approximately 547

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BOE/d in the first quarterof 2005. On March 21, 2005, we completed our acquisition of MarquezEnergy, LLC. The transaction added proved reserves of approximately 2.0 MMBOEas of December 31, 2004 according to NSAI, substantially all of whichconsisted of natural gas. In order to facilitate a possible like-kind exchangeof our Big Mineral Creek property under Section 1031 of the InternalRevenue Code, the equity interests in Marquez Energy are currently being heldby an independent entity acting on our behalf. We have and will at all timesmaintain beneficial ownership of the interests, and will assume directownership of them within 180 days of the closing. The purpose of thisstructure is to give us the option of effecting a like-kind exchange of our BigMineral Creek property pursuant to Section 1031 and thereby deferring aportion of the taxes payable with respect to the sale of the Big Mineral Creekproperty. We are currently pursuing acquisition opportunities in this regard. Inthe event we do not acquire qualified replacement properties prior to September 27,2005, we will not be able to utilize the like-kind exchange provisions of Section 1031,in which case we may incur an income tax liability on the gain on the sale ofthe BMC property of up to approximately $ 15.2 million. In that event the $44.6million sales proceeds currently held in the account “Cash Restricted forInvestment in Oil and Natural Gas Properties” would be transferred to the cashaccount and be available for capital expenditures, the acquisition of long-termassets, and, subject to certain limitations pursuant to the covenants of oursenior 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 flows arepresented 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 500 BOE/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 Gas Production 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                         |       | (4.02                                                  | )          | (5.02                                                | )          |   | (20 | )% |   | (3.77 | ) | (3.63 | ) |   | 4 | % |   |
| Net realized                                   |       | $                                                      | 37.08      |                                                 | $          | 27.76 |   |   | 34 | % |   | $ | 36.68 |   | $ | 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                         |       | (.03                                                   | )          | (.10                                                 | )          |   | (70 | )% |   | (.02 | ) | (.22 | ) |   | (91 | )% |   |
| Net realized                                   |       | $                                                      | 6.36       |                                                 | $          | 5.65 |   |   | 13 | % |   | $ | 6.20 |   | $ | 5.37 |   |   | 15 | % |   |
| Average Sales  Price per BOE                   |       | $                                                      | 36.58      |                                                 | $          | 29.91 |   |   | 22 | % |   | $ | 36.37 |   | $ | 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 cubic feet*

*BOE—Barrel of oil equivalent (computed on an energyequivalent 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 $3.0 million, or $4.02per Bbl. and gas revenue by $0.1 million, or $0.03 per Mcf. During the secondquarter 2004, our realized net losses on hedging activities decreased oilrevenue by $3.6 million, or $5.02 per Bbl. and gas revenue by $0.1 million, or$ 0.10 per Mcf.

Prices to be realized forhedged production are likely to be less than NYMEX or hedged prices. The pricewe receive for our gas production is generally less than the NYMEX pricebecause of adjustments for delivery location (“basis”), relative quality andother factors. Prices to be realized for our hedged oil 

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productionare expected to be significantly less than 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                               |       |                                            | .35        |                                          |       |   | .32 |   |   |   | 9 | % |   |   | .32 |   |   |   | .35 |   |   |   | (9 | )% |   |
| 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)          Productionexpenses are defined as oil and natural gas production expenses and productiontaxes.

(2)          Netof amounts capitalized.

***Results ofOperations***

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

Net income for the secondquarter 2005 was $8.8 million compared to $5.5 million for the second quarterof 2004. The second quarter 2005 earnings include a $6.0 million commodityderivative loss ($3.0 million realized) versus a $4.2 million commodityderivative loss ($3.8 million realized) in the second quarter of 2004. Inaddition, due to increased debt levels, net interest expense totaled $3.3million in the second quarter of 2005 versus $0.3 million in the second quarterof 2004.

Oil and gas sales were$45.4 million, a 41% increase from the second quarter of 2004 oil and gas salesof $32.1 million. Oil sales increased $8.4 million (34%) because of a 25%increase in realized oil prices as well as a 2% increase in oil productionvolumes. Natural gas sales increased $4.8 million (69%) because of an increasein sales quantities of 52% as well as an increase in prices received for gassales of 11%. Revenues were reduced by both the realized and unrealizedcomponents of commodity derivative losses as described above. Other revenuesincreased $0.1 million.

Expensesfor the second quarter 2005 increased $6.5 million or 34% to $25.7 millioncompared to $19.2 million in the second quarter of 2004. Interest expenseincreased $3.0 million or 990% due to increased debt levels from our $150 millionsenior notes issued in 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 impairment expenses increased due to increased production volumes.Amortization of deferred loan costs increased $0.6 million due to amortizationof costs associated with the senior notes (see Note 5 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.

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***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. Earningsfor the first six months of 2005 include a $35.2 million commodity derivativeloss ($6.0 million realized) compared to $6.9 million commodity derivative loss($6.1 million realized) for the six months ended June 30, 2004. Netinterest expense totaled $6.8 million for the first half of 2005 compared 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 $28.3 million increase in unrealizedcommodity derivative losses as compared to the same period in 2004. Otherrevenues increased $0.2 million.

Expenses for the firsthalf of 2005 increased $13.0 million or 34% to $51.0 million compared to $38.0 millionin the first six months of 2004. Interest expense increased $6.2 million or977% due to increased debt levels from our $150 million senior notes issued in December 2004**.**Oil and natural gas production expenses increased $1.6million (7%) due to the increased field activity in 2005. General andadministrative expenses increased $2.0 million (34%) due to Marquez Energyexpenses not incurred in 2004, increases in technical staff, and higherprofessional fees related to accounting and information technology systemsconversions and enhancements and an accrual for the settlement of certainlitigation. Depletion, depreciation, amortization and impairment expensesincreased on a per unit basis due to an increase in estimated futuredevelopment costs and a decrease in reserves at December 31, 2004, therebyincreasing the depletion rate per unit and also due to increased productionvolumes. Amortization of deferred loan costs increased $0.9 million due toamortization of costs associated with the senior notes (see Note 5 to ourinterim 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** | ** ** |
| Cash provided by  operating activities |       | $                                             | 27,174     |   | $ | 18,877 |   |
| Cash used in  investing activities     |       | (44,999                                       | )          | (837 | ) |
| Cash used in financing  activities     |       | (31,229                                       | )          | (13,182 | ) |
|                                        |            |                                               |            |  |  |  |  |

 

Net cash provided by operating activities was $27.2million 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 operating expenses of $13.0. Oil and natural gas sales increased dueto increased production from development activity, the acquisition of MarquezEnergy and increased prices. The production increases were partially offset inthe second quarter by the loss of production from the Big Mineral Creek fieldthat was sold on March 31, 2005. Cash flows from operating activities ascompared to the prior years first six months were negatively impacted primarilyby payments of net premiums paid on derivative contracts of $10.7 million,increases in operating and general and 

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administrative expenses of$1.6 million and increases of oil and natural gas production expenses of $2.0 million.

Net cash used in investing activities was $45.0million in the first six months of 2005 and consisted primarily of $14.6million in expenditures to acquire Marquez Energy and $30.7 million inexpenditures for oil and gas properties.

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. Additionaldividends 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 from 1.75%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 annumis payable with respect to unused borrowing availability under the creditfacility. 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 May 27, 2005. We did not receive any proceeds from theexchange offer which we made to fulfill our obligations under the registrationrights agreement. Pursuant to the exchange offer, we issued the new notes inexchange for the previously outstanding notes. The terms of the new notes areidentical in all material respects to those of the old notes, except that thenew notes (i) have been registered under the Securities Act and thereforeare not subject to certain restrictions on transfer applicable to the old notes

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and (ii) do not haveregistration rights or provide for any additional interest related to theobligation to register. 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. Asof August 10, 2005, $20 million of indebtedness was outstanding underthe 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 from operationsdoes not meet our expectations, we may reduce the expected level of capitalexpenditures and/or fund a larger than expected portion of the expendituresusing borrowings under the Credit Agreement. We may also make acquisitions thatwill require additional capital resources. We may seek such additional capitalthrough a combination of funding sources that may include traditional reservebase borrowings, joint venture partnerships, production payment financings,asset sales and offerings of debt and equity securities and other sources. Wecannot assure you that needed capital will be available on acceptable terms orat all. If we are unable to obtain funds when needed or on acceptable terms, wemay not be able to complete acquisitions that may be favorable to us or financethe capital expenditures necessary to replace our reserves.

***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 by wordssuch as “expects,” “intends,” “plans,” “projects,” “predicts,” “anticipates,” “believes,”“estimates,” “goal,” “should,” “could,” “assume,” and similar words that conveythe uncertainty of future events. These statements are not guarantees of futureperformance and involve certain risks, uncertainties and assumptions that aredifficult to predict. In particular, the factors discussed in our RegistrationStatement on Form S-4 filed on April 20, 2004 could affect our actualresults and cause our actual results to differ materially from expectations,estimates, or assumptions expressed in, forecasted in, or implied in suchforward-looking statements. The cautionary statements contained in ourRegistration Statement on Form S-4 filed on April 20, 2004 are incorporatedherein by reference.

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**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.

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 of June 30,2005, the Company has entered into option, swap and collar agreements toreceive average minimum and maximum New York Mercantile Exchange (NYMEX) WestTexas Intermediate (WTI) prices as summarized below. Location and qualitydifferentials attributable to the Company’s properties are not included in thefollowing prices. The agreements provide for monthly settlement based on thedifferential between the agreement price and the actual NYMEX crude oil 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            |       |            | 2,946      |                 |       |   | $ | 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 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 |   |   |

 

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Our portfolio of commodityderivative transactions as of June 30, 2005 is summarized below:

**CrudeOil**
| **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      |   |

 

**NaturalGas**
| **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.

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(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-$8.50collar 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.

For information regardingthe effect of our commodity derivative transactions on our financial statementssee Note 4 to our interim condensed consolidated financial statements.

**Item 4.**                        Controlsand Procedures

**Disclosure Controlsand Procedures**

Timothy Marquez,our chief executive officer, and David Christofferson, our chief financialofficer, evaluated the effectiveness of our disclosure controls and proceduresas of June 30, 2005. Based on the evaluation, they believe that:

·       ourdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed by us in the reports we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms; and

·       ourdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed by us in the reports we file or submit under theSecurities Exchange Act of 1934 was accumulated and communicated to ourmanagement, including our chief executive officer and chief financial officer,as appropriate to allow timely decisions regarding required disclosure.

**Internal ControlOver Financial Reporting**

There has not been any change in our internal controlover financial reporting that occurred during the quarterly period ended June 30,2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal control 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-K dated April 4,2005 announcing the closing of the sale of our property in Big 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**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| August XX, 2005 | VENOCO, INC. |
|----------------------|--------------|
|                 | By:          |   |
|                 | Name:        | Timothy M. Marquez |
|                 | Title:       | *Chairman and Chief Executive Officer* |
|                 | By:          |   |
|                 | Name:        | David B. Christofferson |
|                 | Title:       | *Chief Financial Officer* |
|                      |              |  |  |

 

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