Use these links to rapidly review the documentVENOCO, INC. Form 10-Q for the Quarterly Period Ended June 30, 2006 TABLE OF CONTENTS



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-Q

|ý                                            | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|-------------------------------------------- | ----------------------------------------------------------------------------------------
|For the quarterly period ended June 30, 2006
|or                                          
|o                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-123711

Venoco, Inc.

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

Registrant's
telephone number, including area code:(303) 626-8300

N/A(Former name or former address, and former fiscal year, if changed since last report)

Indicate
by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ý NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).

Large Accelerated Filer    o

Accelerated Filer    o

Non-accelerated filer    ý


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

YES o NO ý

As of June 30, 2006, there were 32,692,500 shares of the 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, 2006  TABLE OF CONTENTS



|PART I.    |  | FINANCIAL INFORMATION                                                                                                                                      
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 1.    |  | Financial Statements (Unaudited)                                                                                                                           
|           |  | Condensed Consolidated Balance Sheets at December 31, 2005 and June 30, 2006                                                                               
|           |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and the Three and Six Months Ended June 30, 2006          
|           |  | Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2005 and the Three and Six Months Ended June 30, 2006
|           |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and the Six Months Ended June 30, 2006                              
|           |  | Notes to Condensed Consolidated Financial Statements                                                                                                       
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                 
|Item 4.    |  | Controls and Procedures                                                                                                                                    
|PART II.   |  | OTHER INFORMATION                                                                                                                                          
|Item 1.    |  | Legal Proceedings                                                                                                                                          
|Item 1A.   |  | Risk Factors                                                                                                                                               
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                
|Item 3.    |  | Defaults upon Senior Securities                                                                                                                            
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                                                        
|Item 5.    |  | Other Information                                                                                                                                          
|Item 6.    |  | Exhibits                                                                                                                                                   
|Signatures

2

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PART IFINANCIAL INFORMATION

VENOCO, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)        (In thousands, except shares and per share amounts)

|                                           |                                                                                                                                                                                    | December 31,
2005                   |                                   | June 30,
2006 |        
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | --------------------------------- | ------------- | -------
|ASSETS                                     |                                                                                                                                                                                    |                                     |                                   |               |        
|CURRENT ASSETS:                            |                                                                                                                                                                                    |                                     |                                   |               |        
|                                           | Cash and cash equivalents                                                                                                                                                          |                                     | $                                 | 9,389         |        
|                                           | Accounts receivable, net of allowance for doubtful accounts of $759 and $1,218 at December 31, 2005 and June 30, 2006, respectively                                                |                                     |                                   | 29,841        |        
|                                           | Inventories                                                                                                                                                                        |                                     |                                   | 1,753         |        
|                                           | Prepaid expenses and other current assets                                                                                                                                          |                                     |                                   | 4,351         |        
|                                           | Income tax receivable                                                                                                                                                              |                                     |                                   | 4,107         |        
|                                           | Deferred income taxes                                                                                                                                                              |                                     |                                   | 8,611         |        
|                                           | Commodity derivatives                                                                                                                                                              |                                     |                                   | 3,391         |        
|                                           |                                                                                                                                                                                    |                                     |                                   |               |        
|                                           |                                                                                                                                                                                    | Total current assets                |                                   |               | 61,443 
|PROPERTY, PLANT AND EQUIPMENT, AT COST:    |                                                                                                                                                                                    |                                     |                                   |               |        
|                                           | Oil and gas properties (full cost method, of which $2,275 and $3,732 for unproved properties were excluded from amortization at December 31, 2005 and June 30, 2006, respectively) |                                     |                                   | 269,922       |        
|                                           | Drilling equipment                                                                                                                                                                 |                                     |                                   | 7,947         |        
|                                           | Other property and equipment                                                                                                                                                       |                                     |                                   | 27,424        |        
|                                           |                                                                                                                                                                                    |                                     |                                   |               |        
|                                           |                                                                                                                                                                                    | Total property, plant and equipment |                                   |               | 305,293
|                                           | Accumulated depletion, depreciation, amortization and impairment                                                                                                                   |                                     |                                   | (71,517       | )      
|                                           |                                                                                                                                                                                    |                                     |                                   |               |        
|                                           |                                                                                                                                                                                    |                                     | Net property, plant and equipment |               |        
|OTHER ASSETS:                              |                                                                                                                                                                                    |                                     |                                   |               |        
|                                           | Commodity derivatives                                                                                                                                                              |                                     |                                   | 69            |        
|                                           | Deferred loan costs                                                                                                                                                                |                                     |                                   | 5,658         |        
|                                           | Other                                                                                                                                                                              |                                     |                                   | 1,612         |        
|                                           |                                                                                                                                                                                    |                                     |                                   |               |        
|                                           |                                                                                                                                                                                    | Total other assets                  |                                   |               | 7,339  
|                                           |                                                                                                                                                                                    |                                     |                                   |               |        
|TOTAL ASSETS                               |                                                                                                                                                                                    | $                                   | 302,558                           |               | $      
|                                           |                                                                                                                                                                                    |                                     |                                   |               |        
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                                                                                                                                    |                                     |                                   |               |        
|CURRENT LIABILITIES:                       |                                                                                                                                                                                    |                                     |                                   |               |        
|                                           | Accounts payable and accrued liabilities                                                                                                                                           |                                     | $                                 | 31,134        |        
|                                           | Undistributed revenue payable                                                                                                                                                      |                                     |                                   | 2,155         |        
|                                           | Interest payable                                                                                                                                                                   |                                     |                                   | 720           |        
|                                           | Current maturities of long-term debt                                                                                                                                               |                                     |                                   | 126           |        
|                                           | Commodity derivatives                                                                                                                                                              |                                     |                                   | 26,397        |        
|                                           |                                                                                                                                                                                    |                                     |                                   |               |        
|                                           |                                                                                                                                                                                    | Total current liabilities           |                                   |               | 60,532 
|LONG-TERM DEBT                             |                                                                                                                                                                                    |                                     | 178,943                           |               |        
|DEFERRED INCOME TAXES                      |                                                                                                                                                                                    |                                     | 24,108                            |               |        
|COMMODITY DERIVATIVES                      |                                                                                                                                                                                    |                                     | 11,992                            |               |        
|ASSET RETIREMENT OBLIGATIONS               |                                                                                                                                                                                    |                                     | 22,649                            |               |        
|OTHER LONG-TERM LIABILITIES                |                                                                                                                                                                                    |                                     |                                  |               |        
|                                           |                                                                                                                                                                                    |                                     |                                   |               |        
|                                           |                                                                                                                                                                                    | Total liabilities                   |                                   |               | 298,224
|COMMITMENTS AND CONTINGENCIES              |                                                                                                                                                                                    |                                     |                                   |               |        
|STOCKHOLDERS' EQUITY:                      |                                                                                                                                                                                    |                                     |                                   |               |        
|                                           | Common stock, $.01 par value (200,000,000 shares authorized; 32,692,500 shares issued and outstanding at December 31, 2005 and June 30, 2006)                                      |                                     |                                   | 327           |        
|                                           | Additional paid-in capital                                                                                                                                                         |                                     |                                   | 20,976        |        
|                                           | Retained earnings (accumulated deficit)                                                                                                                                            |                                     |                                   | (3,785        | )      
|                                           | Accumulated other comprehensive loss                                                                                                                                               |                                     |                                   | (13,184       | )      
|                                           |                                                                                                                                                                                    |                                     |                                   |               |        
|                                           |                                                                                                                                                                                    | Total stockholders' equity          |                                   |               | 4,334  
|                                           |                                                                                                                                                                                    |                                     |                                   |               |        
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                                    | $                                   | 302,558                           |               | $      
|                                           |                                                                                                                                                                                    |                                     |                                   |               |        

See notes to condensed consolidated financial statements.

3

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VENOCO, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)        (In thousands, except per share amounts)

|                                                        |                                                        | Three Months Ended
June 30, |        | Six Months Ended
June 30, |       
|------------------------------------------------------- | ------------------------------------------------------ | --------------------------- | ------ | ------------------------- | ------
|
|REVENUES:                                               |                                                        |                             |        |                           |       
|                                                        | Oil and natural gas sales                              |                             | $      | 45,352                    |       
|                                                        | Commodity derivative lossesrealized                   |                             |        | (3,590                    | )     
|                                                        | Commodity derivative lossesunrealized                 |                             |        | (2,404                    | )     
|                                                        | Other                                                  |                             |        | 1,012                     |       
|                                                        |                                                        |                             |        |                           |       
|                                                        |                                                        | Total revenues              |        |                           | 40,370
|EXPENSES:                                               |                                                        |                             |        |                           |       
|                                                        | Oil and natural gas production                         |                             |        | 12,352                    |       
|                                                        | Transportation expense                                 |                             |        | 536                       |       
|                                                        | Depletion, depreciation and amortization               |                             |        | 3,840                     |       
|                                                        | Accretion of abandonment liability                     |                             |        | 576                       |       
|                                                        | General and administrative, net of amounts capitalized |                             |        | 4,583                     |       
|                                                        | Amortization of deferred loan costs                    |                             |        | 676                       |       
|                                                        | Interest, net                                          |                             |        | 3,323                     |       
|                                                        |                                                        |                             |        |                           |       
|                                                        |                                                        | Total expenses              |        |                           | 25,886
|                                                        |                                                        |                             |        |                           |       
|Income (loss) before minority interest and income taxes |                                                        |                             | 14,484 |                           |       
|                                                        | Income tax provision (benefit)                         |                             |        | 5,704                     |       
|                                                        |                                                        |                             |        |                           |       
|Net income (loss) before minority interest              |                                                        |                             | 8,780  |                           |       
|                                                        | Minority interest in Marquez Energy                    |                             |        |                          |       
|                                                        |                                                        |                             |        |                           |       
|Net income (loss)                                       |                                                        | $                           | 8,780  |                           | $     
|                                                        |                                                        |                             |        |                           |       
|Earnings per common share:                              |                                                        |                             |        |                           |       
|                                                        | Basic                                                  |                             | $      | 0.27                      |       
|                                                        | Diluted                                                |                             | $      | 0.27                      |       

See
notes to condensed consolidated financial statements.

4

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VENOCO, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME        (In thousands)

|                                                      |                                                                             | Three Months Ended June 30, |       | Six Months Ended June 30, |  
|----------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------- | ----- | ------------------------- | -
|
|Net income (loss)                                     |                                                                             | $                           | 8,780 |                           | $
|OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAX: |                                                                             |                             |       |                           |  
|Hedging activities:                                   |                                                                             |                             |       |                           |  
|                                                      | Reclassification adjustments for settled contracts                          |                             |       |                          |  
|                                                      | Changes in fair value of effective portion of outstanding hedging positions |                             |       | (997                      | )
|                                                      |                                                                             |                             |       |                           |  
|Other comprehensive income (loss)                     |                                                                             |                             | (997  | )                         |  
|                                                      |                                                                             |                             |       |                           |  
|Comprehensive income (loss)                           |                                                                             | $                           | 7,783 |                           | $
|                                                      |                                                                             |                             |       |                           |  

See
notes to condensed consolidated financial statements.

5

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VENOCO, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)        (In thousands)

|                                                  |                                                                                   | Six Months Ended June 30,                                           |                                                    
|------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:             |                                                                                   |                                                                     |                                                    
|                                                  | Net income                                                                        |                                                                     | $                                                  
|                                                  | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                     |                                                    
|                                                  |                                                                                   | Depletion, depreciation, amortization and impairment                |                                                    
|                                                  |                                                                                   | Accretion of abandonment liability                                  |                                                    
|                                                  |                                                                                   | Deferred income taxes (benefit)                                     |                                                    
|                                                  |                                                                                   | Share-based compensation                                            |                                                    
|                                                  |                                                                                   | Amortization of deferred loan costs                                 |                                                    
|                                                  |                                                                                   | Amortization of bond discounts                                      |                                                    
|                                                  |                                                                                   | Minority interest in undistributed earnings                         |                                                    
|                                                  |                                                                                   | Unrealized commodity derivative losses and amortization of premiums |                                                    
|Changes in operating assets and liabilities:      |                                                                                   |                                                                     |                                                    
|                                                  |                                                                                   | Accounts receivable                                                 |                                                    
|                                                  |                                                                                   | Inventories                                                         |                                                    
|                                                  |                                                                                   | Prepaid expenses and other current assets                           |                                                    
|                                                  |                                                                                   | Income tax receivable                                               |                                                    
|                                                  |                                                                                   | Other assets                                                        |                                                    
|                                                  |                                                                                   | Accounts payable and accrued liabilities                            |                                                    
|                                                  |                                                                                   | Undistributed revenue payable                                       |                                                    
|Net premiums paid on derivative contracts         |                                                                                   |                                                                     | (10,715                                            
|                                                  |                                                                                   |                                                                     |                                                    
|Net cash provided by operating activities         |                                                                                   |                                                                     | 28,221                                             
|CASH FLOWS FROM INVESTING ACTIVITIES:             |                                                                                   |                                                                     |                                                    
|                                                  | Expenditures for oil and natural gas properties                                   |                                                                     |                                                    
|                                                  | Expenditures for drilling equipment                                               |                                                                     |                                                    
|                                                  | Expenditures for other property and equipment                                     |                                                                     |                                                    
|                                                  | Proceeds from sale of oil and natural gas properties                              |                                                                     |                                                    
|                                                  | Increase in cash restricted for investment in oil and natural gas properties      |                                                                     |                                                    
|                                                  | Acquisition of TexCal Energy, net of cash acquired                                |                                                                     |                                                    
|                                                  | Acquisition of Marquez Energy, LLC                                                |                                                                     |                                                    
|                                                  | Notes receivable  officers                                                       |                                                                     |                                                    
|                                                  |                                                                                   |                                                                     |                                                    
|                                                  |                                                                                   |                                                                     | Net cash used in investing activities              
|CASH FLOWS FROM FINANCING ACTIVITIES:             |                                                                                   |                                                                     |                                                    
|                                                  | Proceeds from long-term debt                                                      |                                                                     |                                                    
|                                                  | Principal payments on long-term debt                                              |                                                                     |                                                    
|                                                  | Deferred loan costs                                                               |                                                                     |                                                    
|                                                  | Dividend paid to shareholder                                                      |                                                                     |                                                    
|                                                  | Distribution payments to Marquez Energy members                                   |                                                                     |                                                    
|                                                  | Repurchase of common shares                                                       |                                                                     |                                                    
|                                                  |                                                                                   |                                                                     |                                                    
|                                                  |                                                                                   |                                                                     | Net cash (used in) provided by financing activities
|                                                  |                                                                                   |                                                                     |                                                    
|                                                  | Net (decrease) increase in cash and cash equivalents                              |                                                                     |                                                    
|                                                  | Cash and cash equivalents, beginning of period                                    |                                                                     |                                                    
|                                                  |                                                                                   |                                                                     |                                                    
|                                                  | Cash and cash equivalents, end of period                                          |                                                                     | $                                                  
|                                                  |                                                                                   |                                                                     |                                                    
|Supplemental Disclosure of Cash Flow Information |                                                                                   |                                                                     |                                                    
|                                                  | Cash paid for interest                                                            |                                                                     | $                                                  
|                                                  | Cash paid for income taxes                                                        |                                                                     | $                                                  
|Supplemental Disclosure of Noncash Activities    |                                                                                   |                                                                     |                                                    
|                                                  | Decrease (increase) in accrued capital expenditures                               |                                                                     | $                                                  
|                                                  | Distribution of land and building                                                 |                                                                     | $                                                  
|                                                  | Distribution of building note payable                                             |                                                                     | $                                                  

See notes to condensed consolidated financial statements.

6

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VENOCO, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        (UNAUDITED)

1.     BASIS OF PRESENTATION

Description of OperationsVenoco, Inc. ("Venoco" or the "Company"), a Delaware corporation, is
engaged in the business of acquiring interests in, and exploring for and developing, oil and natural gas properties with a focus offshore and onshore California and with additional operations in
Texas.

Condensed Consolidated Financial StatementsThe condensed unaudited consolidated financial statements include the accounts of
Venoco and its subsidiaries, all of which are wholly owned. The financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial
reporting. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all material adjustments considered necessary for a fair
presentation of the Company's interim results have been reflected. Venoco's 2005 Annual Report on Form 10-K includes certain definitions and a summary of significant accounting
policies and should be read in conjunction with this report. The results for interim periods are not necessarily indicative of annual results.

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

Earnings Per ShareStatement of Financial Accounting Standards No. 128,Earnings Per
Share,requires presentation of "basic" and "diluted" earnings per share. Basic net income per common share of stock is calculated by dividing net income by the weighted average
number of common shares outstanding during each period. Diluted net income per common share of stock is calculated by dividing net income by the weighted average number of common shares outstanding
and other dilutive securities. The only securities considered dilutive are the Company's non-qualified stock option awards.

The
following table sets forth the calculation of basic and diluted earnings per share (in thousands except per share amounts):

|                                                 |                                                       | Three Months Ended June 30, |        | Six Months Ended June 30,
|------------------------------------------------ | ----------------------------------------------------- | --------------------------- | ------ | -------------------------
|
|Net income (loss)                                |                                                       | $                           | 8,780  |                          
|Adjustments to net income for dilution           |                                                       |                             |       |                          
|                                                 |                                                       |                             |        |                          
|                                                 | Net income (loss) adjusted for the effect of dilution |                             | $      | 8,780                    
|                                                 |                                                       |                             |        |                          
|Basic weighted average common shares outstanding |                                                       |                             | 32,693 |                          
|Add: dilutive effect of stock options            |                                                       |                             |       |                          
|                                                 |                                                       |                             |        |                          
|                                                 | Diluted weighted average common shares outstanding    |                             |        | 32,693                   
|                                                 |                                                       |                             |        |                          
|Basic earnings per common share                  |                                                       | $                           | 0.27   |                          
|Diluted earnings per common share                |                                                       | $                           | 0.27   |                          

Common Control MergerOn March 21, 2005, the Company acquired Marquez Energy, a Colorado limited liability company that
was majority-owned and controlled by Tim Marquez. Because of the common ownership of Marquez Energy and the Company, this acquisition has been recorded in a manner similar to a
pooling-of-interests. Common control occurred in July 2004 when Tim Marquez acquired an additional 53% of the Company's common stock bringing his common stock holdings
to

7

---



94%.
The Company's financial statements have been adjusted to give effect to the acquisition of Marquez Energy as if it had occurred in July 2004.

2.     ACQUISITIONS

TexCal Energy.On March 31, 2006, the Company acquired 100% of the members' interest in TexCal Energy (LP) LLC (the
"TexCal Acquisition"), an independent exploration and production company with properties in Texas and California, for approximately $456.8 million in cash and related financing costs of
$14.4 million. TexCal had proved reserves of 31.4 MMBOE as of December 31, 2005 according to a reserve report prepared by TexCal's independent engineers. TexCal's operations are located
entirely onshore and are concentrated in the Gulf Coast region of Texas and in the Sacramento Basin in California. The Company financed the acquisition through loans advanced under a second amendment
and restatement of its existing revolving credit facility and a new senior secured second lien term loan facility. The purchase price was allocated to assets and liabilities, adjusted for tax effects,
based on their estimated fair values at the date of acquisition. The acquisition was accounted for using
the purchase method of accounting and has been included in the consolidated financial statements of Venoco as of the date of the acquisition.

The
cash consideration paid for the TexCal Acquisition was preliminarily allocated as follows (in thousands):

Purchase Price
AllocationCurrent assets

$
25,834Oil and gas properties


459,732Other non-current assets


1,018Current liabilities


(22,052
)Long-term asset retirement obligations


(7,722
)Cash consideration

$
456,810


The
following unaudited pro forma condensed consolidated operating results for the six months ended June 30, 2005 and 2006 give effect to the TexCal Acquisition as if it had been
completed as of January 1, 2005 and January 1, 2006. The pro forma amounts shown below are not necessarily indicative of the operating results that would have occurred if the transaction
had occurred on such date. The pro forma adjustments made are based on certain assumptions that we believe are reasonable and on currently available information (in thousands except per share
amounts).

Six Months Ended June 30,2005

2006Total revenues

$
67,748

$
131,739Net income

$
10,771

$
16,606Basic earnings per common share:

$
0.33

$
0.51


Marquez Energy.On March 21, 2005, the Company acquired Marquez Energy, a Colorado limited liability company that was
majority-owned and controlled by Tim Marquez. The Company had paid a deposit of $2 million to the members 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 Marquez Energy's existing debt. As discussed in Note 1, for financial
reporting purposes the acquisition was accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests.

8

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The
Marquez Energy acquisition added proved reserves of approximately 2.0 MMBOE as of December 31, 2004 based on a reserve report prepared by Netherland, Sewell and
Associates, Inc. (NSAI). The $16.8 million purchase price for Marquez Energy was based on members' equity shown on Marquez Energy's unaudited December 31, 2004 balance sheet as
adjusted to reflect the value of its oil and natural gas properties (as determined by NSAI as of December 31, 2004) and certain other adjustments. For the purpose of calculating the purchase
price, the following values were assigned to Marquez Energy's proved reserves: (i) $1.75/Mcfe for its proved developed producing reserves, (ii) $1.00/Mcfe for its proved developed
non-producing reserves and (iii) $0.75/Mcfe for its proved undeveloped reserves. Pursuant to the purchase agreement, NSAI conducted a supplemental evaluation of the Marquez Energy
properties as of year-end 2005, and NSAI or another nationally recognized engineering firm will conduct a further supplemental evaluation as of year-end 2006. In the event that
the year-end 2006 evaluation attributes proved reserves to the Marquez Energy properties as of December 31, 2004 in excess of those reflected in NSAI's initial report, an additional
payment will be made to the former holders of interests in Marquez Energy pursuant to the same formula, subject to a maximum aggregate price of $25 million.
No additional payments were due as of December 31, 2005 based on the year-end evaluation performed by NSAI.

3.     SALES OF PROPERTIES

In January 2006, the Company sold 35% of the interests it acquired in the Willows-Beehive Bend and Bounde Creek gas fields for $3.0 million. No gain
was recognized from the sale for financial reporting purposes. The Company applied the proceeds of the sale to reduce the capitalized cost of oil and natural gas properties.

In
February 2005, the Company entered into a purchase 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 the transaction as of February 1, 2005. The closing of the transaction occurred on
March 31, 2005. In order to facilitate a like-kind exchange of the Company's BMC property under Section 1031 of the Internal Revenue Code, the proceeds from the sale of
$44.6 million were deposited with a qualified intermediary. The Company acquired qualified replacement properties of approximately $15.6 million prior to the 180 day deadline,
which expired on September 27, 2005. Included in the qualified replacement properties acquired was a portion of the Marquez Energy properties. The Company has deferred a portion of the gain on
sale of the BMC property under the provisions of Section 1031 of the Internal Revenue Code. However, since the price of the qualified replacement property acquired is less than the proceeds
from the sale of the BMC property, the Company recognized for tax purposes a gain on the sale of the BMC property of approximately $27.9 million and incurred an associated tax liability of
$11.1 million. In accordance with its accounting policies, the Company did not recognize a gain on sale for financial reporting purposes, but applied the proceeds to reduce the capitalized cost
of its oil and natural gas properties. At June 30, 2005, the Company had not recorded a gain on the sale of the BMC property, but applied the sales proceeds of $44.6 million to reduce
the capitalized cost of oil and natural gas properties and recorded the cash received as restricted for investment in oil and natural gas properties.

9

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4.     LONG-TERM DEBT

Long term debt consisted of the following as of the dates indicated (in thousands):

December 31,
2005

June 30,
2006Revolving credit facility due March 2009

$
20,000

$
159,529Second lien term loan due March 2011





350,0008.75% senior notes due December 2011


149,180


149,2485.79% mortgage on office building due January 2015


9,889


Total long-term debt


179,069


658,777Less: current portion of long-term debt


(126
)

Long-term debt, net of current portion

$
178,943

$
658,777


The
Company financed the TexCal Acquisition through loans advanced under a second amendment and restatement of its existing revolving credit facility and a new senior secured second lien
term loan facility. On March 30, 2006, the Company borrowed $350 million pursuant to the second lien term loan facility. The Company entered into the second amendment and restatement of
its existing revolving credit facility on March 30, 2006. On March 31, 2006, the Company borrowed approximately $119.5 million under the amended revolving credit facility to
finance the remainder of the TexCal purchase price and related financing costs of approximately $14.4 million. The term loan facility was amended and restated as of April 28, 2006 and
the revolving credit facility was further amended on May 2, 2006. The following summarizes certain terms of the credit facilities as amended.

The
amended revolving credit facility has an aggregate maximum loan amount of $300 million and an initial borrowing base of $200 million. Principal on the second lien term
loan facility is payable on March 30, 2011, and principal on the revolving credit facility is payable on March 30, 2009. Pursuant to mandatory prepayment provisions set forth in the
credit facilities, substantially all of the proceeds of asset sales and additional borrowings (except for certain unsecured borrowings and additional borrowings under the revolving credit facility),
and up to 50% of the proceeds of equity issuances, must be used to reduce amounts outstanding under one or both facilities. The Company may from time to
time make optional prepayments on outstanding loans. Under the second lien term loan facility, optional prepayments made prior to March 30, 2008 are subject to a prepayment premium. The
revolving credit facility is secured by a first priority lien on substantially all of the Company's assets and is guaranteed by each of its subsidiaries other than Ellwood Pipeline, Inc. The
second lien term loan facility is secured by second priority liens on the same collateral as the revolving credit facility. A collateral trust agreement has been entered into in order to provide, for
the benefit of the holders of the Company's senior notes, liens on the Company's property that are equal and ratable with the liens securing the second lien term loan facility. At such time as all
liens securing outstanding indebtedness under the revolving credit facility and the second lien term loan facility constitute "Permitted Liens" (as defined in the indenture governing the senior
notes), the collateral trust agreement will be terminated and the senior notes will no longer be secured obligations, but will be effectively junior in right of payment to the indebtedness under the
revolving credit facility and the second lien term loan facility to the extent of the value of the collateral securing those facilities.

Loans
made under the revolving credit agreement and the second lien term loan facility are designated, at the Company's option, as either "Base Rate Loans" or "LIBO Rate Loans." Base
Rate Loans under the revolving credit facility bear interest at a floating rate equal to (i) the greater of Bank of Montreal's announced base rate and the overnight federal funds rate plus
0.50% plus (ii) a margin ranging from zero to 0.75%, based upon utilization. LIBO Rate Loans under the revolving credit facility bear interest at (i) LIBOR plus (ii) a margin
ranging from 1.50% to 2.25%, based upon

10

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utilization.
A commitment fee ranging from 0.375% to 0.5% per annum is payable with respect to unused borrowing availability under the facility.

Base
Rate Loans under the second lien term loan facility bear interest at a floating rate equal to (i) the greater of the administrative agent's announced base rate and the
overnight federal funds rate plus 0.50% plus (ii) a margin ranging from 3.00% to 3.50%. LIBO Rate Loans under the second lien term loan facility bear interest at (i) LIBOR plus
(ii) a margin ranging from 4.00% to 4.50%. In each case, the applicable margin depends on the Company's consolidated leverage ratio and whether the Company has completed a public equity
offering.

The
revolving credit agreement and the second lien term loan facility contain customary representations, warranties, events of default, indemnities and covenants, including financial
covenants that require the Company to maintain specified ratios of EBITDA to interest expense, current assets to current liabilities, debt to EBITDA and PV-10 to total debt.

On
March 22, 2006, the Company paid a dividend consisting of 100% of the membership interests in 6267 Carpinteria Ave. LLC ("6267 Carpinteria") to its sole stockholder, a trust
controlled by the Company's CEO. The obligation for the 5.79% mortgage on the office building owned by 6267 Carpinteria was transferred to the sole stockholder in connection with the dividend.

See
Note 5 for a description of the interest rate derivative contracts entered into during the quarter ended June 30, 2006.

5.     HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS

The Company utilizes swap and collar agreements and option contracts to hedge the effect of price changes on a portion of its future oil and natural gas
production. The Company also utilizes swap agreements to hedge the effect of interest rate changes on a portion of its long term debt. The objective of the Company's hedging activities and the use of
derivative financial instruments is to achieve more predictable cash flows. While the use of these derivative instruments limits the downside risk of adverse price or interest rate movements, they
also limit future revenues from favorable price or interest rate movements. The use of derivatives also involves the risk that the counterparties to such instruments will be unable to meet the
financial terms of such contracts.

The
components of commodity derivative losses in the consolidated income statements are as follows (in thousands):

|                                                            |                                                                              | Three Months Ended
June 30, |        | Six Months Ended
June 30, |  
|----------------------------------------------------------- | ---------------------------------------------------------------------------- | --------------------------- | ------ | ------------------------- | -
|
|Realized commodity derivative (losses)                      |                                                                              | $                           | (3,590 | )                         | $
|Unrealized commodity derivative (losses) gains:             |                                                                              |                             |        |                           |  
|                                                            | Change in fair value of derivatives that do not qualify for hedge accounting |                             |        | (5,340                    | )
|                                                            | Ineffective portion of derivatives qualifying for hedge accounting           |                             |        | 2,936                     |  
|                                                            |                                                                              |                             |        |                           |  
|                                                            | Total unrealized commodity derivative (losses)                               |                             |        | (2,404                    | )
|                                                            |                                                                              |                             |        |                           |  
|Total realized and unrealized commodity derivative (losses) |                                                                              | $                           | (5,994 | )                         | $
|                                                            |                                                                              |                             |        |                           |  

The
estimated fair values of derivatives included in the condensed consolidated balance sheets at December 31, 2005 and June 30, 2006 are summarized below. The increase in
the net derivative liability from December 31, 2005 to June 30, 2006 is primarily attributable to the effect of rising oil

11

---



prices
and the addition of oil collars, partially offset by the effect of declining natural gas prices, and natural gas puts and collars and cash settlements of derivatives during the period (in
thousands):

December 31,
2005

June 30,
2006Derivative assets:Oil derivative contracts

$
1,899

$
1,185Gas derivative contracts


1,561


12,964Derivative liabilities:Oil derivative contracts


(26,540
)

(56,727
)Gas derivative contracts


(11,849
)

(6,011
)Net derivative asset (liability)

$
(34,929
)
$
(48,589
)


As
of June 30, 2006, an unrealized derivative fair value loss of $23.5 million ($14.2 million after tax), related to cash flow hedges, was recorded in accumulated
other comprehensive loss. Based on the estimated fair values of derivative contracts that qualify for cash flow hedge accounting at June 30, 2006, the Company expects to reclassify net losses
of $11.2 million ($6.8 million after tax) out of accumulated other comprehensive loss into earnings during the next twelve months; however, actual gains or losses may vary materially
based on actual prices at the contract settlement dates.

Crude Oil Agreements.As of June 30, 2006, the Company has entered into option, swap and collar agreements to receive
average minimum and maximum New York Mercantile Exchange (NYMEX) West Texas Intermediate (WTI) prices as summarized below. Location and quality differentials attributable to the Company's properties
are not included in the following prices. The agreements provide for monthly settlement based on the differential between the agreement price and the actual NYMEX crude oil price.

|                                                  |                             | Minimum |        | Maximum
|------------------------------------------------- | --------------------------- | ------- | ------ | -------
|
|Crude oil hedges at June 30, 2006 for production: |                             |         |        |        
|                                                  | July 1December 31, 2006    |         | 10,500 |        
|                                                  | January 1December 31, 2007 |         | 7,313  |        
|                                                  | January 1December 31, 2008 |         | 4,950  |        
|                                                  | January 1December 31, 2009 |         | 4,580  |        

Natural Gas Agreements.As of June 30, 2006, the Company had entered into option, swap and collar agreements to
receive average minimum and maximum PG&E Citygate prices as follows:

|                                                    |                             | Minimum |        | Maximum
|--------------------------------------------------- | --------------------------- | ------- | ------ | -------
|
|Natural gas hedges at June 30, 2006 for production: |                             |         |        |        
|                                                    | July 1December 31, 2006    |         | 27,000 |        
|                                                    | January 1December 31, 2007 |         | 21,000 |        
|                                                    | January 1December 31, 2008 |         | 13,500 |        
|                                                    | January 1December 31, 2009 |         | 9,500  |        

The
Company entered into derivative contracts for options that contain provisions for the deferral of the payment or receipt of premiums until the period of production for which the
derivative contract relates. Both the derivative and the net liability for the payment of premiums were recorded at their fair values at the inception of the derivative contracts. The premiums for the
derivative contract options contain an implicit interest rate factor for the difference in the derivative's fair value at inception and the liability for payment of premiums. The Company recorded
$4.1 million for the net derivative

12

---



premiums
payable at June 30, 2006 (including $2.2 million in accounts payable and accrued liabilities and $1.9 million in long-term liabilities), net of the discount
which will be amortized into interest expense over the term of the related contracts.

As
of June 30, 2006, the Company had entered into a forward sales contract with a gas purchaser under which it is obligated for physical delivery of specified volumes of gas with
a floor price. As this contract provides for physical delivery of the gas, it is not considered a derivative because it has been designated as a normal sale. The transaction will be recorded in the
financial statements when the associated delivery occurs. The Company has contracted for 2,000 MCF per day at a floor price of $4.85 per MCF for the period October 1, 2005 to
December 31, 2006.

In
August 2006, the Company entered into two basis swap contracts to mitigate the risk of adverse price movements in 2007 and 2008 between the NYMEX natural gas price and PG&E Citygate
index, which is the index on which the Company's Sacramento Basin natural gas sales are based. Each swap contract is for 10,000 MMbtus per day of natural gas production and requires monthly
settlement. The calendar year 2007 contract calls for the Company to receive the NYMEX Last Day Settlement Price less $0.58 per MMbtu and pay the PG&E Citygate Natural Gas Index. The calendar year
2008 contract calls for the Company to receive the NYMEX Last Day Settlement Price less $0.32 and pay the PG&E Citygate Natural Gas Index.

The
Company entered into an interest rate swap transaction during the quarter ended June 30, 2006 to lock in its interest cost on $200 million of borrowings under the
second lien term loan facility at a fixed rate of 9.9225%, including a 4.5% margin, through May 2008. The Company pays a fixed interest rate of 5.4225% and receives a floating interest rate
based on the three-month LIBOR rate. Settlements are made quarterly beginning August 2006. The Company has not designated this interest rate swap as a hedge. The fair value of the interest rate
swap of $202 at June 30, 2006 has been recorded in other assets with a corresponding credit for the unrealized gain to interest expense.

6.     ASSET RETIREMENT OBLIGATIONS

The Company's asset retirement obligations primarily represent the estimated present value of the amounts expected to be incurred to plug, abandon and remediate
producing properties (including removal of certain onshore and offshore facilities in California) at the end of their productive lives in accordance with applicable state and federal laws. The Company
determines asset retirement obligations by calculating the present value of estimated cash flows related to plug and abandonment liabilities. The asset retirement liability is accreted to its present
value each period and the capitalized asset retirement cost is depleted over the productive life of the related assets. Changes resulting from revisions to the timing or the amount of the original
estimate of undiscounted cash flows are recognized as an increase or decrease in the asset retirement obligation and the related capitalized asset retirement costs. Capitalized costs are depleted as a
component of the full cost pool using the units-of production method.

13

---



The
following table summarizes the activities for the Company's asset retirement obligations for the six months ended June 30, 2006 (in thousands):

June 30,
2006Asset retirement obligations at beginning of period

$
22,757Revisions of estimated liabilities


2,594Liabilities incurred


9,517Liabilities settled


(5
)Accretion expense


1,111Asset retirement obligations at end of period


35,974Less: current asset retirement obligations (classified with accounts payable and accrued liabilities)


(1,556
)Long-term asset retirement obligations

$
34,418


Liabilities
incurred include $8.9 million of asset retirement obligations attributable to the acquisition of TexCal.

7.     SHARE-BASED PAYMENTS

Prior to January 1, 2006, the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under APB Opinion No. 25, no compensation expense was recognized for stock options issued
to employees if the grant price equaled or exceeded the market price on the date of the option grant. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123 (Revised), "Share-Based Payment" ("SFAS 123(R)") using the modified prospective method. Under this method, compensation cost is recorded for all unvested stock options
beginning in the period of adoption and prior period financial statements are not restated. Under the fair value recognition provisions of SFAS 123(R), stock-based compensation is measured at
the grant date based on the value of the awards and the value is recognized on a straight-line basis over the requisite service period (usually the vesting period). SFAS 123(R) also
requires the recognition of the equity component of deferred compensation as additional paid-in capital.

In
accordance with the provisions of SFAS 123(R), total stock-based compensation cost in the amount of $0.7 million and $1.3 million was recorded as general and
administrative expense for the three and six months ended June 30, 2006. SFAS 123(R) requires the Company to estimate forfeitures in calculating the cost related to stock-based
compensation as opposed to recognizing these forfeitures and the corresponding reduction in expense as they occur. The cumulative adjustment from adopting SFAS 123(R) as of January 1,
2006 to include estimated forfeitures in the calculation was not material and had no impact on earnings per share.

Equity Incentive PlanDuring 2005, the Company entered into non-qualified stock option agreements with certain
employees, officers and directors of the Company other than Mr. Marquez. Total options granted in 2005 through June 30, 2006 were 4,253,663 with a weighted average exercise price of
$7.58 ($6.00 to $20.00). The options vest over a four year period, with 20% vesting on the grant date and 20% vesting on each subsequent anniversary of the grant date.

14

---



The
following summarizes the Company's stock option activity for the six months ended June 30, 2006:

Shares

Weighted
Average
Exercise
PriceOutstanding at January 1, 2006


4,013,663

$
7.04Granted


240,000

$
16.58Exercised





Cancelled





Outstanding, end of period


4,253,663

$
7.58Exercisable, end of period


1,561,965Weighted average grant date fair value of options granted

$
5.79


Additional
information related to options outstanding as of June 30, 2006 is as follows:

|              |  | Options Outstanding |  | Options Exercisable
|------------- |  | ------------------- |  | -------------------
|
|$6.00$7.33   |  | 2,995,200           |  | 8.7 years          
|$8.00$8.68   |  | 560,963             |  | 8.8 years          
|$10.67$13.33 |  | 497,500             |  | 9.2 years          
|$15.0020.00  |  | 200,000             |  | 9.7 years          
|              |  |                     |  |                    
|              |  | 4,253,663           |  | 8.8 years          
|              |  |                     |  |                    

Pro Forma EffectsNo compensation cost was recorded prior to January 1, 2006 because the issuances of the stock options
were at exercise prices that were equal to or higher than their fair market value on the date of the grant. Had the Company recognized compensation expense for all options granted based upon the
estimated fair value on the grant date under the fair value methodology prescribed by SFAS 123, its pro forma net earnings and earnings per common share for

15

---



the
three and six months ended June 30, 2005 would have been as follows (in thousands, except per share amounts):

Three Months
Ended
June 30, 2005

Six Months
Ended
June 30, 2005Net income as reported

$
8,780

$
1,962Add:Stock-based compensation expense included in the income statement, net of related tax effects





Deduct:Total stock based compensation expense determined under the fair value method for all awards, net of related tax effects


(357
)

(1,320
)Pro forma net income

$
8,423

$
642Basic earnings per common share:As reported

$
0.27

$
0.06Pro forma

$
0.26

$
0.02Diluted earnings per common share:As reported

$
0.27

$
0.06Pro forma

$
0.26

$
0.02


The
fair value of each option is estimated on the grant date using the Black-Scholes option valuation model. Option valuation models require the input of highly subjective assumptions
including the expected volatility of the price of the underlying stock. The Company's stock options have characteristics significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate, it is management's opinion that the valuations afforded by the existing models are different from the value that the
options would realize if traded in the market.

The
following assumptions were used during the six months ended June 30, 2005 and 2006 to compute the weighted average fair market value of options granted during the periods
presented:

Three Months Ended
June 30,

Six Months Ended
June 30,2005

2006

2005

2006Expected option life

5 years

7 years

5 years

7 yearsRisk free interest rates

3.90
%
4.83
%
3.89
%
4.32
%Estimated volatility

76
%
61
%
76
%
61
%Dividend yield

0.0
%
0.0
%
0.0
%
0.0
%


The
expected life of the options is based, in part, on historical exercise patterns of the holders of options with similar terms with consideration given to how historical patterns may
differ from future exercise patterns based on current or expected market conditions and employee turnover. On January 1, 2006, the Company began calculating the expected life of options granted
using the "simplified method" set forth in Staff Accounting Bulletin 107 (average of vesting period and the term of the option). The risk free interest rate was based on the U.S. Treasury yield curve
in effect at the time of grant. The expected volatility was based on the historical volatility of other public companies with characteristics similar to the Company for the past five years.

As
of June 30, 2006, there was $6.2 million of total unrecognized compensation cost related to stock options which is expected to be amortized over a weighted average
period of 2.9 years.

16

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8.     SHAREHOLDERS' EQUITY

On January 3, 2005, a dividend of $35.0 million was paid to the Company's sole stockholder, a trust controlled by the Company's CEO, from the
proceeds of the issuance of the senior notes.

On
March 22, 2006, the Company paid a dividend consisting of 100% of its membership interest in 6267 Carpinteria to its sole stockholder, a trust controlled by the Company's CEO.
6267 Carpinteria owns the office building and related land leased by the Company in Carpinteria, California. At the date of the dividend, 6267 Carpinteria had net assets of $4.7 million,
including $0.4 million in cash and land and building with a net book value of $13.4 million and a note payable of $9.9 million.

9.     LITIGATION

Beverly Hills Litigation

Eight lawsuits have been filed by persons who are graduates of the Beverly Hills High School or citizens of Beverly Hills/Century City or visitors to that area
from the time period running from the 1930s to date. Six of these lawsuits name the Company as a defendant. There are approximately 1,000 plaintiffs who claim they are suffering from various forms of
cancer or some other medical ailment, fear they may suffer from such maladies in the future, or are related in some manner to someone that suffered from cancer (e.g. heirs or spouses). Plaintiffs'
claims are based on alleged exposure to levels of some substances in the air, soil and water which derive from either oil field or other operations in the area. The Company has owned an oil and gas
facility adjacent to the school since 1995. For the majority of the plaintiffs, their alleged exposures occurred before the Company owned the facility. It is anticipated that additional plaintiffs may
be added to the litigation over time. The Company has defense and indemnity obligations to certain other defendants in the actions. Management believes that the claims made in the suits are without
merit and the Company intends to defend against the claims vigorously. However, the Company cannot predict, at this time, the outcome of the suits. All cases are consolidated before one judge. The
judge has ordered that all of the cases be stayed except for a test
case consisting of twelve plaintiffs. The trial date for the twelve "test" plaintiffs is scheduled to commence in October 2006.

One
of the Company's insurers is currently paying for the defense of these lawsuits under a reservation of its rights. Two other insurers that provided insurance coverage to the Company
(the "Declining Insurers") have taken the position that they are not required to provide coverage relating to the lawsuits because of a pollution exclusion contained in their policies. The Beverly
Hills School District (the "District"), as an additional insured on those policies, brought a declaratory relief action against those insurers in Los Angeles County Superior Court. In
November 2005, the court ruled in favor of one of the insurers. The District is appealing that decision. On July 10, 2006 the same Los Angeles County Superior Court denied a motion for
summary judgment by another of the insurers against the District on the issue of the duty to defend. On February 10, 2006, the Company filed its own declaratory relief action against the
Declining Insurers in Santa Barbara County Superior Court seeking a determination that those insurers have a duty to defend the Company in the lawsuits. The policy issued by the insurer that is
currently providing defense of the lawsuits contains a pollution exclusion similar to that at issue in the action brought by the District. However, the Company has no reason to believe that the
insurer currently providing defense of these actions will cease providing such defense. If it does, and the Company is unsuccessful in enforcing its rights in any subsequent litigation, the Company
may be required to bear the costs of the defense, and those costs may be material. If it is ultimately determined that the pollution exclusion or another exclusion contained in one or more of the
Company's policies applies, the Company will not have the protection of those policies with respect to any damages or settlement costs ultimately incurred in the lawsuits.

The
Company cannot predict the cost of defense and indemnity obligations relating to the Beverly Hills litigation, if any, at the present time. In accordance with SFAS No. 5, Accounting for

17

---



Contingencies, the Company has not accrued for a loss contingency relating to the litigation because it believes that, although unfavorable outcomes in the proceedings may be
possible, they are not considered by management to be probable or reasonably estimable. If one or more of these matters are resolved in a manner adverse to the Company, and if insurance coverage is
determined to not be applicable, their impact on the Company's results of operations, financial position and/or liquidity could be material.

Personal Injury Claims

On February 23, 2006, a complaint was filed in Santa Barbara Superior Court against the Company on behalf of a boy who was severely injured after falling
from a cliff located on property jointly owned by the Company and another company. The complaint asserts that the Company is responsible for the boy's injuries and that the boy is entitled to damages,
including reimbursement of past medical expenses, future expenses, loss of earning capacity and general damages. The Company believes that it has no liability in this matter and intends to defend
itself vigorously. The extent of the Company's
liability with respect to the claim, if any, cannot be predicted at this time but the Company does not expect it to be material. In accordance with SFAS No. 5, Accounting for Contingencies, the
Company has not accrued for a loss contingency related to this claim because it believes that, although an unfavorable
outcome may be possible, losses are not considered by management to be probable.

On
March 31, 2006, a complaint was filed in District Court in Madison County, Texas against a subsidiary of the Company by the widow of an individual who was fatally injured while
working as a gauger/pumper at a well operated by the subsidiary. The cause of the accident is still being investigated. The Company believes that it has insurance coverage with respect to the
accident.

Other

In addition, the Company is subject to other claims and legal actions that may arise in the ordinary course of business. The Company believes that the ultimate
liability, if any, with respect to these other claims and legal actions will not have a material effect on the Company's consolidated financial position, results of operations or liquidity.

10.   RECENT ACCOUNTING PRONOUNCEMENTS

In June 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections, which replaces
APB Opinion No. 20,Accounting Changes, and SFAS No. 3,Reporting Accounting Changes in Interim Financial
Statements. Statement 154 changes the requirements for the accounting and reporting of a change in accounting principle. APB Opinion No. 20 previously required that most
voluntary changes in an accounting principle be recognized by including the cumulative effect of the new accounting principle in net income of the period of the change. SFAS No. 154 now
requires retrospective application of changes in an accounting principle to prior period financial statements, unless it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. The Statement is effective for fiscal years beginning after December 15, 2005. The Company adopted SFAS No. 154 effective January 1, 2006 and the
adoption could have a material impact on its financial position and results of operations if the Company has an accounting change.

In
February 2006, the FASB issued SFAS No. 155,Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements
No. 133 and 140("SFAS 155"). This statement amendsSFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities("SFAS 133"), and SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilitiesand resolves issues addressed in SFAS 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interest in Securitized Financial Assets."
This Statement: (a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise

18

---



would
require bifurcation; (b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133;
(c) establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments
that contain an embedded derivative requiring bifurcation; (d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, (e) eliminates
restrictions on a qualifying special-purpose entity's ability to hold passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial
instrument. The standard also requires presentation within the financial statements that identifies those hybrid financial instruments for which the fair value election has been applied and
information on the income statement impact of the changes in fair value of those instruments. The Company is required to apply SFAS 155 to all financial instruments acquired, issued or subject
to a remeasurement event beginning January 1, 2007, although early adoption is permitted as of the beginning of an entity's fiscal year. The Company is evaluating the provisions of
SFAS 155. The effects of adopting of SFAS 155 on the Company's financial statements are not known at this time.

11.   GUARANTOR FINANCIAL INFORMATION

In connection with the issuance of the senior notes in December 2004, BMC, Ltd., Whittier Pipeline Corp. and 217 State Street, Inc.
("Guarantors") fully and unconditionally guaranteed, on a joint and several basis, the Company's obligations under the senior notes. On March 31, 2005, Marquez Energy became a Guarantor. The
Company has one subsidiary, Ellwood Pipeline, Inc., that is not a Guarantor. On November 1, 2005, the Company merged Marquez Energy and 217 State Street, Inc. with and into
Venoco, Inc., leaving BMC and Whittier as the only Guarantors until the TexCal Acquisition. On March 31, 2006, TexCal and its four subsidiaries became Guarantors. All Guarantors are 100%
owned by the Company.

19

---



The
following is condensed consolidating financial information for the three and six months ended June 30, 2005 and 2006 and as of December 31, 2005 and June 30,
2006.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS        THREE MONTHS ENDED JUNE 30, 2005 (Unaudited)        (in thousands)

|                            |                                                        | Venoco, Inc.   |        | Guarantor
Subsidiaries |        | Non-
Guarantor
Subsidiaries |      | Eliminations |       | Consolidated |      
|--------------------------- | ------------------------------------------------------ | -------------- | ------ | ---------------------- | ------ | --------------------------- | ---- | ------------ | ----- | ------------ | -----
|REVENUES:                   |                                                        |                |        |                        |        |                             |      |              |       |              |      
|                            | Oil and natural gas sales                              |                | $      | 45,059                 |        | $                           | 293  |              | $     |             |      
|                            | Commodity derivative losses (realized)                 |                |        | (3,590                 | )      |                             |     |              |       |             |      
|                            | Commodity derivative losses (unrealized)               |                |        | (2,404                 | )      |                             |     |              |       |             |      
|                            | Other                                                  |                |        | 907                    |        |                             |     |              |       | 1,695        |      
|                            |                                                        |                |        |                        |        |                             |      |              |       |              |      
|                            |                                                        | Total revenues |        |                        | 39,972 |                             |      | 293          |       |              | 1,695
|                            |                                                        |                |        |                        |        |                             |      |              |       |              |      
|EXPENSES:                   |                                                        |                |        |                        |        |                             |      |              |       |              |      
|                            | Oil and natural gas production                         |                |        | 12,075                 |        |                             | 13   |              |       | 264          |      
|                            | Transportation expense                                 |                |        | 1,839                  |        |                             | (141 | )            |       |             |      
|                            | Depletion, depreciation and amortization               |                |        | 3,758                  |        |                             | 1    |              |       | 81           |      
|                            | Accretion of abandonment liability                     |                |        | 557                    |        |                             | 14   |              |       | 5            |      
|                            | General and administrative, net of amounts capitalized |                |        | 4,854                  |        |                             |     |              |       | 157          |      
|                            | Amortization of deferred loan costs                    |                |        | 676                    |        |                             |     |              |       |             |      
|                            | Interest, net                                          |                |        | 3,625                  |        |                             |     |              |       | (302         | )    
|                            |                                                        |                |        |                        |        |                             |      |              |       |              |      
|                            |                                                        | Total expenses |        |                        | 27,384 |                             |      | (113         | )     |              | 205  
|                            |                                                        |                |        |                        |        |                             |      |              |       |              |      
|Equity in subsidiary income |                                                        |                | 2,068  |                        |        |                            |      |              |      |              |      
|                            |                                                        |                |        |                        |        |                             |      |              |       |              |      
|Income before income taxes  |                                                        |                | 14,656 |                        |        | 406                         |      |              | 1,490 |              |      
|Income tax provision        |                                                        |                | 5,876  |                        |        | 131                         |      |              | 581   |              |      
|                            |                                                        |                |        |                        |        |                             |      |              |       |              |      
|Net income loss             |                                                        | $              | 8,780  |                        | $      | 275                         |      | $            | 909   |              | $    
|                            |                                                        |                |        |                        |        |                             |      |              |       |              |      

20

---



CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS        THREE MONTHS ENDED JUNE 30, 2006 (Unaudited)        (in thousands)

|                                  |                                                        | Venoco, Inc.   |        | Guarantor
Subsidiaries |        | Non-
Guarantor
Subsidiaries |        | Eliminations |       | Consolidated |      
|--------------------------------- | ------------------------------------------------------ | -------------- | ------ | ---------------------- | ------ | --------------------------- | ------ | ------------ | ----- | ------------ | -----
|REVENUES:                         |                                                        |                |        |                        |        |                             |        |              |       |              |      
|                                  | Oil and natural gas sales                              |                | $      | 51,050                 |        | $                           | 25,053 |              | $     |             |      
|                                  | Commodity derivative losses (realized)                 |                |        | (6,727                 | )      |                             |       |              |       |             |      
|                                  | Commodity derivative losses (unrealized)               |                |        | (5,469                 | )      |                             |       |              |       |             |      
|                                  | Other                                                  |                |        | 1,426                  |        |                             | 129    |              |       | 1,203        |      
|                                  |                                                        |                |        |                        |        |                             |        |              |       |              |      
|                                  |                                                        | Total revenues |        |                        | 40,280 |                             |        | 25,182       |       |              | 1,203
|                                  |                                                        |                |        |                        |        |                             |        |              |       |              |      
|EXPENSES:                         |                                                        |                |        |                        |        |                             |        |              |       |              |      
|                                  | Oil and natural gas production                         |                |        | 13,558                 |        |                             | 9,243  |              |       | 395          |      
|                                  | Transportation expense                                 |                |        | 1,771                  |        |                             | 60     |              |       |             |      
|                                  | Depletion, depreciation and amortization               |                |        | 11,301                 |        |                             | 5,481  |              |       | 21           |      
|                                  | Accretion of abandonment liability                     |                |        | 455                    |        |                             | 181    |              |       | 5            |      
|                                  | General and administrative, net of amounts capitalized |                |        | 7,473                  |        |                             | 242    |              |       | 66           |      
|                                  | Amortization of deferred loan costs                    |                |        | 1,133                  |        |                             |       |              |       |             |      
|                                  | Interest, net                                          |                |        | 15,439                 |        |                             | (20    | )            |       | (563         | )    
|                                  |                                                        |                |        |                        |        |                             |        |              |       |              |      
|                                  |                                                        | Total expenses |        |                        | 51,130 |                             |        | 15,187       |       |              | (76  
|                                  |                                                        |                |        |                        |        |                             |        |              |       |              |      
|Equity in subsidiary income       |                                                        |                | 6,764  |                        |        |                            |        |              |      |              |      
|                                  |                                                        |                |        |                        |        |                             |        |              |       |              |      
|Income (loss) before income taxes |                                                        |                | (4,086 | )                      |        | 9,995                       |        |              | 1,279 |              |      
|Income tax provision (benefit)    |                                                        |                | (4,410 | )                      |        | 3,998                       |        |              | 512   |              |      
|                                  |                                                        |                |        |                        |        |                             |        |              |       |              |      
|Net income (loss)                 |                                                        | $              | 324    |                        | $      | 5,997                       |        | $            | 767   |              | $    
|                                  |                                                        |                |        |                        |        |                             |        |              |       |              |      

21

---



CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS        SIX MONTHS ENDED JUNE 30, 2005 (Unaudited)        (in thousands)

|                                                  |                                                        | Venoco, Inc.   |       | Guarantor
Subsidiaries |        | Non-
Guarantor
Subsidiaries |        | Eliminations |       | Consolidated |      
|------------------------------------------------- | ------------------------------------------------------ | -------------- | ----- | ---------------------- | ------ | --------------------------- | ------ | ------------ | ----- | ------------ | -----
|REVENUES:                                         |                                                        |                |       |                        |        |                             |        |              |       |              |      
|                                                  | Oil and natural gas sales                              |                | $     | 84,704                 |        | $                           | 2,686  |              | $     |             |      
|                                                  | Commodity derivative losses (realized)                 |                |       | (7,155                 | )      |                             |       |              |       |             |      
|                                                  | Commodity derivative losses (unrealized)               |                |       | (27,999                | )      |                             |       |              |       |             |      
|                                                  | Other                                                  |                |       | 1,692                  |        |                             | 21,670 |              |       | 3,742        |      
|                                                  |                                                        |                |       |                        |        |                             |        |              |       |              |      
|                                                  |                                                        | Total revenues |       |                        | 51,242 |                             |        | 24,356       |       |              | 3,742
|                                                  |                                                        |                |       |                        |        |                             |        |              |       |              |      
|EXPENSES:                                         |                                                        |                |       |                        |        |                             |        |              |       |              |      
|                                                  | Oil and natural gas production                         |                |       | 23,138                 |        |                             | 477    |              |       | 667          |      
|                                                  | Transportation expense                                 |                |       | 3,833                  |        |                             | (141   | )            |       |             |      
|                                                  | Depletion, depreciation and amortization               |                |       | 9,083                  |        |                             | 254    |              |       | 156          |      
|                                                  | Accretion of abandonment liability                     |                |       | 969                    |        |                             | 38     |              |       | 11           |      
|                                                  | General and administrative, net of amounts capitalized |                |       | 8,427                  |        |                             | 124    |              |       | 287          |      
|                                                  | Amortization of deferred loan costs                    |                |       | 1,021                  |        |                             |        |              |       |              |      
|                                                  | Interest, net                                          |                |       | 7,403                  |        |                             |        |              |       | (583         | )    
|                                                  |                                                        |                |       |                        |        |                             |        |              |       |              |      
|                                                  |                                                        | Total expenses |       |                        | 53,874 |                             |        | 752          |       |              | 538  
|                                                  |                                                        |                |       |                        |        |                             |        |              |       |              |      
|Equity in subsidiary income                       |                                                        |                | 4,102 |                        |        |                             |        |              |       |              |      
|                                                  |                                                        |                |       |                        |        |                             |        |              |       |              |      
|Income before income taxes                        |                                                        |                | 1,470 |                        |        | 23,604                      |        |              | 3,204 |              |      
|Income tax provision (benefit)                    |                                                        |                | (534  | )                      |        | 9,902                       |        |              | 1,303 |              |      
|                                                  |                                                        |                |       |                        |        |                             |        |              |       |              |      
|Income before minority interest in Marquez Energy |                                                        |                | 2,004 |                        |        | 13,702                      |        |              | 1,901 |              |      
|Minority interest in Marquez Energy               |                                                        |                | 42    |                        |        |                            |        |              |      |              |      
|                                                  |                                                        |                |       |                        |        |                             |        |              |       |              |      
|Net income                                        |                                                        | $              | 1,962 |                        | $      | 13,702                      |        | $            | 1,901 |              | $    
|                                                  |                                                        |                |       |                        |        |                             |        |              |       |              |      

22

---



CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS        SIX MONTHS ENDED JUNE 30, 2006 (Unaudited)        (in thousands)

|                               |                                                        | Venoco, Inc.   |        | Guarantor
Subsidiaries |        | Non-
Guarantor
Subsidiaries |        | Eliminations |       | Consolidated |      
|------------------------------ | ------------------------------------------------------ | -------------- | ------ | ---------------------- | ------ | --------------------------- | ------ | ------------ | ----- | ------------ | -----
|REVENUES:                      |                                                        |                |        |                        |        |                             |        |              |       |              |      
|                               | Oil and natural gas sales                              |                | $      | 100,931                |        | $                           | 26,443 |              | $     |             |      
|                               | Commodity derivative losses (realized)                 |                |        | (12,789                | )      |                             |       |              |       |             |      
|                               | Commodity derivative losses (unrealized)               |                |        | (14,977                | )      |                             |       |              |       |             |      
|                               | Other                                                  |                |        | 2,861                  |        |                             | 129    |              |       | 2,744        |      
|                               |                                                        |                |        |                        |        |                             |        |              |       |              |      
|                               |                                                        | Total revenues |        |                        | 76,026 |                             |        | 26,572       |       |              | 2,744
|                               |                                                        |                |        |                        |        |                             |        |              |       |              |      
|EXPENSES:                      |                                                        |                |        |                        |        |                             |        |              |       |              |      
|                               | Oil and natural gas production                         |                |        | 25,301                 |        |                             | 9,324  |              |       | 893          |      
|                               | Transportation expense                                 |                |        | 3,411                  |        |                             | 60     |              |       |             |      
|                               | Depletion, depreciation and amortization               |                |        | 17,902                 |        |                             | 5,500  |              |       | 95           |      
|                               | Accretion of abandonment liability                     |                |        | 904                    |        |                             | 196    |              |       | 11           |      
|                               | General and administrative, net of amounts capitalized |                |        | 12,170                 |        |                             | 242    |              |       | 202          |      
|                               | Amortization of deferred loan costs                    |                |        | 1,471                  |        |                             |       |              |       |             |      
|                               | Interest, net                                          |                |        | 19,653                 |        |                             | (20    | )            |       | (1,004       | )    
|                               |                                                        |                |        |                        |        |                             |        |              |       |              |      
|                               |                                                        | Total expenses |        |                        | 80,812 |                             |        | 15,302       |       |              | 197  
|                               |                                                        |                |        |                        |        |                             |        |              |       |              |      
|Equity in subsidiary income    |                                                        |                | 8,290  |                        |        |                            |        |              |      |              |      
|                               |                                                        |                |        |                        |        |                             |        |              |       |              |      
|Income before income taxes     |                                                        |                | 3,504  |                        |        | 11,270                      |        |              | 2,547 |              |      
|Income tax provision (benefit) |                                                        |                | (1,927 | )                      |        | 4,508                       |        |              | 1,019 |              |      
|                               |                                                        |                |        |                        |        |                             |        |              |       |              |      
|Net income                     |                                                        | $              | 5,431  |                        | $      | 6,762                       |        | $            | 1,528 |              | $    
|                               |                                                        |                |        |                        |        |                             |        |              |       |              |      

23

---



CONDENSED CONSOLIDATING BALANCE SHEETS        AT DECEMBER 31, 2005        (in thousands)

|                                           |                                           | Venoco, Inc. |         | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiaries |        | Eliminations |         | Consolidated
|------------------------------------------ | ----------------------------------------- | ------------ | ------- | ---------------------- | - | -------------------------- | ------ | ------------ | ------- | ------------
|ASSETS                                     |                                           |              |         |                        |   |                            |        |              |         |             
|CURRENT ASSETS:                            |                                           |              |         |                        |   |                            |        |              |         |             
|                                           | Cash and cash equivalents                 |              | $       | 9,041                  |   | $                          |       |              | $       | 348         
|                                           | Accounts receivable                       |              |         | 29,253                 |   |                            | 490    |              |         | 98          
|                                           | Inventories                               |              |         | 1,753                  |   |                            |       |              |         |            
|                                           | Prepaid expenses and other current assets |              |         | 3,894                  |   |                            |       |              |         | 457         
|                                           | Income taxes receivable                   |              |         | 4,107                  |   |                            |       |              |         |            
|                                           | Deferred income taxes                     |              |         | 8,611                  |   |                            |       |              |         |            
|                                           | Commodity derivatives                     |              |         | 3,391                  |   |                            |       |              |         |            
|                                           |                                           |              |         |                        |   |                            |        |              |         |             
|TOTAL CURRENT ASSETS                       |                                           |              | 60,050  |                        |   | 490                        |        |              | 903     |             
|                                           |                                           |              |         |                        |   |                            |        |              |         |             
|                                           | PROPERTY, PLANT & EQUIPMENT, NET          |              |         | 222,798                |   |                            | 17,756 |              |         | 14,868      
|                                           | COMMODITY DERIVATIVES                     |              |         | 69                     |   |                            |       |              |         |            
|                                           | INVESTMENTS IN AFFILIATES                 |              |         | 69,651                 |   |                            |       |              |         |            
|                                           | OTHER                                     |              |         | 7,270                  |   |                            |       |              |         |            
|                                           |                                           |              |         |                        |   |                            |        |              |         |             
|TOTAL ASSETS                               |                                           | $            | 359,838 |                        | $ | 18,246                     |        | $            | 15,771  |             
|                                           |                                           |              |         |                        |   |                            |        |              |         |             
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                           |              |         |                        |   |                            |        |              |         |             
|CURRENT LIABILITIES:                       |                                           |              |         |                        |   |                            |        |              |         |             
|                                           | Accounts payable and accrued liabilities  |              | $       | 31,064                 |   |                            | 10     |              |         | 60          
|                                           | Undistributed revenue payable             |              |         | 2,155                  |   |                            |       |              |         |            
|                                           | Accrued interest                          |              |         | 720                    |   |                            |       |              |         |            
|                                           | Current maturities of long-term debt      |              |         |                       |   |                            |       |              |         | 126         
|                                           | Commodity derivatives                     |              |         | 26,397                 |   |                            |       |              |         |            
|                                           |                                           |              |         |                        |   |                            |        |              |         |             
|TOTAL CURRENT LIABILITIES                  |                                           |              | 60,336  |                        |   | 10                         |        |              | 186     |             
|                                           |                                           |              |         |                        |   |                            |        |              |         |             
|LONG-TERM DEBT                             |                                           |              | 169,180 |                        |   |                           |        |              | 9,763   |             
|DEFERRED INCOME TAXES                      |                                           |              | 24,108  |                        |   |                           |        |              |        |             
|COMMODITY DERIVATIVES                      |                                           |              | 11,992  |                        |   |                           |        |              |        |             
|ASSET RETIREMENT OBLIGATIONS               |                                           |              | 21,507  |                        |   | 701                        |        |              | 441     |             
|INTERCOMPANY PAYABLES (RECEIVABLES)        |                                           |              | 68,381  |                        |   | (49,325                    | )      |              | (19,056 | )           
|                                           |                                           |              |         |                        |   |                            |        |              |         |             
|TOTAL LIABILITIES                          |                                           |              | 355,504 |                        |   | (48,614                    | )      |              | (8,666  | )           
|                                           |                                           |              |         |                        |   |                            |        |              |         |             
|TOTAL STOCKHOLDERS' EQUITY                 |                                           |              | 4,334   |                        |   | 66,860                     |        |              | 24,437  |             
|                                           |                                           |              |         |                        |   |                            |        |              |         |             
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                           | $            | 359,838 |                        | $ | 18,246                     |        | $            | 15,771  |             
|                                           |                                           |              |         |                        |   |                            |        |              |         |             

24

---





CONDENSED CONSOLIDATING BALANCE SHEETS        AT JUNE 30, 2006 (Unaudited)        (in thousands)

|                                           |                                           | Venoco, Inc. |         | Guarantor
Subsidiaries |   | Non-
Guarantor
Subsidiaries |         | Eliminations |         | Consolidated
|------------------------------------------ | ----------------------------------------- | ------------ | ------- | ---------------------- | - | --------------------------- | ------- | ------------ | ------- | ------------
|ASSETS:                                    |                                           |              |         |                        |   |                             |         |              |         |             
|CURRENT ASSETS:                            |                                           |              |         |                        |   |                             |         |              |         |             
|                                           | Cash and cash equivalents                 |              | $       | 83                     |   | $                           | 13,258  |              | $       | 46          
|                                           | Accounts receivable                       |              |         | 27,887                 |   |                             | 12,713  |              |         | 69          
|                                           | Inventories                               |              |         | 2,177                  |   |                             |        |              |         |            
|                                           | Prepaid expenses and other current assets |              |         | 3,379                  |   |                             | 1,859   |              |         |            
|                                           | Income taxes receivable                   |              |         | 2,811                  |   |                             |        |              |         |            
|                                           | Deferred income taxes                     |              |         | 9,673                  |   |                             |        |              |         |            
|                                           | Commodity derivatives                     |              |         | 7,507                  |   |                             |        |              |         |            
|                                           |                                           |              |         |                        |   |                             |         |              |         |             
|TOTAL CURRENT ASSETS                       |                                           |              | 53,517  |                        |   | 27,830                      |         |              | 115     |             
|                                           |                                           |              |         |                        |   |                             |         |              |         |             
|                                           | PROPERTY, PLANT & EQUIPMENT, NET          |              |         | 280,815                |   |                             | 483,097 |              |         | 975         
|                                           | COMMODITY DERIVATIVES                     |              |         | 6,642                  |   |                             |        |              |         |            
|                                           | INVESTMENTS IN AFFILIATES                 |              |         | 540,039                |   |                             |        |              |         |            
|                                           | OTHER                                     |              |         | 20,987                 |   |                             | 985     |              |         |            
|                                           |                                           |              |         |                        |   |                             |         |              |         |             
|TOTAL ASSETS                               |                                           | $            | 902,000 |                        | $ | 511,912                     |         | $            | 1,090   |             
|                                           |                                           |              |         |                        |   |                             |         |              |         |             
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                           |              |         |                        |   |                             |         |              |         |             
|CURRENT LIABILITIES:                       |                                           |              |         |                        |   |                             |         |              |         |             
|                                           | Accounts payable and accrued liabilities  |              | $       | 30,860                 |   | $                           | 12,487  |              | $       |            
|                                           | Undistributed revenue payable             |              |         | 513                    |   |                             | 10,304  |              |         |            
|                                           | Accrued interest                          |              |         | 11,380                 |   |                             | (1      | )            |         |            
|                                           | Commodity derivatives                     |              |         | 33,344                 |   |                             |        |              |         |            
|                                           |                                           |              |         |                        |   |                             |         |              |         |             
|TOTAL CURRENT LIABILITIES:                 |                                           |              | 76,097  |                        |   | 22,790                      |         |              |        |             
|                                           |                                           |              |         |                        |   |                             |         |              |         |             
|LONG-TERM DEBT                             |                                           |              | 658,777 |                        |   |                            |         |              |        |             
|DEFERRED INCOME TAXES                      |                                           |              | 24,635  |                        |   |                            |         |              |        |             
|COMMODITY DERIVATIVES                      |                                           |              | 29,394  |                        |   |                            |         |              |        |             
|ASSET RETIREMENT OBLIGATIONS               |                                           |              | 25,488  |                        |   | 8,478                       |         |              | 452     |             
|INTERCOMPANY PAYABLES (RECEIVABLES)        |                                           |              | 80,421  |                        |   | (51,442                     | )       |              | (28,979 | )           
|OTHER LONG-TERM LIABILITIES                |                                           |              | 1,901   |                        |   |                            |         |              |        |             
|                                           |                                           |              |         |                        |   |                             |         |              |         |             
|TOTAL LIABILITIES                          |                                           |              | 896,713 |                        |   | (20,174                     | )       |              | (28,527 | )           
|                                           |                                           |              |         |                        |   |                             |         |              |         |             
|TOTAL STOCKHOLDERS' EQUITY                 |                                           |              | 5,287   |                        |   | 532,086                     |         |              | 29,617  |             
|                                           |                                           |              |         |                        |   |                             |         |              |         |             
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                           | $            | 902,000 |                        | $ | 511,912                     |         | $            | 1,090   |             
|                                           |                                           |              |         |                        |   |                             |         |              |         |             

25

---



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS        SIX MONTHS ENDED JUNE 30, 2005 (Unaudited)        (in thousands)

|                                      |                                                                      | Venoco, Inc.                          |   | Guarantor
Subsidiaries |         | Non-
Guarantor
Subsidiaries |         | Eliminations |   | Consolidated |       
|------------------------------------- | -------------------------------------------------------------------- | ------------------------------------- | - | ---------------------- | ------- | --------------------------- | ------- | ------------ | - | ------------ | ------
|OPERATING ACTIVITIES:                 |                                                                      |                                       |   |                        |         |                             |         |              |   |              |       
|                                      | Net cash provided by operating activities                            |                                       | $ | 23,461                 |         | $                           | 1,555   |              | $ | 3,205        |       
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                      |                                       |   |                        |         |                             |         |              |   |              |       
|                                      | Capital expenditures for oil and gas properties                      |                                       |   | (31,469                | )       |                             | (581    | )            |   |              |       
|                                      | Acquisition of Marquez Energy, LLC                                   |                                       |   | (14,628                | )       |                             |         |              |   |              |       
|                                      | Proceeds from sale of oil and gas properties                         |                                       |   |                        |         |                             | 44,619  |              |   |              |       
|                                      | Increase in cash restricted for investment in oil and gas properties |                                       |   |                        |         |                             | (44,619 | )            |   |              |       
|                                      | Notes receivableofficers and employees                              |                                       |   | 1,390                  |         |                             |         |              |   |              |       
|                                      | Capital expenditures for property and equipment and other            |                                       |   | (759                   | )       |                             |         |              |   |              |       
|                                      |                                                                      |                                       |   |                        |         |                             |         |              |   |              |       
|                                      |                                                                      | Net cash used in investing activities |   |                        | (45,466 | )                           |         | (581         | ) |              |      
|                                      |                                                                      |                                       |   |                        |         |                             |         |              |   |              |       
|                                      | Net proceeds from (repayments of) intercompany borrowings            |                                       |   | 3,978                  |         |                             | (974    | )            |   | (3,004       | )     
|                                      | Proceeds from long-term debt                                         |                                       |   | 23,000                 |         |                             |         |              |   |              |       
|                                      | Principal payments on long-term debt                                 |                                       |   | (12,684                | )       |                             |         |              |   | 7            |       
|                                      | Distribution payments to Marquez Energy member                       |                                       |   | (707                   | )       |                             |         |              |   |              |       
|                                      | Payments of dividends                                                |                                       |   | (35,000                | )       |                             |         |              |   |              |       
|                                      | Repurchase of common stock                                           |                                       |   | (5,245                 | )       |                             |         |              |   |              |       
|                                      | Increase in deferred loan costs                                      |                                       |   | (599                   | )       |                             |         |              |   |              |       
|                                      |                                                                      |                                       |   |                        |         |                             |         |              |   |              |       
|                                      |                                                                      | Net cash used in financing activities |   |                        | (27,257 | )                           |         | (974         | ) |              | (2,997
|                                      |                                                                      |                                       |   |                        |         |                             |         |              |   |              |       
|                                      | Net increase (decrease) in cash and cash equivalents                 |                                       |   | (49,262                | )       |                             |        |              |   | 208          |       
|                                      | Cash and cash equivalents, beginning of period                       |                                       |   | 54,665                 |         |                             |        |              |   | 50           |       
|                                      |                                                                      |                                       |   |                        |         |                             |         |              |   |              |       
|                                      | Cash and cash equivalents, end of period                             |                                       | $ | 5,403                  |         | $                           |        |              | $ | 258          |       
|                                      |                                                                      |                                       |   |                        |         |                             |         |              |   |              |       

26

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS        SIX MONTHS ENDED JUNE 30, 2006 (Unaudited)        (in thousands)

|                                      |                                                           | Venoco, Inc.                              |   | Guarantor
Subsidiaries |          | Non-
Guarantor
Subsidiaries |         | Eliminations |   | Consolidated |      
|------------------------------------- | --------------------------------------------------------- | ----------------------------------------- | - | ---------------------- | -------- | --------------------------- | ------- | ------------ | - | ------------ | -----
|OPERATING ACTIVITIES:                 |                                                           |                                           |   |                        |          |                             |         |              |   |              |      
|                                      | Net cash provided by (used in) operating activities       |                                           | $ | 55,237                 |          | $                           | 7,296   |              | $ | (2,163       | )    
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                           |                                           |   |                        |          |                             |         |              |   |              |      
|                                      | Capital expenditures for oil and gas properties           |                                           |   | (69,434                | )        |                             | (14,040 | )            |   |             |      
|                                      | Proceeds from sale of oil and gas properties              |                                           |   |                       |          |                             | 3,031   |              |   |             |      
|                                      | Investment in Texcal, net of cash received                |                                           |   | (456,810               | )        |                             | 9,291   |              |   |             |      
|                                      | Capital expenditures for property and equipment and other |                                           |   | (3,259                 | )        |                             | (41     | )            |   |             |      
|                                      |                                                           |                                           |   |                        |          |                             |         |              |   |              |      
|                                      |                                                           | Net cash used in investing activities     |   |                        | (529,503 | )                           |         | (1,759       | ) |              |     
|                                      | Net proceeds from (repayments of) intercompany borrowings |                                           |   | (9,615                 | )        |                             | 7,721   |              |   | 1,894        |      
|                                      | Proceeds from long-term debt                              |                                           |   | 504,529                |          |                             |        |              |   |             |      
|                                      | Principal payments on long-term debt                      |                                           |   | (15,000                | )        |                             |        |              |   | (33          | )    
|                                      | Payments of dividends                                     |                                           |   | (426                   | )        |                             |        |              |   |             |      
|                                      | Increase in deferred loan costs                           |                                           |   | (14,180                | )        |                             |        |              |   |             |      
|                                      |                                                           |                                           |   |                        |          |                             |         |              |   |              |      
|                                      |                                                           | Net cash provided by financing activities |   |                        | 465,308  |                             |         | 7,721        |   |              | 1,861
|                                      |                                                           |                                           |   |                        |          |                             |         |              |   |              |      
|                                      | Net increase (decrease) in cash and cash equivalents      |                                           |   | (8,958                 | )        |                             | 13,258  |              |   | (302         | )    
|                                      | Cash and cash equivalents, beginning of period            |                                           |   | 9,041                  |          |                             |        |              |   | 348          |      
|                                      |                                                           |                                           |   |                        |          |                             |         |              |   |              |      
|                                      | Cash and cash equivalents, end of period                  |                                           | $ | 83                     |          | $                           | 13,258  |              | $ | 46           |      
|                                      |                                                           |                                           |   |                        |          |                             |         |              |   |              |      

27

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations"
contained in our Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on April 5, 2006, as well as with
the financial statements and related notes and the other information appearing elsewhere in this report. For further information on our business strategy, the opportunities we intend to pursue and the
risks and uncertainties to which our business is subject, see "Business and PropertiesOur Strategy" and "Risk Factors" as set forth in the above referenced report on
Form 10-K. Certain statements contained herein that set forth management's intentions, plans, beliefs, expectations or predictions of the future are forward-looking statements. It
is important to note that actual results could differ materially from those projected in such forward-looking statements. The risks and uncertainties include but are not limited to potential
unfavorable or uncertain results of exploration, development and exploitation activities, drilling costs and operational uncertainties, risks associated with quantities of total reserves and rates of
production from existing gas and oil reserves and pricing assumptions relating to those reserves, potential delays in the timing of planned operations, competition and other risks associated with
permitting and with leasing gas and oil properties, potential cost overruns, potential dry holes and regulatory uncertainties and the availability of capital to fund planned expenditures, as well as
general industry and market conditions. As used in this report, unless the context otherwise indicates, references to "we," "our," "ours," and "us" refer to Venoco, Inc. and its subsidiaries
collectively.

Overview

We are an independent energy company primarily engaged in the acquisition, exploration, exploitation and development of oil and natural gas properties. Since the
change in our senior management that occurred in June 2004, we have returned to our historical strategy of devoting substantial resources to exploration, exploitation and development projects
on our properties, and to the acquisition of additional properties. Pursuit of this strategy has led to increases in our oil and natural gas production. Our net production for the second quarter of
2006 was 17,114 BOE/d, compared to 11,215 BOE/d for the first quarter of 2006 and 11,513 BOE/d for the second quarter of 2005. Our second quarter 2006 results include the effect of our
March 31, 2006 acquisition of TexCal Energy. We expect our production to continue to increase in both the third and fourth quarters of 2006 relative to 2005, and to increase quarter to quarter
throughout 2007. Because of the anticipated increases in production and the effect of our hedging program, we expect revenues, not including the effect of non-cash, unrealized derivative
gains and losses, to increase in 2006 compared to 2005, and 2007 compared to 2006, even if oil and natural gas prices decline moderately. We believe that continued pursuit of our business strategy
will lead to an increase in our proved reserves in 2006 and in subsequent years. In the execution of our business strategy, management is principally focused on increasing our reserves of oil and
natural gas and on continuing and strengthening the trend of increasing annual production through exploration, exploitation and development activities, acquisitions and the resolution of operational
problems as they arise. Our management is also focused on the risks and opportunities associated with current oil and natural gas prices, which are generally high compared to historical averages, and
on the goal of maximizing production rates while operating in a safe manner. Rising oil and natural gas prices created substantial unrealized commodity derivative losses in 2005 and rising oil prices
led to further unrealized commodity derivative losses in the first half of 2006. These unrealized losses, which totaled $15 million in the first half of 2006, resulted from
mark-to-market valuations for non-highly effective or ineffective portions of our derivative positions and are reflected as commodity derivative losses in our
income statement. Any payments actually due to counterparties in the future on these derivatives will ultimately be funded by higher prices received from the sale of our production. Our disciplined
hedging strategy, which includes the use of collars,

28

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swaps
and purchased floors, has allowed us to lock in minimum future floor prices we consider attractive on substantial production volumes through December 2009, while often allowing upside
participation. See "Qualitative and Quantitative Disclosures About Market Risk."

Capital Expenditures

We have developed an active capital expenditure program to take advantage of our extensive inventory of drilling prospects. We estimate that our exploration,
exploitation and development capital expenditures will be approximately $200 million in 2006, including over $40 million on projects acquired as part of the TexCal acquisition. In the
first half of 2006, we incurred $83.5 million of capital expenditures on our projects, not including capital expenditures made by TexCal prior to our acquisition of that company. Projects we
expect to pursue in 2006 in the Sockeye and South Ellwood
fields include over 20 redrills, recompletions and workovers. In the first six months of 2006, we completed two workovers in the South Ellwood field and were unsuccessful with a third workover. We
also completed three workovers in the Sockeye field. We also drilled two wells in the Sockeye field, both of which were completed. In the period we also finished testing two exploratory wells drilled
in the South Ellwood Field. One, the North Flank well was dry and will be converted into a water injection well in the future. The other, the Sespe well has been completed and is producing. We also
expect to increase water injection capabilities at these fields and to incorporate system upgrades to mitigate operating risks and enhance reliability. In the Sacramento Basin, we plan to drill about
80 new wells and to complete approximately 50 to 75 workovers and recompletions in 2006. In the first six months of 2006, we drilled and completed 23 new wells and completed 37 workovers and
recompletions in the Sacramento Basin. During the period we also drilled three dry wells in the basin. In Texas, we expect to drill approximately seven new wells and to conduct operations to increase
the operating efficiency and production rates in some of the fields acquired as part of the TexCal acquisition. In the second quarter of 2006, subsequent to our acquisition of TexCal, we successfully
drilled one well in the Word Field in Texas and we completed 32 rework operations in Texas, 28 of which were in the Hastings Field. Exploration activities planned for 2006 include the drilling of
approximately seven exploration wells. Two of these wells were the above described North Flank and Sespe wells drilled in the South Ellwood Field. We also expect to continue our aggressive leasing
program in key areas. The aggregate levels of capital expenditures for 2006, and the allocation of such expenditures, are dependent on a variety of factors, including the availability of cash flow and
other capital resources to fund such expenditures, and the availability of service contractors and equipment, permitting issues, weather and limits on the number of activities that can be conducted at
any one time on our offshore platforms. Accordingly, the actual levels of capital expenditures and the allocation of such expenditures may vary materially from the above estimates. See
"Liquidity and Capital ResourcesCapital Resources and Requirements."

Acquisitions and Divestitures

Acquisition of TexCal.We acquired TexCal on March 31, 2006 for $456 million in cash and related financing
costs of $14.4 million. According to a reserve report prepared by DeGolyer & MacNaughton, as of December 31, 2005, TexCal had proved reserves of 31.4 MMBOE. It had average net
production of 5,468 BOE/d in the first quarter of 2006, of which 61% was natural gas and 39% was oil and condensate. The acquisition is consistent with our strategy of acquiring large, mature fields
with established reserves and significant exploitation and development potential, and will provide us with substantial additions to our existing multi-year drilling inventory. TexCal
acquired all of its properties in October 2004 from Tri-Union Development Corporation, or Tri-Union, which was then a debtor in proceedings under Chapter 11 of the U.S.
bankruptcy code. In part due to the circumstances leading to the Tri-Union bankruptcy, capital expenditures devoted to the TexCal properties have been limited in recent years. We financed
the acquisition through loans advanced under our revolving credit facility and a new second lien term loan facility. We borrowed approximately $119.5 million under the revolving

29

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credit
facility and $350 million under the second lien term loan facility to finance the $456 million purchase price and related financing costs.

Acquisition of Marquez Energy.We completed our acquisition of Marquez Energy, a Colorado limited liability company majority
owned and controlled by Timothy Marquez, on March 21, 2005. According to a reserve report prepared by Netherland, Sewell & Associates, Inc., or NSAI, Marquez Energy had proved
reserves of approximately 2.0 MMBOE as of December 31, 2004. The purchase price for the membership interests in Marquez Energy was $16.8 million (including a $2.0 million deposit
paid in 2004). The purchase price was based on the members' equity on Marquez Energy's unaudited December 31, 2004 balance sheet, as adjusted to reflect the value of its oil and natural gas
properties (as determined by NSAI as of December 31, 2004) and certain other adjustments. For the purpose of calculating the purchase price, the following values were assigned to Marquez
Energy's proved reserves: (i) $1.75/Mcfe for its proved developed producing reserves, (ii) $1.00/Mcfe for its proved developed non-producing reserves and
(iii) $0.75/Mcfe for its proved undeveloped reserves. Pursuant to the purchase agreement, NSAI conducted a supplemental evaluation of the Marquez Energy properties as of year-end
2005, and NSAI or another nationally recognized engineering firm will conduct a further evaluation as of year-end 2006. In the event the year-end 2006 evaluation attributes
proved reserves to the Marquez Energy properties as of December 31, 2004 in excess of those reflected in NSAI's initial report, an additional payment will be made to the former holders of
interests in Marquez Energy pursuant to the same formula, subject to a maximum aggregate price of $25.0 million, including assumption of debt. No additional payments were due as a result of an
evaluation conducted by NSAI as of December 31, 2005. Because Marquez Energy was a company under common control since July 12, 2004, our financial statements and production information
for the entire year 2005 and for the third and fourth quarters of 2004 include Marquez Energy. For the same reason, the acquisition was accounted for in a manner similar to a pooling of interests
whereby the historical results of Marquez Energy have been combined with our financial results since July 1, 2004.

Sale of Big Mineral Creek.On March 31, 2005, we completed the sale of our Big Mineral Creek field, located in Grayson
County, Texas, to BlackWell Energy Group, LLC for $44.6 million. The transaction was given economic effect as of February 1, 2005. As of December 31, 2004, the field had proved
reserves of approximately 3.4 MMBOE, according to a report by NSAI. Average net production at the
field was approximately 547 BOE/d in the first quarter of 2005. Pursuant to Section 1031 of the Internal Revenue Code, we effected a like-kind exchange of a portion of the Big
Mineral Creek field representing approximately $15.0 million of the total sale price for certain Marquez Energy properties and properties acquired from third parties. The like-kind
exchange provisions resulted in the deferral of a portion of income taxes related to the gain on sale. We did not recognize a gain on sale for financial reporting purposes, but applied the net sales
proceeds to reduce the capitalized costs of our oil and natural gas properties in accordance with our full-cost accounting method.

Other.In May of 2006 we acquired additional interests in leases in the Willows-Beehive Bend gas field for a price of
$0.6 million. In September 2005, we acquired a100% working interest in the Willows-Beehive Bend gas field, a 100% working interest in the Bounde Creek gas field and a 65% working
interest in the Arbuckle field for an aggregate price of $10.1 million, net of certain participation rights held by third parties. We operate all of the acquired fields, which are located in
the Sacramento Basin. In January 2006, we sold 35% of the interests we acquired in the Willows-Beehive Bend and Bounde Creek fields for $3.0 million. In the fourth quarter of 2005, we
purchased the Union Island pipeline, a 32-mile natural gas pipeline that runs from the Union Island field to a location near Pittsburg, California, for $6.1 million.

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Trends Affecting our Results of Operations

Our results of operations include the effect of TexCal's operations beginning April 1, 2006 which has led to significant increases in production, revenue
and related expenses in the three and six month periods ended June 30, 2006 compared to the same periods in 2005.

Oil
prices have increased significantly since the beginning of 2004, and natural gas prices, despite recent downward trends, have been substantially higher in both 2005 and 2006 than in
2004. These prices have contributed to an increase in our oil and natural gas sales and revenues in both 2005 compared to 2004 and 2004 compared to 2003. Oil and natural gas prices have remained at
high levels in 2006 compared to historical averages.

Our
production of oil and natural gas has increased since the change in our senior management that occurred in June 2004. Our net production for the second quarter of 2006 was
17,114 BOE/d, compared to 11,215 BOE/d for the first quarter of 2006 and 11,513 BOE/d for the second quarter of 2005. Relative to the second quarter of 2005, production volumes in the second quarter
of 2006 were significantly impacted by the acquisition of TexCal. Properties we acquired from TexCal contributed average net production of 5,645 BOE/d in the second quarter of 2006. In addition to
increases resulting from the acquisition of TexCal, we expect to show increases in production from our December 31, 2005
asset base in the fourth quarter of 2006 relative to the same periods in 2005. Production in the third quarter of 2006 from two significant fields included in our December 31, 2005 asset base
will be effected by maintenance projects in the quarter. First, production from the South Ellwood field has been curtailed in August due to maintenance on a third party owned transportation barge. As
a result, we have accelerated our scheduled maintenance in the South Ellwood field from September to August to coincide with the barge maintenance. We currently expect production to be fully restored
by the end of the month. Second, we have been advised by the carrier that the primary pipeline which serves our Willows gas field in the Sacramento Basin will operate on reduced capacity for several
weeks in the third quarter due to maintenance.

Production
expenses in the second quarter of 2006 increased to $14.90 BOE from $12.21 in the first quarter of 2006 and $11.79 in the second quarter of 2005. This increase was primarily
attributable to substantial remedial work we conducted in the Hastings field, a property we obtained in the TexCal acquisition. This work is expected to, together with various capital expenditures on
the field, contribute to significant net production increases from the field in the third quarter of this year. We expect to complete most of the remedial work this year after which production
expenses per BOE should approximate pre-acquisition historical levels.

Our
depletion, depreciation and amortization (DD&A) rate increased in the second quarter of 2006 to $10.79 per BOE from $6.81 per BOE in the first quarter of 2006. This is due to the
costs of the TexCal acquisition being added to our property cost basis at March 31, 2006. The second quarter 2006 DD&A rate is therefore more indicative of future rates than the first quarter
2006 rates.

In
order to manage and maximize our growth, we have been increasing our professional staff, and this has resulted in increased general and administrative costs. The acquisition of TexCal
has also increased those costs. In the second quarter of 2006 we also incurred substantial costs in regard to the integration of TexCal and various systems conversion costs. Additional integration and
systems conversion costs will be incurred in the third and fourth quarters of 2006, with these projects expected to be substantially complete by year end. As a result, these general and administrative
costs, which were $4.37 per BOE in the second quarter of 2005, and $3.79 per BOE for the entire year 2005, increased to $4.96 per BOE in the second quarter of 2006. We expect general and
administrative costs to be less than historical costs per BOE once the integration and systems conversion projects are completed in 2006. However, we have not to date fully quantified the costs we
expect to incur with respect to Sarbanes-Oxley Act compliance, and those costs may be significant.

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The
indebtedness we incurred in the TexCal transaction significantly increased our debt service obligations. Satisfaction of those obligations will require a substantial portion of the
operating cash flow generated from the properties we acquired in the transaction. See "Liquidity and Capital ResourcesCapital Resources and Requirements."

Internal Control Over Financial Reporting

In November 2005, we restated the financial statements included in our Quarterly Reports on Form 10-Q for the first two quarters of
2005. In addition, we have historically operated with a relatively small number of employees in the accounting and financial reporting area. If we had previously conducted an assessment of our
internal controls under the standards set forth in Section 404 of the Sarbanes-Oxley Act and related rules, either or both of these factors likely would have led us to conclude that we had one
or more material weaknesses in our internal controls. In addition, our outside auditors, in the performance of their 2005 audit, concluded that material weaknesses in our internal controls existed in
2005. We are addressing these issues by adopting more extensive accounting controls and financial review procedures and we have hired a Chief Accounting Officer to oversee our financial reporting
processes. We have also retained an independent consulting firm with considerable experience in the area of Sarbanes-Oxley Act compliance to assist us in documenting our policies, procedures and
internal control over financial reporting, assessing the effectiveness of the design of those controls and testing whether those controls are operating as designed. In the course of this process, we
have hired additional accounting staff and expect to hire additional accounting staff and to take other measures to further enhance our internal controls. We will continue to engage additional outside
advisors as appropriate.

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Results of Operations

The following table reflects the components of our oil and natural gas production and sales prices and sets forth our operating revenues, costs and expenses on a
BOE basis for the three- and six-month periods ended June 30, 2005 and 2006.

|                                                 |  | Three Months Ended
June 30, |        | Six Months Ended
June 30, |  
|------------------------------------------------ |  | --------------------------- | ------ | ------------------------- | -
|
|Production Volume:                               |  |                             |        |                           |  
|Natural gas (MMcf)                               |  |                             | 1,846  |                           |  
|Oil (MBbls)                                      |  |                             | 740    |                           |  
|MBOE                                             |  |                             | 1,048  |                           |  
|Daily Average Production Volume(1):              |  |                             |        |                           |  
|Natural gas (Mcf/d)                              |  |                             | 20,289 |                           |  
|Oil (Bbls/d)                                     |  |                             | 8,132  |                           |  
|BOE/d                                            |  |                             | 11,513 |                           |  
|Oil Price per Bbl Produced (in dollars):         |  |                             |        |                           |  
|Realized price before hedging loss               |  | $                           | 41.10  |                           | $
|Realized hedging loss                            |  |                             | (4.57  | )                         |  
|                                                 |  |                             |        |                           |  
|Net realized                                     |  | $                           | 36.53  |                           | $
|                                                 |  |                             |        |                           |  
|Natural Gas Price per Mcf Produced (in dollars): |  |                             |        |                           |  
|Realized price before hedging loss               |  | $                           | 6.39   |                           | $
|Realized hedging gain (loss)                     |  |                             | (.11   | )                         |  
|                                                 |  |                             |        |                           |  
|Net realized                                     |  | $                           | 6.28   |                           | $
|                                                 |  |                             |        |                           |  
|Average Sale Price per BOE(2)                    |  | $                           | 36.11  |                           | $
|Expense per BOE:                                 |  |                             |        |                           |  
|Production expenses(1)                           |  | $                           | 11.79  |                           | $
|Transportation expenses                          |  |                             | 0.51   |                           |  
|Depreciation, depletion and amortization         |  |                             | 3.66   |                           |  
|General and administrative expense(2)            |  |                             | 4.37   |                           |  
|Interest expense, net(2)                         |  |                             | 3.17   |                           |  

---

Comparison of Quarter Ended June 30, 2006 to Quarter Ended June 30, 2005

Oil and Natural Gas Revenues.Oil and natural gas revenues increased $30.8 million, or 68%, to $76.1 million
for the quarter ended June 30, 2006 from $45.4 million for the same period in 2005. The increase was primarily due to production attributable to the TexCal acquisition and higher
realized oil prices.

Oil
revenues increased by $20.1 million in the second quarter of 2006 or 60% to $53.6 million compared to $33.5 million in the second quarter of 2005. Oil production
rose 23%, with production of 907 MBbl in the second quarter of 2006 compared to 740 MBbl in the second quarter of 2005. The increase was primarily due to production attributable to the TexCal
acquisition. Our average realized

33

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price
for oil before hedging losses increased $20.40 or 50% to $61.50 per Bbl for the period. We hedged 70% of our oil production during the period (excluding floors), resulting in realized hedging
losses of $9.38 per Bbl and unrealized hedging losses of $8.62 per Bbl. Total hedging losses on oil were $18.00 per Bbl.

Natural
gas revenues increased $10.7 million in the second quarter of 2006 or 91% to $22.5 million compared to $11.8 million in the second quarter of 2005. Natural
gas production increased 111% with production of 3,902 MMcf compared to 1,846 MMcf in the second quarter of 2005. The majority of the increase was due to production attributable to the TexCal
acquisition. Approximately 10% of the increase is attributable to increased production from other Venoco properties. The increased production from other Venoco properties in the second quarter of 2006
compared to the second quarter of 2005 relates to our ongoing field development activities. Our average realized price for natural gas before hedging gains decreased $0.63 or 10% to $5.76 per Mcf for
the period. We hedged 44% of our natural gas production during the period (excluding floors), resulting in realized hedging gains of $0.46 per Mcf and unrealized hedging gains of $0.60 per Mcf. Total
hedging gains on natural gas were $1.06 per Mcf.

Commodity Derivatives and Other Revenues.Realized commodity derivative losses increased $3.1 million or 87% to
$6.7 million in the second quarter of 2006 as compared with the same period in 2005. Unrealized commodity derivative losses were $5.5 million in the second quarter of 2006, an increase
of 127% from the $2.4 million in unrealized commodity derivative losses in the second quarter of 2005. The changes in commodity derivative losses are due to the effect changes in market prices
of oil and natural gas have on our net sales, in the case of realized losses, and the effect of mark to market pricing adjustments on the carrying value of our derivative positions, in the case of
unrealized losses. Other revenue also increased 65% from $1.0 million in the second quarter of 2005 to $1.7 million in the second quarter of 2006. This increase was primarily due to
other revenues of $0.6 million from a pipeline we acquired in the fourth quarter of 2005.

As
a result of the above, total revenues increased $25.2 million or 62% to $65.6 million in the second quarter of 2006 compared to $40.4 million in the second
quarter of 2005.

Production Expenses.Production expenses increased $10.8 million or 88% to $23.2 million in the second quarter
of 2006 from $12.4 million in the second quarter of 2005. The increase was primarily due to production attributable to the TexCal acquisition and a 14% increase in production expenses from
other Venoco properties. The increase in production expenses for other Venoco properties in the second quarter of 2006 compared to the second quarter of 2005 relates to an increase in the number of
producing wells, normal variances of timing of production expenses and increased costs of third party services. On a per unit basis, costs increased in the quarter of $3.11 per BOE, from $11.79 per
BOE in the second quarter of 2005 to $14.90 per BOE in the second quarter of 2006. This increase was primarily attributable to substantial remedial work we conducted in the Hastings field, a property
we obtained in the TexCal acquisition. This work, which is expected to be substantially complete in 2006, contributed approximately $1.6 million to production expenses in the quarter, or
approximately $1.03 per BOE produced in the period. Production expenses on a per unit basis for other Venoco properties increased 14% due to normal variances in the timing of production expenses and
increased costs of third party services.

Transportation Expenses.Transportation expenses increased 50% from $0.5 million in the second quarter of 2005 to
$0.8 million in the second quarter of 2006. This was primarily attributable to volume increases. On a per BOE basis, transportation expenses increased $0.01 per BOE from $0.51 per BOE in the
second quarter of 2005 to $0.52 in the second quarter of 2006.

Depletion, Depreciation and Amortization (DD&A).DD&A expense increased $13.0 million or 338% to $16.8 million
in the second quarter of 2006 from $3.8 million in the second quarter of 2005.

34

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DD&A
expense rose $7.13 per BOE from $3.66 per BOE in the second quarter of 2005 to $10.79 per BOE in the second quarter of 2006. This increase is due to higher depletion expense resulting from the
increase in the value of oil and natural gas properties obtained in the TexCal acquisition.

Accretion of Abandonment Liability.Accretion expense increased $0.1 million or 11% to $0.6 million in the
second quarter of 2006 from $0.5 million in the second quarter of 2005. The increase was due to accretion from the acquired TexCal properties.

General and Administrative (G&A).G&A expense increased $3.1 million or 68% to $7.7 million in the second
quarter of 2006 from $4.6 million in the second quarter of 2005. G&A expense rose $0.59 per BOE or 14% from $4.37 per BOE in the second quarter of 2005 to $4.96 per BOE in the second quarter of
2006. We have increased the depth of our organization in order to position us for growth and to more effectively exploit our asset base by adding professional, technical and support staff which has
contributed to the increase in G&A expenses. Other significant components of the increase include $0.7 million in compensation expense related to the implementation of FAS 123R in 2006
and $0.8 million of expenses related to TexCal transition and integration activities, which are expected to be completed in 2006. In addition we incurred $0.3 million in direct costs
related to Sarbanes-Oxley compliance activities plus other indirect costs for internal systems and process conversions intended to position us to more efficiently comply with the Sarbanes-Oxley Act in
the future.

Interest Expense and Amortization of Deferred Loan Costs.Interest expense, net of interest income and capitalized interest,
increased $11.5 million or 347% to $14.9 million in the second quarter of 2006 from $3.3 million in the second quarter of 2005. The change was primarily due to debt incurred in
late March 2006 to acquire TexCal.

Income tax expense.Income tax expense in the second quarter of 2006 was $0.1 million, representing a
$5.6 million decrease compared to $5.7 million in income tax expense incurred in the second quarter of 2005. The decrease was due to lower income before income taxes in the period versus
the second quarter of 2005.

Net Income.Net income for the second quarter of 2006 was $0.3 million as compared to net income of
$8.8 million in the second quarter of 2005.

Comparison of Six Months Ended June 30, 2006 to Six Months Ended June 30, 2005

Oil and Natural Gas Revenues.Oil and natural gas revenues increased $40.0 million or 46% to $127.4 million for
the six months ended June 30, 2006 from $87.4 million for the same period in 2005. The increase was primarily due to production attributable to the TexCal acquisition, partially offset
by a 7% decrease in production from other Venoco properties, and higher realized oil prices. The period to period change in production volumes from other Venoco properties was the result of the effect
of our
sale of the Big Mineral Creek field on March 31, 2005 and from high initial production rates in early 2005 from new offshore oil wells which had recently come on line at that time.

Oil
revenues increased by $26.6 million in the first half of 2006 or 41% to $90.7 million compared to $64.2 million in the first half of 2005. Oil production rose 1%
with production of 1,606 MBbl in the first half of 2006 compared to 1,583 MBbl in the first half of 2005. The production increase attributable to the TexCal properties was offset by an 11% decline in
production volumes from other Venoco properties. This change resulted from our sale of the Big Mineral Creek field and from high initial production rates in early 2005 from new offshore oil wells
which had recently come on line at that time. The Big Mineral Creek field averaged net production of 547 BOE/d in the first quarter of 2005 and was sold on March 31, 2005. Production volumes
from other Venoco properties in the first half of 2006 were significantly impacted relative to the same period in 2005 by the delayed timing of additional saltwater injection facilities, which timing
limited production from some wills in the first quarter of 2006. Our average realized price for oil before hedging losses increased $16.86 or 42% to $57.31 per

35

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Bbl
for the period. We hedged 68% of our oil production during the period (excluding floors), resulting in realized hedging losses of $8.83 per Bbl and unrealized hedging losses of $11.94 per Bbl.
Total hedging losses on oil were $20.77 per Bbl.

Natural
gas revenues increased $13.4 million in the first half of 2006 or 58% to $36.6 million compared to $23.2 million in the first half of 2005. Natural gas
production increased 54% with production of 5,764 MMcf compared to 3,732 MMcf in the first half of 2005. The majority of the increase was due to production attributable to the TexCal acquisition.
Approximately 5% of the increase resulted from increased production from our other Venoco properties. The increased production from other Venoco properties relates to our ongoing field development
activities. Our average realized price for natural gas before hedging gains increased $0.14 or 2% to $6.36 per Mcf for the period. We hedged 53% of our natural gas production during the period
(excluding floors), resulting in realized hedging gains of $0.24 per Mcf and unrealized hedging gains of $0.73 per Mcf. Total hedging gains on natural gas were $0.97 per Mcf.

Commodity Derivatives and Other Revenues.Realized commodity derivative losses increased $5.6 million or 79% to
$12.8 million in the first half of 2006 as compared with the same period in 2005. Unrealized commodity derivative losses were $15.0 million in the first half of 2006, a 47% reduction
from the $28.0 million in unrealized commodity derivative losses in the first half of 2005. The changes in commodity derivative losses are due to the effect changes in market prices of oil and
natural gas have on our net sales, in the case of realized losses, and the effect of mark to market pricing adjustments on the carrying value of our derivative positions, in the case of unrealized
losses. Other revenue also increased 62% from $2.1 million in the first half of 2005 to $3.4 million in the first half of 2006. This increase was primarily due to revenues of
$1.1 million from a pipeline we acquired in the fourth quarter of 2005.

As
a result of the above, total revenues increased $48.7 million or 90% to $103.0 million in the first half of 2006 compared to $54.3 million in the first half of
2005.

Production Expenses.Production expenses increased $11.2 million or 46% to $35.5 million in the first half of
2006 from $24.3 million in the first half of 2005. The increase was primarily due to production attributable to the TexCal acquisition and a 9% increase in production expenses from other Venoco
properties. The increase in production expenses for other Venoco properties relates to an increase in the number of producing wells, normal variances of timing of production expenses and increased
costs of third party services. On a per unit basis, costs increased $2.83 per BOE, from $11.01 per BOE in the first half of 2005 to $13.84 per BOE in the first half of 2006. This increase was
partially attributable to substantial remedial work we conducted in the Hastings field, a property we obtained in the TexCal acquisition. This work, which is expected to be substantially complete in
2006, contributed approximately $1.6 million to production expenses in the second quarter, and approximately $0.62 per BOE produced in the six month period ending June 30, 2006. In
addition, production expenses on a per unit basis for other Venoco properties increased 17% due to normal variances in the timing of production expenses and increased costs of third party services.

36

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Transportation Expenses.Transportation expenses increased 32% from $1.2 million in the first half of 2005 to
$1.6 million in the first half of 2006. This was primarily attributable to the number of barge shipments of oil from our South Ellwood field in the period and normal timing variances. On a per
BOE basis, transportation expenses increased $0.08 per BOE, from $0.55 per BOE in the first half of 2005 to $0.63 per BOE in the first half of 2006.

Depletion, Depreciation and Amortization (DD&A).DD&A expense increased $14.0 million or 148% to $23.5 million
in the first half of 2006 from $9.5 million in the first half of 2005. DD&A expense rose $4.84 per BOE, from $4.31 per BOE in the first half of 2005 to $9.15 per BOE in the first half of 2006.
This increase is due to higher depletion expense resulting from the increase in the value of oil and natural gas properties obtained in the TexCal acquisition. This is primarily reflected in our
second quarter 2006 DD&A rate, which was $10.79 per BOE, as contrasted with $6.81 per BOE in the first quarter of the year.

Accretion of Abandonment Liability.Accretion expense increased $0.1 million or 9% to $1.1 million in the first
half of 2006 from $1.0 million in the first half of 2005. The increase was due to accretion from the acquired TexCal properties.

General and Administrative (G&A).G&A expense increased $4.4 million or 57% to $12.1 million in the first half
of 2006 from $7.7 million in the first half of 2005. G&A expense rose $1.23 per BOE or 35% from $3.49 per BOE in the first half of 2005 to $4.72 per BOE in the first half of 2006. We have
increased the depth of our organization in order to position us for growth and to more effectively exploit our asset base by adding professional, technical and support staff, which has contributed to
the increase in G&A expenses. Other significant components of the increase include $1.3 million in non-cash compensation expense related to the implementation of FAS 123R in
2006 and $0.8 million of expenses related to TexCal transition and integration activities, which are expected to be completed in 2006. In addition, we incurred $0.7 million in direct
costs related to the Sarbanes-Oxley compliance activities and other indirect costs for internal systems and process conversions intended to position us to more efficiently comply with the
Sarbanes-Oxley Act in the future.

Interest Expense and Amortization of Deferred Loan Costs.Interest expense, net of interest income and capitalized interest,
increased $11.8 million or 173% to $18.6 million in the first half of 2006 from $6.8 million in the first half of 2005. The change was primarily due to debt incurred in late
March 2006 to acquire TexCal.

Income tax expense.Income tax expense in the first half of 2006 was $3.6 million, representing a $2.8 million
increase compared to the $0.8 million expense incurred in the first half of 2005. The increase was due to the increase in taxable income in the period.

Net Income.Net income for the first half of 2006 was $5.4 million as compared to net income of $2.0 million in
the first half of 2005.

Liquidity and Capital Resources

Our primary sources of liquidity are cash generated from our operations and amounts available under our revolving credit facility.

37

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Cash Flows

Six Months Ended March 31,2005

2006(in thousands)Cash provided by operating activities

$
28,221

$
60,370Cash used in investing activities


(46,047
)

(531,262
)Cash provided by (used in) financing activities


(31,228
)

474,890


Net
cash provided by operating activities was $60.4 million in the first half of 2006 compared with $28.2 million in the first half of 2005. Cash flows from operating
activities during the first half of 2006 were favorably impacted by production attributable to the TexCal acquisition, a $14.0 million increase in the addback for depletion, depreciation and
amortization (a non-cash charge) and an $11.3 million decrease in cash paid for premiums on derivative contracts.

Net
cash used in investing activities was $531.3 million in the first half of 2006 compared with $46.0 million in the first half of 2005. The primary investing activities
in the first half of 2006 include $447.5 million paid in cash to acquire TexCal (net of TexCal cash) and $83.5 million in expenditures for oil and gas properties. The primary investing
activities in the first half of 2005 consisted of $14.6 million in expenditures to acquire Marquez Energy and $32.0 million in costs incurred for oil and natural gas properties.

Net
cash provided by financing activities was $474.9 million in the first half of 2006 compared to a use of cash of $31.2 million in the first half of 2005. Proceeds from
long-term debt in the first half of 2006 included $350.0 million borrowed under the term loan facility and $139.5 million in net borrowings under the revolving credit
facility, which amounts were used to fund the acquisition of TexCal, $14.2 million in loan costs and short-term working capital needs. Net cash used in financing activities in the
first half of 2005 primarily resulted from the payment of a $35.0 million dividend to our sole stockholder, principal payments on long-term debt of $12.7 million and
$5.2 million paid to repurchase common shares, partially offset by $23.0 million in new borrowings.

Capital Resources and Requirements

We plan to make substantial capital expenditures in the future for the acquisition, exploration, exploitation and development of oil and natural gas properties.
We expect that our exploration, exploitation and development capital expenditures in 2006 will be approximately $200 million, including over $40 million on projects acquired as a part of
the TexCal acquisition. In the first half of 2006, we incurred $83.5 million of capital expenditures on our projects, not including capital expenditures made by TexCal prior to our acquisition
of that company. As a general matter, our strategy is to finance our exploration, exploitation and development capital expenditures primarily with cash flow from operations and to use additional
borrowings under our revolving credit facility only on a limited basis. Due to the additional debt service requirements we incurred pursuant to the TexCal acquisition, we have utilized our revolving
credit facility more than we ordinarily would to supplement our capital budget since the closing of the acquisition. The revolving credit facility has an aggregate maximum loan amount of
$300 million and currently has a borrowing base of $200 million. As of August 11, 2006, there was approximately $169.5 million outstanding under the revolving credit
facility.

We
entered into a second lien term loan facility and increased borrowings under our revolving credit facility in order to finance the TexCal acquisition. On March 30, 2006, we
borrowed $350 million pursuant to the second lien term loan facility. On March 31, 2006, we borrowed $119.5 million under the revolving credit facility. Principal on the second
lien term loan facility is payable on March 30, 2011, and principal on the revolving credit facility is payable on March 30, 2009. Pursuant to mandatory

38

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prepayment
provisions set forth in the credit facilities, substantially all of the proceeds of asset sales and additional borrowings (except for certain unsecured borrowings and additional borrowings
under the revolving credit facility), and up to 50% of the proceeds of equity issuances, must be used to reduce amounts outstanding under one or both facilities. We may from time to time make optional
prepayments on outstanding loans. Under the second lien term loan facility, optional prepayments made prior to March 2008 are subject to a prepayment premium.

Loans
made under both facilities are designated, at our option, as either "Base Rate Loans" or "LIBO Rate Loans." Base Rate Loans under the revolving credit facility bear interest at a
floating rate equal to (i) the greater of Bank of Montreal's announced base rate and the overnight federal funds rate plus 0.50% plus (ii) a margin ranging from zero to 0.75%, based upon
the percentage of the total borrowing base represented by outstanding borrowings. LIBO Rate Loans under the revolving credit facility bear interest at (i) LIBOR plus (ii) a margin
ranging from 1.50% to 2.25%, also based upon utilization. A commitment fee ranging from 0.375% to 0.5% per annum is payable with respect to unused borrowing availability under the facility.

Base
Rate Loans under the second lien term loan facility bear interest at a floating rate equal to (i) the greater of the administrative agent's announced base rate and the
overnight federal funds rate plus 0.50% plus (ii) 3.50%. LIBO Rate Loans under the second lien term loan facility bear interest at LIBOR plus 4.50%. Each of the applicable margins could
decrease 0.50% in the event of completion of a public offering of our common stock for so long as our consolidated leverage ratio is less than 3:1.

The
agreements governing the revolving credit facility and the second lien term loan facility contain customary representations, warranties, events of default, indemnities and covenants,
including financial covenants that require us to maintain specified ratios of EBITDA to interest expense, current assets to current liabilities, debt to EBITDA and PV-10 to total debt. As
of June 30, 2006, we were in compliance with all of our debt covenants.

As
of August 11, 2006, amounts outstanding under the credit facilities bore interest at a weighted average interest rate of 8.96%. We expect that debt service obligations under
our debt agreements will total approximately $14.9 million for the third quarter of 2006. Our debt service obligations under the
credit facilities may increase if market interest rates rise. See "Quantitative and Qualitative Disclosures About Market Risk."

Because
we must dedicate a substantial portion of our cash flow from operations to the payment of interest on our debt, that portion of our cash flow is not available for other purposes.
Our ability to make scheduled interest payments on our indebtedness and pursue our capital expenditure plan will depend to a significant extent on our financial and operating performance, which
performance is subject to prevailing economic conditions, commodity prices and a variety of other factors. We have filed with the Securities and Exchange Commission a Registration Statement on
Form S-1 with respect to a planned public offering of our common stock. In the event the offering is consummated, we intend to use the net proceeds to reduce amounts outstanding
under our credit facilities and thereby gain greater financial flexibility.

If
our cash flow and other capital resources are insufficient to fund our debt service obligations and our capital expenditure budget, we may be forced to reduce or delay scheduled
capital projects, sell material assets or operations or restructure our debt. If we do not consummate our planned public offering, or otherwise raise additional capital to reduce our debt obligations
or supplement our capital budget, we would reduce the expected level of capital expenditures. If our cash flow from operations does not meet our expectations, this could also result in our reduction
of the expected level of capital expenditures. Until we increase our liquidity, our ability to make significant acquisitions will be limited. If we seek additional capital for that or other reasons,
we may do so through traditional reserve base borrowings, joint venture partnerships, asset sales, offerings of debt and equity securities or other means. We cannot assure you that needed capital will
be available on acceptable terms or at all. Our

39

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ability
to raise funds through the incurrence of additional indebtedness and certain other means is limited by covenants in our debt agreements. In addition, pursuant to the mandatory prepayment
provisions in our credit facilities described above, our ability to respond to a shortfall in our expected liquidity by selling assets, issuing equity securities or incurring additional indebtedness
would be limited by provisions in the facilities that require us to use some or all of the proceeds of such transactions to reduce amounts outstanding under one or both of the facilities. If we are
unable to obtain funds when needed or on acceptable terms, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to replace our
reserves.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The discussion in this section provides information about derivative financial instruments we use to manage commodity price volatility. Due to the historical
volatility of crude oil and natural gas prices, we have implemented a hedging strategy aimed at reducing the variability of the prices we receive for our production and providing a minimum revenue
stream. Currently, we use options (including collars) and fixed price swaps for hedging commodity prices. All contracts are settled with cash and do not
require the delivery of a physical quantity to satisfy settlement. While this hedging strategy may result in us having lower revenues than we would have if we were unhedged in times of higher oil and
natural gas prices, management believes that the stabilization of prices and protection afforded us by providing a revenue floor is beneficial. We had hedging contracts (excluding floors) in place for
approximately 71% of our oil production and approximately 14% of our natural gas production during the year ended December 31, 2005. We had hedging contracts (excluding floors) in place for
approximately 68% of our oil production and approximately 53% of our natural gas production during the six months ended June 30, 2006.

We
are subject to interest rate risk with respect to amounts borrowed under our credit facilities because such amounts bear interest at variable rates. At March 29, 2006,
immediately prior to the TexCal acquisition, we had $10 million of indebtedness outstanding under our revolving credit facility. In connection with that transaction, we drew down an additional
$119.5 million under that facility, and we borrowed $350 million under the second lien term loan facility. As of August 11, 2006, there was approximately $519.5 million
outstanding under those facilities. On May 4, 2006, we entered into an interest rate swap transaction to lock in our interest cost on $200 million of borrowings under the second-lien
term loan facility at a fixed rate of 9.9225%, including a 4.5% margin, through May 8, 2008. A 1.0% increase in interest rates on unhedged variable rate borrowings of $309.5 million at
June 30, 2006 would result in additional interest expense of $3.1 million.

Cumulative Effect of Derivative Transactions

Oil.As of June 30, 2006, we had entered into option (including collar) and swap agreements to
receive average minimum and maximum NYMEX West Texas Intermediate prices as summarized below. Location and quality differentials attributable to our properties are not reflected in those prices. The
agreements provide for monthly settlement based on the differential between the agreement price and the actual NYMEX crude oil price. [table to be updated]

|                                            |  | Minimum |  | Maximum
|------------------------------------------- |  | ------- |  | -------
|
|Oil hedges at June 30, 2006 for production: |  |         |  |        
|July 1December 31, 2006                    |  | 10,500  |  | $      
|January 1December 31, 2007                 |  | 7,313   |  | $      
|January 1December 31, 2008                 |  | 4,950   |  | $      
|January 1December 31, 2009                 |  | 4,580   |  | $      

40

---



Natural Gas.As of June 30, 2006, we had entered into option, swap and collar agreements to
receive average minimum and maximum PG&E Citygate prices as follows: [table to be updated]

|                                                    |  | Minimum |  | Maximum
|--------------------------------------------------- |  | ------- |  | -------
|
|Natural gas hedges at June 30, 2006 for production: |  |         |  |        
|July 1December 31, 2006                            |  | 27,000  |  | $      
|January 1December 31, 2007                         |  | 21,000  |  | $      
|January 1December 31, 2008                         |  | 13,500  |  | $      
|January 1December 31, 2009                         |  | 9,500   |  | $      

Portfolio of Derivative Transactions

Our portfolio of commodity derivative transactions as of June 30, 2006 is summarized below: [table to be updated]

|Type of Contract |  | Basis |  | Oil
Quantity
(Bbl/d) |  | Strike Price ($/Bbl) |  | Term            
|---------------- |  | ----- |  | -------------------- |  | -------------------- |  | ----------------
|Swap             |  | NYMEX |  | 1,000                |  | $57.00 Fixed         |  | Jan 1Dec 31, 06
|Collar           |  | NYMEX |  | 2,000                |  | $40.00/$51.00        |  | Jan 1Dec 31, 06
|Collar           |  | NYMEX |  | 1,000                |  | $40.00/$51.05        |  | Jan 1Dec 31, 06
|Collar           |  | NYMEX |  | 1,000                |  | $40.00/$57.75        |  | Jan 1Dec 31, 06
|Collar           |  | NYMEX |  | 1,500                |  | $58.00/$74.60        |  | Apr 1Dec 31, 06
|Collar           |  | NYMEX |  | 500                  |  | $60.00/$78.70        |  | Apr 1Dec 31, 06
|Put              |  | NYMEX |  | 1,000                |  | $40.00 Floor         |  | Jan 1Dec 31, 06
|Put              |  | NYMEX |  | 1,000                |  | $42.90 Floor         |  | Jan 1Dec 31, 06
|Put              |  | NYMEX |  | 1,500                |  | $57.00 Floor         |  | Jan 1Dec 31, 06
|Collar           |  | NYMEX |  | 2,000                |  | $40.00/$65.80        |  | Jan 1Dec 31, 07
|Collar           |  | NYMEX |  | 1,000                |  | $40.00/$67.50        |  | Jan 1Dec 31, 07
|Collar           |  | NYMEX |  | 1,000                |  | $58.00/$76.25        |  | Jan 1Dec 31, 07
|Collar           |  | NYMEX |  | 1,600                |  | $53.00/$75.00        |  | Jan 1Jun 30, 07
|Collar           |  | NYMEX |  | 1,030                |  | $53.00/$75.00        |  | Jul 1Dec 31, 07
|Put(1)           |  | NYMEX |  | 2,000                |  | $58.00 Floor         |  | Jan 1Dec 31, 07
|Call(2)          |  | NYMEX |  | 566                  |  | $77.15 Cap           |  | Jan 1Jun 30, 07
|Call(3)          |  | NYMEX |  | 1,035                |  | $81.00 Cap           |  | Jul 1Dec 31, 07
|Collar           |  | NYMEX |  | 3,450                |  | $52.00/$75.00        |  | Jan 1Jun 30, 08
|Collar           |  | NYMEX |  | 2,450                |  | $52.00/$75.00        |  | Jul 1Dec 31, 08
|Collar           |  | NYMEX |  | 1,000                |  | $58.00/$78.00        |  | Jul 1Dec 31, 08
|Collar           |  | NYMEX |  | 1,500                |  | $58.00/$75.25        |  | Jan 1Dec 31, 08
|Collar           |  | NYMEX |  | 2,170                |  | $50.00/$75.00        |  | Jan 1Jun 30, 09
|Collar           |  | NYMEX |  | 1,000                |  | $56.00/$79.25        |  | Jul 1Dec 31, 09
|Collar           |  | NYMEX |  | 3,000                |  | $55.00/$77.00        |  | Jan 1Dec 31, 09

---

41

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Natural Gas

|Type of Contract |  | Basis         |  | Quantity
(MMBtu/d) |  | Strike Price
($/MMBtu) |  | Term             
|---------------- |  | ------------- |  | ------------------ |  | ---------------------- |  | -----------------
|Physical Sale    |  | SoCal         |  | 2,000              |  | $5.90 Floor(1)         |  | 11/01/0512/31/06
|Swap             |  | NYMEX         |  | 2,000              |  | $6.71 Fixed            |  | Jan 1Dec 31, 06 
|Collar           |  | NYMEX         |  | 4,000              |  | $6.00/$8.50            |  | Jan 1Dec 31, 06 
|Collar           |  | NYMEX         |  | 6,000              |  | $9.00/$15.00           |  | Jan 1Dec 31, 06 
|Collar           |  | PG&E Citygate |  | 3,000              |  | $7.00/$9.45            |  | Jan 1Dec 31, 06 
|Basis Swap       |  | PG&E Citygate |  | 6,000              |  | ($0.035)(2)            |  | Jan 1Dec 31, 06 
|Put              |  | PG&E Citygate |  | 6,000              |  | $6.00 Floor            |  | Jan 1Dec 31, 06 
|Swap             |  | NYMEX         |  | 3,000              |  | $8.05 Fixed            |  | May 1Dec 31, 06 
|Collar           |  | NYMEX         |  | 3,000              |  | $7.25/$11.70           |  | May 1Dec 31, 06 
|Collar           |  | PG&E Citygate |  | 6,000              |  | $6.00/$8.40            |  | Jan 1Dec 31, 07 
|Collar           |  | NYMEX         |  | 5,000              |  | $8.00/$14.60           |  | Jan 1Dec 31, 07 
|Put(3)           |  | NYMEX         |  | 10,000             |  | $7.985 Floor           |  | Jan 1Dec 31, 07 
|Call(4)          |  | NYMEX         |  | 4,564              |  | $12.15 Cap             |  | Jan 1Jun 30, 07 
|Call(5)          |  | NYMEX         |  | 4,310              |  | $11.95 Cap             |  | Jul 1Dec 31, 07 
|Put(6)           |  | NYMEX         |  | 6,000              |  | $8.00 Floor            |  | Jan 1Dec 31, 08 
|Call(7)          |  | NYMEX         |  | 4,513              |  | $12.15 Cap             |  | Jan 1Jun 30, 08 
|Call(8)          |  | NYMEX         |  | 4,382              |  | $10.60 Cap             |  | Jul 1Dec 31, 08 
|Collar           |  | NYMEX         |  | 7,500              |  | $8.00/$12.75           |  | Jan 1Dec 31, 08 
|Swap             |  | NYMEX         |  | 1,250              |  | $8.72 Fixed            |  | Jan 1Jun 30, 09 
|Collar           |  | NYMEX         |  | 1,250              |  | $7.75/$13.05           |  | Jan 1Jun 30, 09 
|Swap             |  | NYMEX         |  | 1,250              |  | $8.00 Fixed            |  | Jul 1Dec 31, 09 
|Collar           |  | NYMEX         |  | 1,250              |  | $7.25/$11.30           |  | Jul 1Dec 31, 09 
|Collar           |  | NYMEX         |  | 7,000              |  | $7.50/$12.75           |  | Jan 1Dec 31, 09 

---

In
August 2006, the Company entered into two basis swap contracts to mitigate the risk of adverse price movements in 2007 and 2008 between the NYMEX natural gas price and the PG&E
Citygate index, which is the index on which the Company' Sacramento Basin natural gas sales are based. Each swap contract is for 10,000 MMbtus per day of natural gas production and requires monthly
settlement. The calendar year 2007 contract calls for the Company to receive the NYMEX Last Day Settlement Price less $0.58 per MMbtu and pay the PG&E Citygate Natural Gas Index. The calendar year
2008 contract calls for the Company to receive the NYMEX Last Day Settlement Price less $0.32 and pay the PG&E Citygate Natural Gas Index.

42

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We
enter into derivative contracts, primarily collars, swaps and option contracts, to hedge future crude oil and natural gas production in order to mitigate the risk of market price
fluctuations. The objective of our hedging activities and the use of derivative financial instruments is to achieve more predictable cash flows. Our hedging activities mitigate our exposure to price
declines and allow us the flexibility to continue to execute our capital plan even if prices decline. Our collar and swap contracts, however, prevent us from receiving the full advantage of increases
in oil or natural gas prices above the maximum fixed amount specified in the hedge agreement. Also, if production is less than the amount we have hedged and the price of oil or natural gas exceeds a
fixed price in a hedge contract, we will be required to make payments against which there are no offsetting sales of production. This could impact our ability to fund future capital expenditures. In
addition, we have incurred, and may incur in the future, substantial unrealized commodity derivative losses in connection with our hedging activities, although we do not expect such losses to have a
material effect on our ability to fund expected capital expenditures. Finally, the use of derivatives involves the risk that the counterparties to such instruments will be unable to meet the financial
terms of such contracts.

In
order to qualify for hedge accounting, the relationship between the hedging instrument and the hedged item must be highly effective in achieving the offset of changes in cash flows
attributable to the hedged risk both at the inception of the contract and on an ongoing basis. We measure effectiveness on
a quarterly basis. Hedge accounting is discontinued prospectively when a hedge instrument is no longer considered highly effective.

All
derivative instruments are recorded on the balance sheet at fair value. Fair value is generally determined based on the difference between the fixed contract price and the underlying
market price at the determination date, and/or confirmed by the counterparty. Changes in the fair value of the effective portion of the cash flow hedges are recorded as a component of accumulated
other comprehensive income (loss), which is later transferred to the income statement as a component of commodity derivative income (loss) when the hedged transaction occurs. Changes in the fair value
of derivatives that do not qualify as a hedge or are not designated as a hedge, as well as the ineffective portion of hedge derivatives, are recorded in commodity derivative income (loss) on the
income statement. We determine hedge ineffectiveness based on changes during the period in the price differentials between the index price of the derivative contracts (which uses a NYMEX index in the
case of oil hedges, and NYMEX and PG&E Citygate in the case of natural gas hedges) and the contract price for the point of sale for the cash flow that is being hedged. Hedge ineffectiveness occurs
only if the cumulative gain or loss on the derivative hedging instrument exceeds the cumulative change in the expected future cash flows on the hedged transaction. Ineffectiveness is recorded in
earnings to the extent the cumulative changes in fair value of the actual derivative exceed the cumulative changes in fair value of the hypothetical derivative.

Changes in Fair Value

The fair value of outstanding oil and natural gas commodity derivative instruments and the change in fair value that would be expected from a $5.00 per Bbl
increase in the price of oil and a $1.00 per MMBtu increase in the price of natural gas are shown in the table below (in millions):

June 30, 2006Fair
Value

Effect of
$5.00/Bbl and
$1.00/MMbtu
Price
IncreasesEffective portion of derivatives designated as cash flow hedges

$
(22.8
)
$
(22.1
)Derivatives not designated as hedging instruments and the ineffective portion of derivatives designated as cash flow hedges

$
(33.5
)
$
(30.3
)


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The
fair value of the swaps and option contracts are estimated based on quoted prices from independent reporting services compared to the contract price of the agreement, and approximate
the cash gain or loss that would have been realized if the contracts had been closed out at period end. All hedge positions offset physical positions exposed to the cash market. None of these
offsetting physical positions are included in the above table. Price risk sensitivities were calculated by assuming across-the-board increases in price of $5.00 per Bbl for oil
and $1.00 per MMBtu for natural gas regardless of term or historical relationships between the contractual price of the instruments and the underlying commodity price. In the event of actual changes
in prompt month prices equal to the assumptions, the fair value of our derivative portfolio would typically change by less than the amount shown in the table due to lower volatility in
out-month prices. In the event of actual changes in all months equal to the assumptions, the fair value of our derivative portfolio would typically change by less than the amount shown in
the table due to the fact that many of the changes would be within the range of our derivative collars where the movement in fair value would typically be less than the changes in commodity prices.

With
respect to oil, we had, as of June 30, 2006, NYMEX put options with a weighted average strike price of $48.11 per Bbl on 3,500 Bbl/d in the third and fourth quarters of 2006.
With respect to natural gas, we had, as of June 30, 2006, put options with a weighted average strike price of $6.00 per MMBtu on 6,000 MMBtu/d in the third and fourth quarters of 2006. These
put options cost an average of $2.83 per Bbl and $0.46 per MMBtu for the third and fourth quarters of 2006 (a total of $4.6 million), which was paid when the put options were contracted. This
amount is not included in the fair value of derivatives in the table above.

See
note 4 to our financial statements for a discussion of our long-term debt as of December 31, 2005 and June 30, 2006.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Timothy Marquez, our Chief Executive Officer, and David Christofferson, our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of June 30, 2006. Based on the evaluation, they believe that:



We
are currently taking steps intended to enhance our internal control over financial reporting. See "Management's Discussion and Analysis of Financial Condition and Results of
OperationOverviewInternal Control Over Financial Reporting."

Internal Control Over Financial Reporting

There has not been any change in our internal control over financial reporting that occurred during the quarterly period ended June 30, 2006 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART IIOTHER INFORMATION

Item 1. Legal Proceedings

Not applicable

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on
Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In the quarterly period ended June 30, 2006, we granted options to purchase 100,000 shares of our common stock to Jeff Janik, Senior Vice President in
charge of our Texas operations. These options have an exercise price of $15.00 per share. The grant of the options was exempt from the registration requirements of the Securities Act of 1933 pursuant
to Section 4(2) of that act. The options were
granted without general solicitation or advertising. In addition, Mr. Janik had access to information concerning our company, including through our public filings with the SEC, comparable to
the information that would have been provided in a registration statement had the grant of the options been registered.

Item 3. Defaults Upon Senior Securities

Not Applicable

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

Not applicable

Item 5. Other Information

Not Applicable

Item 6. 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.

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SIGNATURES

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

|August 14, 2006 |  | VENOCO, INC.
|--------------- |  | ------------
|                |  | By:         
|                |  |             
|                |  |             
|                |  | By:         
|                |  |             
|                |  |             

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