**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form 10-Q/A**

**AmendmentNo. 1**

x                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended March 31, 2005**

**Or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**CommissionFile Number: 333-123711**

**Venoco, Inc.**

| **Delaware**                              |   | **77-0323555**          |
|-------------------------------------------|--------|-------------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer        |
| incorporation or  organization)           |   | Identification  Number) |
| **370 17th Street, Suite 3260**      |   | ** **              |
| **Denver,  Colorado**                     |   | **80202-1370**          |
| (Address of  principal executive offices) |   | (Zip Code)              |

 

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

**N/A**

(Former name or former address,if changed since last report)

Indicate by check markwhether the registrant (1) has filed all reports required by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such report(s), and (2) has been subject to such filing requirementsfor the past 90 days. YES x  NO o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). YES o  NO x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). YES o  NO x

Asof March 31, 2005, there were 32,692,500 shares of the issuer’s commonstock, par value $0.01 per share, issued and outstanding.

 

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**VENOCO, INC.Form 10-Q/A for the Quarterly Period Ended March 31, 2005TABLE OF CONTENTS**

|                   | ** **                                                                                                                                                                 |            | **Page**   | ** ** |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                                                  | ** ** | ** ** |
| Item  1.          | Financial Statements  (Unaudited)                                                                                                                                          |       |       |
|              | Condensed  Consolidated Balance Sheets at March 31, 2005 (Successor) and  December 31, 2004 (Successor)                                                          | 4          |       |
|              | Condensed  Consolidated Statements of Operations for the Three Months Ended  March 31, 2005 (Successor) and the Three Months Ended March 31,  2004 (Predecessor) | 5          |       |
|              | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended  March 31, 2005 (Successor) and the Three Months Ended March 31,  2004 (Predecessor) | 6          |       |
|              | Notes to  Condensed Consolidated Financial Statements                                                                                                                      | 7          |       |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                | 24         |       |
| Item 3.           | Quantitative  and Qualitative Disclosures about Market Risk                                                                                                                | 31         |       |
| Item 4.           | Controls  and Procedures                                                                                                                                                   | 34         |       |
| **PART II.** | **OTHER  INFORMATION**                                                                                                                                                     |       |       |
| Item 1.           | Legal  Proceedings                                                                                                                                                         | 35         |       |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                               | 35         |       |
| Item 3.           | Defaults  upon Senior Securities                                                                                                                                           | 35         |       |
| Item 4.           | Submission  of Matters to a Vote of Security Holders                                                                                                                       | 35         |       |
| Item 5.           | Other  Information                                                                                                                                                         | 35         |       |
| Item 6.           | Exhibits  and Reports on Form 8-K                                                                                                                                     | 35         |       |
| Signatures        | 37                                                                                                                                                                         |       |
|                   |                                                                                                                                                                            |            |            |            |  |

 

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**EXPLANATORY NOTE**

This Amendment to the Quarterly Report of Venoco, Inc.(the “Company”) on Form 10-Q/Afor the quarterly period ended March 31, 2005 is being filed in order toreflect the restatement of the Company’s previously issued quarterly condensedconsolidated financial statements for the quarter ended March 31, 2005(the “Original Filing”) as discussed in Note 2 to the condensed consolidatedfinancial statements included in Item 1.

For the convenience of the reader, this Form 10-Q/Asets forth the Original Filing in its entirety. However, this Form 10-Q/Aamends and restates only Part I of the Original Filing and amends andrestates that Part solely as a result of and to reflect the Restatement and toadd Note 9 to the condensed consolidated financial statements regardingstock option issuances. Part I has not been updated to reflect otherevents occurring after the Original Filing or to modify or update thosedisclosures affected by subsequent events other than the stock split effectedon November 8, 2005 and described in Note 1 to the condensedconsolidated financial statements. Certain information, including forward-lookingstatements in the Original Filing regarding anticipated production and capitalexpenditures, have been superceded by disclosures made by the Company since thedate of the Original Filing, including in the Company’s current report on Form 8-Kdated November 17, 2005. In addition, pursuant to the rules of theSEC, Item 6 of Part II of the Original Filing has been amended to containcurrently-dated certifications from our Chief Executive Officer and ChiefFinancial Officer, as required by Sections 302 and 906 of theSarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officerand Chief Financial Officer are attached to this Form 10-Q/A asexhibits 31.1, 31.2, and 32, respectively.

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**PART I—FINANCIAL INFORMATION**

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

| ** **                                                                                                                                                                            | ** ** | **March 31,  2005**                     | ** ** | **December 31,  2004**                  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **(Successor)**                              | ** ** | **(Successor)**                              | ** ** |
| ** **                                                                                                                                                                            | ** ** | **As restated  (See Note 2)** | ** ** | **As restated  (See Note 2)** | ** ** |
| **ASSETS**                                                                                                                                                                            |       |                                         |       |                                         |       |   |   |   |   |
| CURRENT ASSETS:                                                                                                                                                                       |       |                                         |       |                                         |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                            |       |                                         | $          | 5,024                                        |       |   |   | $ | 54,715 |   |   |
| Accounts  receivable                                                                                                                                                                  |       |                                         | 23,280     |                                         |       |   | 17,755 |   |   |
| Inventories                                                                                                                                                                           |       |                                         | 1,105      |                                         |       |   | 1,079 |   |   |
| Income tax  receivable                                                                                                                                                                |       |                                         | 2,670      |                                         |       |   | 3,906 |   |   |
| Commodity derivatives                                                                                                                                                                 |       |                                         | 677        |                                         |       |   | 5,300 |   |   |
| Notes  receivable—officer                                                                                                                                                        |       |                                         | —     |                                         |       |   | 1,420 |   |   |
| Prepaid expenses  and other current assets                                                                                                                                            |       |                                         | 4,650      |                                         |       |   | 3,640 |   |   |
| Total current  assets                                                                                                                                                                 |       |                                         | 37,406     |                                         |       |   | 87,815 |   |   |
| CASH RESTRICTED  FOR INVESTMENT IN OIL AND NATURAL GAS PROPERTIES                                                                                                                     |       |                                         | 44,619     |                                         |       |   | — |   |   |
| PROPERTY, PLANT AND EQUIPMENT, AT COST:                                                                                                                                               |       |                                         |       |                                         |       |   |   |   |   |
| Oil and natural  gas properties (full cost method, of which $3,444 and $3,317 were excluded  from amortization at March 31, 2005 and December 31, 2004,  respectively) |       |                                         | 184,916    |                                         |       |   | 214,842 |   |   |
| Drilling equipment                                                                                                                                                                    |       |                                         | 7,598      |                                         |       |   | 7,594 |   |   |
| Other property and  equipment                                                                                                                                                         |       |                                         | 25,967     |                                         |       |   | 25,857 |   |   |
| Total property,  plant and equipment                                                                                                                                                  |       |                                         | 218,481    |                                         |       |   | 248,293 |   |   |
| Less accumulated  depletion, depreciation, amortization and impairment                                                                                                                |       |                                         | 55,383     |                                         |       |   | 49,730 |   |   |
| Net property,  plant and equipment                                                                                                                                                    |       |                                         | 163,098    |                                         |       |   | 198,563 |   |   |
| OTHER ASSETS:                                                                                                                                                                         |       |                                         |       |                                         |       |   |   |   |   |
| Commodity  derivatives                                                                                                                                                                |       |                                         | 1,146      |                                         |       |   | 4,855 |   |   |
| Deferred loan  costs                                                                                                                                                                  |       |                                         | 6,541      |                                         |       |   | 6,596 |   |   |
| Other                                                                                                                                                                                 |       |                                         | 1,099      |                                         |       |   | 1,053 |   |   |
| Total other assets                                                                                                                                                                    |       |                                         | 8,786      |                                         |       |   | 12,504 |   |   |
| TOTAL ASSETS                                                                                                                                                                          |       |                                         | $          | 253,909                                      |       |   |   | $ | 298,882 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                               |       |                                         |       |                                         |       |   |   |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                  |       |                                         |       |                                         |       |   |   |   |   |
| Accounts payable  and accrued liabilities                                                                                                                                             |       |                                         | $          | 21,137                                       |       |   |   | $ | 19,385 |   |   |
| Undistributed  revenue payable                                                                                                                                                        |       |                                         | 4,540      |                                         |       |   | 4,774 |   |   |
| Current maturities  of long-term debt                                                                                                                                                 |       |                                         | 121        |                                         |       |   | 127 |   |   |
| Commodity  derivatives                                                                                                                                                                |       |                                         | 20,713     |                                         |       |   | 1,520 |   |   |
| Repurchase of  common stock                                                                                                                                                           |       |                                         | 109        |                                         |       |   | 5,316 |   |   |
| Total current  liabilities                                                                                                                                                            |       |                                         | 46,620     |                                         |       |   | 31,122 |   |   |
| LONG-TERM  DEBT                                                                                                                                                                       |       |                                         | 171,934    |                                         |       |   | 163,542 |   |   |
| DEFERRED INCOME  TAXES                                                                                                                                                                |       |                                         | 14,859     |                                         |       |   | 32,208 |   |   |
| ASSET RETIREMENT  OBLIGATIONS                                                                                                                                                         |       |                                         | 23,122     |                                         |       |   | 23,184 |   |   |
| COMMODITY  DERIVATIVES                                                                                                                                                                |       |                                         | 12,266     |                                         |       |   | — |   |   |
| Total liabilities                                                                                                                                                                     |       |                                         | 268,801    |                                         |       |   | 250,056 |   |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                         |       |                                         |       |                                         |       |   |   |   |   |
| MINORITY INTEREST                                                                                                                                                                     |       |                                         | —     |                                         |       |   | 387 |   |   |
| STOCKHOLDERS’ EQUITY (DEFICIT):                                                                                                                                                  |       |                                         |       |                                         |       |   |   |   |   |
| Common stock, $.01  par value (75,000,000 shares authorized; 32,692,500 shares issued and  outstanding at March 31, 2005 and December 31, 2004)                             |       |                                         | 327        |                                         |       |   | 327 |   |   |
| Additional paid-in  capital                                                                                                                                                           |       |                                         | 21,057     |                                         |       |   | 31,085 |   |   |
| Retained earnings  (deficit)                                                                                                                                                          |       |                                         | (26,713    | )                                            |       |   | 15,104 |   |   |
| Accumulated other  comprehensive income (loss)                                                                                                                                        |       |                                         | (9,563     | )                                            |       |   | 1,923 |   |   |
| Total  stockholders’ equity (deficit)                                                                                                                                            |       |                                         | (14,892    | )                                            |       |   | 48,439 |   |   |
| TOTAL LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)                                                                                                                            |       |                                         | $          | 253,909                                      |       |   |   | $ | 298,882 |   |   |

 

See notes to condensed consolidated financial statements.

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

| ** **                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **(Successor)**                                  | ** ** | **(Predecessor)** | ** ** |
| ** **                                              | ** ** | **As restated  (See Note 2)**     | ** ** | ** ** | ** ** |
| REVENUES:                                               |       |                                             |       |   |   |   |   |   |   |
| Oil and natural gas sales                               |       |                                             | $          | 42,038 |   |   |   | $ | 30,825 |   |   |
| Commodity derivative losses                             |       |                                             | (29,160    | ) |   |   | (2,762 | ) |   |
| Other                                                   |       |                                             | 1,079      |   |   |   | 1,039 |   |   |
| Total revenues                                          |       |                                             | 13,957     |   |   |   | 29,102 |   |   |
| EXPENSES:                                               |       |                                             |       |   |   |   |   |   |   |
| Oil and natural gas production                          |       |                                             | 11,930     |   |   |   | 11,231 |   |   |
| Transportation expense                                  |       |                                             | 680        |   |   |   | 748 |   |   |
| Depletion, depreciation, amortization and impairment    |       |                                             | 5,653      |   |   |   | 4,021 |   |   |
| Accretion of abandonment liability                      |       |                                             | 442        |   |   |   | 360 |   |   |
| General and administrative, net of amounts  capitalized |       |                                             | 3,116      |   |   |   | 2,435 |   |   |
| Amortization of deferred loan costs                     |       |                                             | 345        |   |   |   | 69 |   |   |
| Interest, net                                           |       |                                             | 3,497      |   |   |   | 328 |   |   |
| Total expenses                                          |       |                                             | 25,663     |   |   |   | 19,192 |   |   |
| Income (loss) before income taxes                       |       |                                             | (11,706    | ) |   |   | 9,910 |   |   |
| Income tax provision (benefit)                          |       |                                             | (4,930     | ) |   |   | 4,131 |   |   |
| Income (loss) before minority interest                  |       |                                             | (6,776     | ) |   |   | 5,779 |   |   |
| Minority interest in consolidated subsidiary            |       |                                             | 42         |   |   |   | — |   |   |
| Net income (loss)                                       |       |                                             | (6,818     | ) |   |   | 5,779 |   |   |
| Preferred stock dividends                               |       |                                             | —     |   |   |   | (2,116 | ) |   |
| Net income (loss)  applicable to common equity          |       |                                             | $          | (6,818 | ) |   |   | $ | 3,663 |   |   |

 

See notes to condensed consolidated financial statements.

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

| ** **                                                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                                                                     | ** ** | **(Successor)**                                  | ** ** | **(Predecessor)** | ** ** |
| ** **                                                                                     | ** ** | **As restated  (See Note 2)**     | ** ** | ** ** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                         |       |                                             |       |   |   |   |   |   |   |
| Net income (loss)                                                                              |       |                                             | $          | (6,818 | ) |   |   | $ | 5,779 |   |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                             |       |   |   |   |   |   |   |
| Depletion, depreciation, amortization and impairment                                           |       |                                             | 5,653      |   |   |   | 4,021 |   |   |
| Accretion of abandonment liability                                                             |       |                                             | 442        |   |   |   | 360 |   |   |
| Deferred income taxes                                                                          |       |                                             | (6,167     | ) |   |   | 2,873 |   |   |
| Amortization of deferred loan costs and bond  discount                                         |       |                                             | 387        |   |   |   | 79 |   |   |
| Gain on sale of property and equipment                                                         |       |                                             | —     |   |   |   | (123 | ) |   |
| Change in other liabilities                                                                    |       |                                             | —     |   |   |   | (153 | ) |   |
| Change in operating assets and liabilities                                                     |       |                                             | (3,427     | ) |   |   | (1,080 | ) |   |
| Net premiums paid on derivative contracts                                                      |       |                                             | (5,420     | ) |   |   | — |   |   |
| Changes in unrealized commodity derivatives                                                    |       |                                             | 26,148     |   |   |   | 408 |   |   |
| Minority interest in undistributed earnings of  subsidiary                                     |       |                                             | 42         |   |   |   | — |   |   |
| Net cash provided by operating activities                                                      |       |                                             | 10,840     |   |   |   | 12,164 |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                         |       |                                             |       |   |   |   |   |   |   |
| Expenditures for oil and gas properties                                                        |       |                                             | (14,302    | ) |   |   | (1,643 | ) |   |
| Acquisition of Marquez Energy, LLC                                                             |       |                                             | (14,628    | ) |   |   | — |   |   |
| Proceeds from sale of oil and gas properties                                                   |       |                                             | 44,619     |   |   |   | 1,526 |   |   |
| Increase in cash restricted for investment in oil  and natural gas properties                  |       |                                             | (44,619    | ) |   |   | — |   |   |
| Notes receivable—officers and employees                                                   |       |                                             | 1,390      |   |   |   | — |   |   |
| Other                                                                                          |       |                                             | (139       | ) |   |   | 175 |   |   |
| Net cash (used in) provided by investing activities                                            |       |                                             | (27,679    | ) |   |   | 58 |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                         |       |                                             |       |   |   |   |   |   |   |
| Proceeds from long-term debt                                                                   |       |                                             | 13,000     |   |   |   | — |   |   |
| Principal payments on long-term debt                                                           |       |                                             | (4,648     | ) |   |   | (7,333 | ) |   |
| Distribution payments to Marquez Energy member                                                 |       |                                             | (707       | ) |   |   | — |   |   |
| Payments of dividends to shareholder                                                           |       |                                             | (35,000    | ) |   |   | — |   |   |
| Repurchase of common stock                                                                     |       |                                             | (5,207     | ) |   |   | — |   |   |
| Increase in deferred loan costs                                                                |       |                                             | (290       | ) |   |   | — |   |   |
| Net cash used in financing activities                                                          |       |                                             | (32,852    | ) |   |   | (7,333 | ) |   |
| Net (decrease)  increase in cash and cash equivalents                                          |       |                                             | (49,691    | ) |   |   | 4,889 |   |   |
| Cash and cash  equivalents, beginning of period                                                |       |                                             | 54,715     |   |   |   | 8,417 |   |   |
| Cash and cash  equivalents, end of period                                                      |       |                                             | $          | 5,024 |   |   |   | $ | 13,306 |   |   |
| Supplemental Disclosure  of Cash Flow Information—                                        |       |                                             |       |   |   |   |   |   |   |
| Cash paid during  the year for:                                                                |       |                                             |       |   |   |   |   |   |   |
| Interest                                                                                       |       |                                             | $          | 180 |   |   |   | $ | 524 |   |   |

 

See notes to condensed consolidated financial statements.

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**VENOCO, INC.AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSTHREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)**

**1.   BASIS OFPRESENTATION**

***Interim FinancialStatements******—***Theaccompanying condensed consolidated financial statements of Venoco Inc.are unaudited. In the opinion of management, the accompanying unauditedcondensed consolidated financial statements contain all adjustments (consistingonly of normal recurring accruals) necessary to present fairly the Company’sfinancial position at March 31, 2005 and the results of operations andcash flows for the three months ended March 31, 2005 and 2004. Certaindisclosures have been condensed or omitted from these financial statements.Accordingly, these financial statements should be read in conjunction with theCompany’s audited 2004 financial statements contained in its RegistrationStatement on Form S-4/A (Registration No. 333-123711) asfiled with the Securities and Exchange Commission on April 20, 2005. Theresults for interim periods are not necessarily indicative of annual results.

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

***New Company Basis***—During2004, the Company’s CEO, Tim Marquez, increased his ownership in the Companyfrom 41% to 100%. As a result of a transaction that closed on July 12,2004, Mr. Marquez purchased 53% of the common shares (2,468 common shares)of the Company from two of the Company’s former officers and their respectiveaffiliates. On December 22, 2004, the Company merged with a corporationthe sole stockholder of which was a trust controlled by Mr. Marquez. Thismerger had the effect of giving Mr. Marquez the remaining 6% of theCompany’s common stock.

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

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

**2.   RESTATEMENT**

The Company has restated its consolidated financialstatements for the quarter ended March 31, 2005 for the items discussedbelow. These items resulted in adjustments that reduced net income by $42 thousandfor the March 2005 quarter. They also resulted in balance sheetadjustments which decreased total assets by $0.4 million, decreased totalliabilities by $3.6 million and increased total stockholders equity by$3.2 million.

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

A summary of thesignificant effects of the restatement on the Company’s condensed consolidatedbalance sheets as of December 31, 2004 and March 31, 2005 and the Company’scondensed consolidated statements of income for the quarter ended March 31,2005 is as follows (in thousands):

**CondensedConsolidated Balance Sheet Adjustments**

| ** **                                       | ** ** | **As  Previously  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|-----------------|------------|------------------|------------|
| **At  March 31, 2005**                      |       |                         |       |            |       |             |       |   |   |
| Property and  equipment, net                     |       | $                            | 163,465    |            |       | $                | (367       | ) |   | $ | 163,098 |   |
| Total assets                                     |       | 254,276                      |       |            | (367       | )                |       | 253,909 |   |
| Deferred income  taxes                           |       | 18,463                       |       |            | (3,604     | )                |       | 14,859 |   |
| Total liabilities                                |       | 272,405                      |       |            | (3,604     | )                |       | 268,801 |   |
| Stockholder’s  equity                       |       | (18,129                      | )          |            | 3,237      |             |       | (14,892 | ) |
| Total liabilities  and stockholders’ equity |       | $                            | 254,276    |            |       | $                | (367       | ) |   | $ | 253,909 |   |
| **At December 31, 2004**                    | ** ** | ** **                   | ** ** |            |       |             | ** ** | ** ** | ** ** |
| Minority Interest                                |       | $                            | —     |            |       | $                | 387        |   |   | $ | 387 |   |
| Stockholders’ equity                        |       | 48,826                       |       |            | (387       | )                |       | 48,439 |   |

 

**CondensedConsolidated Statements of Income Adjustments**

| ** **                                          | ** ** | **As  Previously  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|-----------------|------------|------------------|------------|
| **For the  three months ended March 31, 2005** |       |                         |       |            |       |             |       |   |   |   |   |
| Total revenues                                      |       |                         | $          | 13,605          |       |             |       | $ | 352 |   |   | $ | 13,957 |   |
| Total expenses                                      |       |                         | 25,311     |            |       |             | 352        |   |   | 25,663 |   |
| Minority interest  in consolidated subsidiary       |       |                         | —     |            |       |             | 42         |   |   | 42 |   |
| Net loss                                            |       |                         | (6,776     | )               |       |             | 42         |   |   | (6,818 | ) |
|                                                     |            |                              |            |                 |            |                  |            |  |  |  |  |  |  |  |

 

The guarantor financialinformation presented in Note 14 which is presented in order to isolate thefinancial information of those subsidiaries which are not guarantors of our8.75% senior notes as described in Note 6 has also been revised. The financialinformation of those subsidiaries which are not guarantors of the 8.75% seniornotes did not materially change.

**3.   ACQUISITIONOF PROPERTIES**

On March 21, 2005,the Company completed the acquisition of Marquez Energy. The transaction addedproved reserves of approximately 2.0 MMBOE as of December 31, 2004, basedon a reserve report prepared by Netherland, Sewell and Associates, Inc.(NSAI). The purchase price for the membership 

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interestsin Marquez Energy was $16.6 million. The purchase price was based on themember’s equity on Marquez Energy’s unaudited December 31, 2004 balancesheet as adjusted to reflect the value of its oil and natural gas properties(as determined by NSAI as of December 31, 2004) and certain otheradjustments. For the purpose of calculating the purchase price, the followingvalues were assigned to Marquez Energy’s proved reserves: (i) $1.75/Mcfefor its proved developed producing reserves, (ii) $1.00/Mcfe for itsproved developed non-producing reserves and (iii) $0.75/Mcfe for itsproved undeveloped reserves. NSAI or another nationally recognized engineeringfirm will conduct supplemental evaluations of the Marquez Energy properties asof year-end 2005 and 2006. In the event those evaluations attribute provedreserves to the Marquez Energy properties as of December 31, 2004 inexcess of those reflected in NSAI’s initial report, additional payments will bemade to the former holders of interests in Marquez Energy pursuant to the sameformula, subject to a maximum aggregate price, including debt assumption, of$25 million. The Company had paid a deposit of $2 million to themembers of Marquez Energy as of December 31, 2004 and on March 21,2005 paid the remaining $14.6 million to the members of Marquez Energy and$3.2 million to Bank of Oklahoma to repay the existing debt. As discussedin Note 1, for financial reporting purposes the acquisition was accounted foras a reorganization of entities under common control in a manner similar to apooling of interests.

**4.   SALES OFPROPERTIES**

In February 2005, the Company entered into apurchase and sale agreement to sell its interest in the Big Mineral Creek field(“BMC”), located in Grayson County, Texas. The sales price was$45 million, subject to adjustments that, among other things, gaveeconomic effect to the transaction as of February 1, 2005. The closing ofthe transaction occurred on March 31, 2005. As of December 31, thefield had proved reserves of approximately 3.4 MMBOE, according to a report byNSAI.

In order to facilitate a possible like-kind exchangeof the Company’s BMC property under Section 1031 of the Internal RevenueCode, the proceeds of the sale were deposited with a qualified intermediary. Inaddition, the equity interests in Marquez Energy are currently being held by anindependent entity acting on behalf of the Company to allow a portion of theMarquez Energy properties to be potentially used as replacement properties tothe BMC property. The Company has and will at all times continue to maintain beneficialownership of the interests, and will assume direct ownership of them within180 days of the closing. The purpose of this structure is to give theCompany the option of effecting a like-kind exchange of the BMC propertypursuant to Section 1031 and thereby deferring a portion of the taxespayable with respect to the sale of the BMC property. The Company hasidentified and is pursuing six acquisition opportunities each of which qualifyas replacement properties. The Company has not recorded a gain on the sale ofthe BMC property, but has applied the sales proceeds of $44.6 million toreduce the capitalized cost of oil and natural gas properties and has recordedthe cash received as “Cash Restricted for Investment in Oil and Natural GasProperties” on the condensed consolidated balance sheet at March 31, 2005.

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

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

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**5.   HEDGINGAND DERIVATIVE FINANCIAL INSTRUMENTS**

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

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

All derivative instruments are recorded on the balancesheet at fair value. Fair value is generally determined based on the differencebetween the fixed contract price and the underlying market price at thedetermination date, and/or confirmed by the counterparty. Changes in the fairvalue of the effective portion of the cash flow hedges are recorded as acomponent of accumulated other comprehensive income (loss), which is latertransferred to the income statement as a component of commodity derivativeincome (loss) when the hedged transaction occurs. Changes in the fair value ofderivatives which do not qualify as a hedge or are not designated as a hedge,as well as the ineffective portion of hedge derivatives, are recorded incommodity derivative income (loss) on the income statement. The Companydetermines hedge ineffectiveness based on changes during the period in theprice differentials between the index price of the derivative contracts (whichuses a New York Mercantile Exchange (“NYMEX”) index in the case of oil hedges,and NYMEX and PG&E Citygate in the case of natural gas hedges) and thecontract 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 thederivative hedging instrument exceeds the cumulative change in the expectedfuture cash flows on the hedged transaction. Ineffectiveness is recorded inearnings to the extent the cumulative changes in fair value of the actualderivative exceed the cumulative changes in fair value of the hypotheticalderivative.

Thecomponents of commodity derivative losses in the condensed consolidated incomestatements are as follows (in thousands):

| ** **                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                                                    | ** ** | **(Successor)**                                  | ** ** | **(Predecessor)** | ** ** |
| Realized  commodity derivative losses                                         |       |                                             | $          | 3,565 |   |   |   | $ | 2,354 |   |   |
| Unrealized commodity  derivative losses:                                      |       |                                             |       |   |   |   |   |   |   |
| Change in fair value of derivatives that do not  qualify for hedge accounting |       |                                             | 23,096     |   |   |   | 408 |   |   |
| Ineffective portion of derivatives qualifying for  hedge accounting           |       |                                             | 2,499      |   |   |   | — |   |   |
| Unrealized commodity derivative losses                                        |       |                                             | 25,595     |   |   |   | 408 |   |   |
| Total realized and  unrealized commodity derivative losses                    |       |                                             | $          | 29,160 |   |   |   | $ | 2,762 |   |   |

 

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

| ** **                        | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(Successor)**          | ** ** | **(Successor)**             | ** ** |
| Derivative assets:                |       |                     |       |                        |       |   |   |   |   |
| Oil derivative contracts          |       |                     | $          | 1,253                       |       |   |   | $ | 6,775 |   |   |
| Gas derivative contracts          |       |                     | 570        |                        |       |   | 3,380 |   |   |
| Derivative liabilities:           |       |                     |       |                        |       |   |   |   |   |
| Oil derivative contracts          |       |                     | (30,007    | )                           |       |   | (1,383 | ) |   |
| Gas derivative contracts          |       |                     | (2,972     | )                           |       |   | (137 | ) |   |
| Net derivative asset  (liability) |       |                     | $          | (31,156                     | )          |   |   | $ | 8,635 |   |   |

 

As of March 31, 2005, an unrealized derivativefair value loss of $15.8 million ($9.6 million after tax), related tocash flow hedges, was recorded in accumulated other comprehensive loss. Basedon March 31, 2005 mark-to-market prices, the Company expects to reclassifyas decreases to earnings $10.3 million ($6.2 million after tax) fromaccumulated other comprehensive loss during the next twelve months. The actualreclassification to earnings will be based on mark-to-market prices at thecontract settlement date.

***Crude Oil Agreements***   Asof March 31, 2005, the Company has entered into option, swap and collaragreements to receive average minimum and maximum New York Mercantile Exchange(NYMEX) West Texas Intermediate (WTI) prices as summarized below. Location andquality differentials attributable to the Company’s properties are not includedin the following prices. The agreements provide for monthly settlement based onthe differential between the agreement price and the actual NYMEX crude oilprice.

| ** **                                               | ** ** | **Minimum**     | ** ** | **Maximum**          | ** ** |
|----------------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| ** **                                               | ** ** | **Barrels/day** | ** ** | **Avg. Prices** | ** ** | **Barrels/day** | ** ** | **Avg. Prices** | ** ** |
| Crude oil hedges at  March 31, 2005 for production: |       |            |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| April 1-December 31, 2005                      |       |            | 9,471      |                 |       |   | $ | 37.73 |   |   |   | 5,471 |   |   |   | $ | 47.17 |   |   |
| January 1-December 31, 2006                    |       |            | 7,000      |                 |       |   | $ | 40.80 |   |   |   | 5,000 |   |   |   | $ | 50.70 |   |   |
| January 1-December 31,  2007                   |       |            | 3,000      |                 |       |   | $ | 40.00 |   |   |   | 3,000 |   |   |   | $ | 66.37 |   |   |

 

***Natural Gas Agreements*—**Asof March 31, 2005, the Company has entered into option, swap and collaragreements to receive average minimum and maximum PG&E Citygate prices asfollows:

| ** **                                                 | ** ** | **Minimum**   | ** ** | **Maximum**          | ** ** |
|------------------------------------------------------------|------------|---------------|------------|----------------------|------------|
| ** **                                                 | ** ** | **MMBtu/Day** | ** ** | **Avg. Prices** | ** ** | **MMBtu/Day** | ** ** | **Avg. Prices** | ** ** |
| Natural gas hedges at  March 31, 2005 for production: |       |          |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| April 1-December 31, 2005                        |       |          | 14,000     |                 |       |   | $ | 6.09 |   |   |   | 4,000 |   |   |   | $ | 6.77 |   |   |
| January 1-December 31, 2006                      |       |          | 12,000     |                 |       |   | $ | 6.10 |   |   |   | 6,000 |   |   |   | $ | 7.87 |   |   |
| January 1-December 31,  2007                     |       |          | 6,000      |                 |       |   | $ | 6.00 |   |   |   | 6,000 |   |   |   | $ | 8.40 |   |   |

 

As of March 31, 2005the Company has entered into a fixed-price forward sales contract with agas purchaser under which it is obligated for physical delivery of specifiedvolumes of gas at a fixed price. As this contract provides for physicaldelivery of the gas it is not considered a hedge contract because it has beendesignated as a normal sale and the transaction will be recorded in thefinancial statements when the 

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associateddelivery occurs. The Company has contracted for 2,000 MCF per day at $4.85 perMCF for the period April 1, 2005 to September 30, 2006.

**6.   LONG-TERMDEBT**

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

| ** **                                                  | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| 8.75% senior  notes due December 15, 2011              |       | $                        | 149,077    |                        |       | $ | 149,043 |   |   |
| Revolving Credit  Facility due November 4, 2007        |       | 13,000                   |       |                        | —     |   |   |
| Revolving Credit  Facility due August 31, 2006         |       | —                   |       |                        | 4,684      |   |   |
| 5.79% Mortgage on  office building due January 1, 2015 |       | 9,978                    |       |                        | 9,942      |   |   |
| Total long-term  debt                                       |       | 172,055                  |       |                        | 163,669    |   |   |
| Less: current  portion of long-term debt                    |       | (121                     | )          |                        | (127       | ) |   |
| Long-term  debt, net of current portion                     |       | $                        | 171,934    |                        |       | $ | 163,542 |   |   |

 

On December 20, 2004, the Company sold$150 million in 8.75% senior notes (“the notes”). The notes were issued at99.362% of par to yield 8.80% to maturity due December 2011. Interest onthe notes is due each June 15 and December 15 beginning June 15,2005. The notes are senior unsecured obligations and contain covenants that,among other things, limit the Company’s ability to make investments, incuradditional debt or issue preferred stock, create liens and sell assets.

Proceeds from the sale of the notes were used to repayexisting borrowings of $98.7 million against the Company’s$102 million Senior Secured Facility (“the Senior Facility”) obtained in November 2004.The Company also obtained in December 2004 an amended and restatedrevolving credit agreement with an initial borrowing base of $50 millionand no associated term loan facility (“restated Credit Agreement”). Theborrowing base under the restated Credit Agreement was reduced to$40 million on March 31, 2005 due to the sale of BMC. The restatedCredit Agreement contains a number of restrictive covenants with regard to leverageand current ratios and other terms customary in a credit facility secured byoil and natural gas properties. At March 31, 2005, there were$13 million of borrowings against the restated Credit Agreement. At March 31,2005, the average interest rate on the revolving loans was 4.99 percent. Asof March 31, 2005, the Company was in compliance with all of its financialcovenants.

At December 31, 2004, Marquez Energy, nowconsolidated with the Company, had a $5.0 million revolving creditfacility with the Bank of Oklahoma. Interest accrued at the JP Morgan ChaseBank prime rate plus 1 percent. The agreement was collateralized by theCompany’s oil and gas properties and was guaranteed by the Company’s principalshareholder and president. The credit agreement also contained certain networth, leverage and ratio requirements and limited the payment ofdistributions. At December 31, 2004, the Company had approximately$4.7 million of outstanding borrowings under this credit facility. TheCompany repaid the outstanding borrowings on March 21, 2005 of$3.2 million on the credit facility.

In addition, on December 9,2004, the Company purchased an office building in Carpinteria, Californiasecured by a 5.79% $10 million promissory note due January 1, 2015.The promissory note provides for a monthly payment of $58,612 beginning February 1,2005 and continuing through December 1, 2014. The balance of unpaidprincipal and all accrued but unpaid interest is due and payable on January 1,2015.

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**7.   COMPREHENSIVEINCOME (LOSS)**

Comprehensiveincome (loss) includes net income and certain items recorded directly toStockholders’ Equity and classified as Accumulated Other Comprehensive Income (“OCI”).The following table reflects comprehensive income for the three-monthperiods ended March 31, 2005 and 2004.

| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                                                   | ** ** | **(Successor)**                                  | ** ** | **(Predecessor)** | ** ** |
| ** **                                                                   | ** ** | **As restated  (See Note 2)**     | ** ** | ** ** | ** ** |
| Net income (loss)                                                            |       |                                             | $          | (6,818 | ) |   |   | $ | 5,779 |   |   |
| OTHER  COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAX:                       |       |                                             |       |   |   |   |   |   |   |
| Hedging  activities:                                                         |       |                                             |       |   |   |   |   |   |   |
| Reclassification adjustments for settled contracts                           |       |                                             | 161        |   |   |   | 351 |   |   |
| Changes in fair value of effective portion of  outstanding hedging positions |       |                                             | (11,647    | ) |   |   | (1,822 | ) |   |
| Other  comprehensive loss                                                    |       |                                             | (11,486    | ) |   |   | (1,471 | ) |   |
| Comprehensive income  (loss)                                                 |       |                                             | $          | (18,304 | ) |   |   | $ | 4,308 |   |   |

 

**8.   LITIGATION**

***Beverly Hills Litigation***

Six lawsuits have been filed against the Company andcertain other energy companies in Los Angeles County Superior Court by personswho attended Beverly Hills High School or who are citizens of BeverlyHills/Century City or visitors to that area from the time period running fromthe 1930s to date. There are approximately 1,000 plaintiffs (includingplaintiffs in two related lawsuits in which the Company has not been named) whoclaim to be suffering from various forms of cancer or some other illnesses,fear they may suffer from such maladies in the future, or are related in somemanner to persons who have suffered from cancer or other illnesses. Plaintiffsallege that exposure to substances in the air, soil and water which derive fromeither oil field or other operations in the area are the cause of the cancersand other maladies. The Company has owned an oil and gas facility adjacent tothe school since 1995. For the majority of the plaintiffs, their allegedexposures occurred before the Company owned the facility. It is anticipatedthat additional plaintiffs may be added to the litigation over time. All caseshave been consolidated before one judge. The judge has ordered that all of thecases be stayed except for an initial trial group consisting of twelve “representative”plaintiffs. Discovery relating to the initial trial group is ongoing, with atrial set for March 2006. Management believes that the claims made in thesuits are without merit and the Company intends to defend against the claimsvigorously. However, the Company cannot predict, at this time, the outcome ofthe suits. The Company also has defense and indemnity obligations to certain otherdefendants in the actions. The Company cannot predict the cost of defense andindemnity obligations, if any, at the present time.

In accordance with Statement of Financial AccountingStandard (“SFAS”) No. 5, *Accounting forContingencies*, the Company has not accrued for a loss contingencyrelating to the Beverly Hills litigation because it believes that, althoughunfavorable outcomes in the proceedings may be reasonably possible, they arenot considered by management to be probable or reasonably estimable. If one ormore of these matters are resolved in a manner adverse to the Company, and ifinsurance coverage were determined to not be applicable, their impact on theCompany’s results of operations, financial position and/or liquidity could bematerial.

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

In December 2004, alawsuit was filed against the Company by two of its former directors and theformer preferred shareholders. The claim is for indemnification of attorneys’fees and expenses incurred in defending the former directors in litigationfiled by the former CEO in connection with the termination of his employmentfrom Venoco. Fees incurred in the defense total approximately $1,000,000. TheCompany contends that plaintiffs are not entitled to indemnification becausethe alleged acts occurred prior to the time they were directors. If a courtdetermines that plaintiffs are entitled to indemnification the Company believesthat the amount of the Company’s indemnity obligation would be significantlyless than $1,000,000. The Company has accrued certain amounts with respect tothis matter in accordance with SFAS No. 5, *Accounting for Contingencies*.

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

In December 2004, aformer COO of the Company filed a lawsuit against the Company and its CEO inSanta Barbara County Superior Court, claiming that the Company breached hisemployment agreement and wrongfully failed to pay him wages due, primarily inconnection with stock bonuses. The Company believes that he was entitled toapproximately 45,000 shares (approximately 7,000 of which were previouslyissued) and that the Company has the right to repurchase those shares at netbook value as of January 1, 2004 ($.53/share). The former COO is allegingthat he is entitled to a cash bonus of approximately $24,000 plus interest andapproximately 68,700 shares in total. The Company believes that the plaintiff’scontentions are without merit. In April 2005 the former COO filed aPetition for Appraisal in the Delaware Court of Chancery asking for anappraisal of the shares he holds as well as those shares which are the subjectof the employment contract dispute. The former COO contends that the fair valueof the Company’s shares is greater than the $18.44/share offered in connectionwith the December 2004 statutory merger. The Company believes that only2,772 shares are subject to the appraisal action—being the shares that the COOhad outside his employment arrangement—and that $18.44 is the fair value ofthose shares. In accordance with SFAS No. 5, *Accounting for Contingencies*, the Company has not accruedfor a loss contingency relating to these matters because it believes that,although an unfavorable outcome in the proceedings may be possible, it is notconsidered by management to be probable or reasonably estimable.

***Personal Injury Claim***

In August 2004, a 14-year-old boy fell offa bluff property jointly owned by the Company and another company. The boysustained head injuries, the extent of which are not fully known at this time.An attorney hired by the boy’s family contacted the Company in November 2004.The Company believes that it has no liability in connection with this accident.

In addition, the Companyis subject to other claims and legal actions that may arise in the ordinarycourse of business. The Company believes that the ultimate liability, if any,with respect to these other claims and legal actions will not have a materialeffect on the Company’s consolidated financial position or results of operations.

**9.   STOCKOPTION PLANS**

During2005, the Company entered into non-qualified stock option agreements withcertain employees and officers of the Company other than Mr. Marquez. Totaloptions granted in 2005 through March 31, 2005 were 3,271,161 at aweighted average exercise price of $6.44 ($6.00 to $8.67). The options vestover a four year period, with 20% vesting on the grant date and 20% vesting oneach subsequent anniversary of the grant date. The non-qualified stock optionagreements provide that all options will become immediately vested following achange in control of the Company. The agreements further provide that alloptions will become immediately vested if the Company terminates the optionholder’s 

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employment unless the termination is for specifictypes of misconduct. The Company has previously recorded stock compensationpursuant to the intrinsic value method under Accounting Principles Board (“APB”)Opinion No. 25, whereby no compensation was recognized for these stockoption rewards. Had compensation expense for the options granted to ouremployees and officers been determined based on the fair value at the grantdate for the options, consistent with the provisions of SFAS No. 123, theCompany’s net income (loss) for the three months ended March 31, 2005 and2004 would have changed to the pro forma amounts listed below:

| ** **                                                                                                                      | ** ** | **Three Months Ended  March 31,**         | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
| Net income (loss)  as reported                                                                                                  |       |                                                     | $          | (6,818 | ) |   |   | $ | 5,779 |   |   |
| Add:                                                                                                                            |       |                                                     |       |   |   |   |   |   |   |
| Stock-based  compensation expense included in the income statement, net of related tax  effects                                 |       |                                                     | 0          |   |   |   | 0 |   |   |
| Deduct:                                                                                                                         |       |                                                     |       |   |   |   |   |   |   |
| Total stock based  compensation expense determined under the fair value method for all  awards, net of related tax effects |       |                                                     | (963       | ) |   |   | 0 |   |   |
| Pro forma net income  (loss)                                                                                                    |       |                                                     | $          | (7,781 | ) |   |   | $ | 5,779 |   |   |

 

**10.   SHAREHOLDERS’EQUITY**

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

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

**11.   ASSETRETIREMENT OBLIGATIONS**

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

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

| ** **                                                         | ** ** | **2005**        | ** ** | **2004**          | ** ** |
|--------------------------------------------------------------------|------------|-----------------|------------|-------------------|------------|
| ** **                                                         | ** ** | **(Successor)** | ** ** | **(Predecessor)** | ** ** |
| Balance of ARO as  of January 1,                              |       |            | $          | 23,390            |       |   |   | $ | 19,248 |   |   |
| Revisions in  estimated cashflows                                  |       |            | —     |              |       |   | — |   |   |
| Liabilities  incurred during the three months ended March 31, |       |            | 33         |              |       |   | — |   |   |
| Liabilities  settled during the three months ended March 31   |       |            | (547       | )                 |       |   | (30 | ) |   |
| Accretion expense                                                  |       |            | 442        |              |       |   | 360 |   |   |
| Balance of ARO as of  March 31,                               |       |            | $          | 23,318            |       |   |   | $ | 19,578 |   |   |

 

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Of the liability for assetretirement obligations balance at March 31, 2005, $0.2 million isclassified as current and included in accrued liabilities in the accompanyingconsolidated balance sheet. The balance of ARO as of March 31, 2005represents the Company’s estimate of the present value of its aggregate assetretirement obligations as of that date. The discount rates used to calculatethe present value varied depending on the estimated timing of the obligation,but typically ranged between 6% and 8%.

**12.   SUBSEQUENTEVENTS**

In April 2005, theCompany entered into a collar agreement to receive average minimum and maximumPG&E Citygate prices of $7.00 and $9.45, respectively on natural gasproduction of 3,000 MMBtu per day for the calendar year 2006. Theagreement provides for monthly settlement based on the differential between theagreement prices and the PG&E Citygate prices.

**13.   RECENTACCOUNTING PRONOUNCEMENTS**

In December 2004 the Financial AccountingStandards Board (“FASB”) issued SFAS No.123R (revised 2004), “*Share-Based Payments*” which requires that the compensationrelating to all stock-based awards, including stock options, be recognized inthe financial statements. This pronouncement replaces SFAS No. 123, “*Accounting for Stock-Based Compensation*,” and supersedes APBOpinion No. 25, “*Accounting for StockIssued to Employees*.” In April 2005, the Securities andExchange Commission postponed the required implementation date for this newstatement to annual periods beginning after June 15, 2005. The Companycurrently plans to adopt SFAS No. 123R as of January 1, 2006. TheCompany has previously recorded stock compensation pursuant to the intrinsicvalue method under APB Opinion No. 25, wherby no compensation wasrecognized for most stock option awards. The Company expects that stock optiongrants will continue to be a significant part of employee compensation, and,therefore, SFAS No. 123R will have a significant impact on itsfinancial statements. For the pro forma effect of recording compensation forall stock awards at fair value, using the Black-Sholes method, see Note 9 toour condensed consolidated financial statements. The Company has not yetcompleted its evaluation, but expects the adoption of SFAS No. 123R tohave an effect on the financial statements similar to the pro forma effects. TheCompany is currently considering alternative valuation methods to determine thefair value of stock options granted after December 31, 2005.

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

In March 2005, the FASB issued FASBInterpretation (“FIN”) No. 47, *Accountingfor Conditional Asset Retirement Obligations*. This Interpretationclarifies the definition and treatment of conditional asset retirementobligations as discussed in FASB Statement No. 143, *Accounting for Asset Retirement Obligations*.A conditional asset retirement obligation is defined as an asset retirementactivity in which the timing and/or method of settlement are dependent onfuture events that may be outside the control of a company. FIN 47 states thata company must record a liability when incurred for conditional assetretirement obligations if the fair value of the obligation is reasonablyestimable. This Interpretation is intended to provide more information aboutlong-lived assets, more information about future cash outflows for these obligationsand more consistent recognition of these liabilities. FIN 47 is effective for 

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fiscal years ending after December 15,2005. The Company does not believe that its financial position, results ofoperations or cash flows will be impacted by this Interpretation.

In June 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*,which replaces APB Opinion No. 20, *AccountingChanges*, and SFAS No. 3, *ReportingAccounting Changes in Interim Financial Statements*. Statement 154changes the requirements for the accounting and reporting of a change inaccounting principle. APB Opinion No. 20 previously required that mostvoluntary changes in an accounting principle be recognized by including thecumulative effect of the new accounting principle in net income of the periodof the change. SFAS No. 154 now requires retrospective application ofchanges in an accounting principle to prior period financial statements, unlessit is impracticable to determine either the period-specific effects or thecumulative effect of the change. The Statement is effective for fiscal yearsbeginning after December 15, 2005. We do not expect the adoption of thisstatement will have a material impact on our financial statements.

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

**14.   GUARANTORFINANCIAL INFORMATION**

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

The following is condensed consolidating financialinformation for the three months ended March 31, 2005 and 2004 and as of March 31,2005 and December 31, 2004.

17

----

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS INFORMATIONTHREE MONTHS ENDED MARCH 31, 2004(Predecessor)(in thousands)**

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

| ** **                                              | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| REVENUES:                                               |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas sales                               |       |                  | $          | 28,967                      |       |                            |       | $                | 1,858      |             |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 30,825 |   |   |
| Commodity derivative losses                             |       |                  | (2,762     | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (2,762 | ) |   |
| Other                                                   |       |                  | 596        |                        |       |                            | 15         |             |       |             | 1,643      |   |   |   | (1,215 | ) |   |   | 1,039 |   |   |
| Total revenues                                          |       |                  | 26,801     |                        |       |                            | 1,873      |             |       |             | 1,643      |   |   |   | (1,215 | ) |   |   | 29,102 |   |   |
| EXPENSES:                                               |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas production                          |       |                  | 10,477     |                        |       |                            | 511        |             |       |             | 243        |   |   |   | — |   |   |   | 11,231 |   |   |
| Transportation expense                                  |       |                  | 1,897      |                        |       |                            | —     |             |       |             | —     |   |   |   | (1,149 | ) |   |   | 748 |   |   |
| Depletion, depreciation, amortization and impairment    |       |                  | 3,719      |                        |       |                            | 191        |             |       |             | 111        |   |   |   | — |   |   |   | 4,021 |   |   |
| Accretion of abandonment liability                      |       |                  | 337        |                        |       |                            | 18         |             |       |             | 5          |   |   |   | — |   |   |   | 360 |   |   |
| General and administrative, net of amounts  capitalized |       |                  | 2,278      |                        |       |                            | 147        |             |       |             | 76         |   |   |   | (66 | ) |   |   | 2,435 |   |   |
| Amortization of deferred loan costs                     |       |                  | 69         |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 69 |   |   |
| Interest, net                                           |       |                  | 643        |                        |       |                            | —     |             |       |             | (315       | ) |   |   | — |   |   |   | 328 |   |   |
| Total expenses                                          |       |                  | 19,420     |                        |       |                            | 867        |             |       |             | 120        |   |   |   | (1,215 | ) |   |   | 19,192 |   |   |
| Equity in  subsidiary income                            |       |                  | 1,475      |                        |       |                            | —     |             |       |             | —     |   |   |   | (1,475 | ) |   |   | — |   |   |
| Income (loss)  before income taxes                      |       |                  | 8,856      |                        |       |                            | 1,006      |             |       |             | 1,523      |   |   |   | (1,475 | ) |   |   | 9,910 |   |   |
| Income tax  provision (benefit)                         |       |                  | 3,077      |                        |       |                            | 419        |             |       |             | 635        |   |   |   | — |   |   |   | 4,131 |   |   |
| Net income (loss)                                       |       |                  | $          | 5,779                       |       |                            |       | $                | 587        |             |       |   | $ | 888 |   |   |   | $ | (1,475 | ) |   |   | $ | 5,779 |   |   |
| Net income (loss)  as previously reported (see Note 2)  |       |                  | $          | 5,041                       |       |                            |       | $                | 854        |             |       |   | $ | 888 |   |   |   | $ | (1,004 | ) |   |   | $ | 5,779 |   |   |

 

18

----

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS INFORMATIONTHREE MONTHS ENDED MARCH 31, 2005(Successor)(in thousands)**

**(Asrestated, See Note 2)**

| ** **                                                  | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| REVENUES:                                                   |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas sales                                   |       |                  | $          | 38,072                      |       |                            |       | $                | 3,966      |             |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 42,038 |   |   |
| Commodity derivative losses                                 |       |                  | (29,160    | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (29,160 | ) |   |
| Other                                                       |       |                  | 781        |                        |       |                            | 21,674     |             |       |             | 2,047      |   |   |   | (23,423 | ) |   |   | 1,079 |   |   |
| Total revenues                                              |       |                  | 9,693      |                        |       |                            | 25,640     |             |       |             | 2,047      |   |   |   | (23,423 | ) |   |   | 13,957 |   |   |
| EXPENSES:                                                   |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas production                              |       |                  | 10,563     |                        |       |                            | 964        |             |       |             | 403        |   |   |   | — |   |   |   | 11,930 |   |   |
| Transportation expense                                      |       |                  | 1,974      |                        |       |                            | 20         |             |       |             | —     |   |   |   | (1,314 | ) |   |   | 680 |   |   |
| Depletion, depreciation, amortization and impairment        |       |                  | 5,281      |                        |       |                            | 297        |             |       |             | 75         |   |   |   | — |   |   |   | 5,653 |   |   |
| Accretion of abandonment liability                          |       |                  | 403        |                        |       |                            | 33         |             |       |             | 6          |   |   |   | — |   |   |   | 442 |   |   |
| General and administrative, net of amounts  capitalized     |       |                  | 3,103      |                        |       |                            | 594        |             |       |             | 130        |   |   |   | (711 | ) |   |   | 3,116 |   |   |
| Amortization of deferred loan costs                         |       |                  | 341        |                        |       |                            | 4          |             |       |             | —     |   |   |   | — |   |   |   | 345 |   |   |
| Interest, net                                               |       |                  | 3,730      |                        |       |                            | 48         |             |       |             | (281       | ) |   |   | — |   |   |   | 3,497 |   |   |
| Total expenses                                              |       |                  | 25,395     |                        |       |                            | 1,960      |             |       |             | 333        |   |   |   | (2,025 | ) |   |   | 25,663 |   |   |
| Equity in  subsidiary income                                |       |                  | 2,271      |                        |       |                            | —     |             |       |             | —     |   |   |   | (2,271 | ) |   |   | — |   |   |
| Income (loss)  before income taxes                          |       |                  | (13,431    | )                           |       |                            | 23,680     |             |       |             | 1,714      |   |   |   | (23,669 | ) |   |   | (11,706 | ) |   |
| Income tax  provision (benefit)                             |       |                  | (6,613     | )                           |       |                            | 9,973      |             |       |             | 722        |   |   |   | (9,012 | ) |   |   | (4,930 | ) |   |
| Income (loss)  before minority interest                     |       |                  | (6,818     | )                           |       |                            | 13,707     |             |       |             | 992        |   |   |   | (14,657 | ) |   |   | (6,776 | ) |   |
| Minority interest  in consolidated subsidiary income        |       |                  | —     |                        |       |                            | 42         |             |       |             | —     |   |   |   | — |   |   |   | 42 |   |   |
| Net income (loss)                                           |       |                  | $          | (6,818                      | )          |                            |       | $                | 13,665     |             |       |   | $ | 992 |   |   |   | $ | (14,657 | ) |   |   | $ | (6,818 | ) |   |
| Net income (loss)  as previously reported (see Note 2) |       |                  | $          | (3,579                      | )          |                            |       | $                | 22,772     |             |       |   | $ | 1,036 |   |   |   | $ | (27,005 | ) |   |   | $ | (6,776 | ) |   |

 

19

----

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

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

| ** **                                                     | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                     |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| CURRENT ASSETS:                                                |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                     |       |                  | $          | 53,075                      |       |                            |       | $                | 1,590      |             |       |   | $ | 50 |   |   |   | $ | — |   |   |   | $ | 54,715 |   |   |
| Accounts  receivable                                           |       |                  | 16,306     |                        |       |                            | 904        |             |       |             | 545        |   |   |   | — |   |   |   | 17,755 |   |   |
| Inventories                                                    |       |                  | 1,079      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 1,079 |   |   |
| Commodity  derivatives                                         |       |                  | 5,300      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 5,300 |   |   |
| Notes  receivable—officer                                 |       |                  | —     |                        |       |                            | 1,420      |             |       |             | —     |   |   |   | — |   |   |   | 1,420 |   |   |
| Prepaid expenses  and other current assets                     |       |                  | 7,249      |                        |       |                            | 110        |             |       |             | 187        |   |   |   | — |   |   |   | 7,546 |   |   |
| TOTAL CURRENT  ASSETS                                          |       |                  | 83,009     |                        |       |                            | 4,024      |             |       |             | 782        |   |   |   | — |   |   |   | 87,815 |   |   |
| PROPERTY,  PLANT & EQUIPMENT, NET                     |       |                  | 151,242    |                        |       |                            | 32,166     |             |       |             | 15,155     |   |   |   | — |   |   |   | 198,563 |   |   |
| COMMODITY  DERIVATIVES                                         |       |                  | 4,855      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 4,855 |   |   |
| INVESTMENTS IN  AFFILIATES(*)                                  |       |                  | 63,449     |                        |       |                            | —     |             |       |             | —     |   |   |   | (63,449 | ) |   |   | — |   |   |
| OTHER                                                          |       |                  | 7,613      |                        |       |                            | 36         |             |       |             | —     |   |   |   | — |   |   |   | 7,649 |   |   |
| TOTAL ASSETS(*)                                                |       |                  | $          | 310,168                     |       |                            |       | $                | 36,226     |             |       |   | $ | 15,937 |   |   |   | $ | (63,449 | ) |   |   | $ | 298,882 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**        |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| CURRENT LIABILITIES:                                           |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable  and accrued liabilities                      |       |                  | $          | 18,326                      |       |                            |       | $                | 712        |             |       |   | $ | 347 |   |   |   | $ | — |   |   |   | $ | 19,385 |   |   |
| Undistributed  revenue payable                                 |       |                  | 4,053      |                        |       |                            | 721        |             |       |             | —     |   |   |   | — |   |   |   | 4,774 |   |   |
| Current maturities  of long-term debt                          |       |                  | —     |                        |       |                            | —     |             |       |             | 127        |   |   |   | — |   |   |   | 127 |   |   |
| Commodity  derivatives                                         |       |                  | 1,520      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 1,520 |   |   |
| Reprchase of  common shares                                    |       |                  | 5,316      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 5,316 |   |   |
| TOTAL CURRENT  LIABILITIES                                     |       |                  | 29,215     |                        |       |                            | 1,433      |             |       |             | 474        |   |   |   | — |   |   |   | 31,122 |   |   |
| LONG-TERM  DEBT                                                |       |                  | 149,043    |                        |       |                            | 4,684      |             |       |             | 9,815      |   |   |   | — |   |   |   | 163,542 |   |   |
| DEFERRED INCOME  TAXES                                         |       |                  | 32,208     |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 32,208 |   |   |
| ASSET RETIREMENT  OBLIGATIONS                                  |       |                  | 20,750     |                        |       |                            | 2,012      |             |       |             | 422        |   |   |   | — |   |   |   | 23,184 |   |   |
| INTERCOMPANY  PAYABLES (RECEIVABLES)                           |       |                  | 30,513     |                        |       |                            | (16,982    | )                |       |             | (13,531    | ) |   |   | — |   |   |   | — |   |   |
| TOTAL LIABILITIES                                              |       |                  | 261,729    |                        |       |                            | (8,853     | )                |       |             | (2,820     | ) |   |   | — |   |   |   | 250,056 |   |   |
| MINORITY  INTEREST(*)                                          |       |                  | —     |                        |       |                            | 387        |             |       |             | —     |   |   |   | — |   |   |   | 387 |   |   |
| TOTAL  STOCKHOLDERS’ EQUITY (DEFICIT)(*)                  |       |                  | 48,439     |                        |       |                            | 44,692     |             |       |             | 18,757     |   |   |   | (63,449 | ) |   |   | 48,439 |   |   |
| TOTAL LIABILITIES  AND STOCKHOLDERS’ EQUITY  (DEFICIT)(*) |       |                  | $          | 310,168                     |       |                            |       | $                | 36,226     |             |       |   | $ | 15,937 |   |   |   | $ | (63,449 | ) |   |   | $ | 298,882 |   |   |
|                                                                |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| (*) Amounts previously reported (see Note 2):                  |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Investment in  affiliates                                      |       |                  | 41,293     |                        |       |                            | 16,761     |             |       |             | —     |   |   |   | (58,054 | ) |   |   | — |   |   |
| Total Assets                                                   |       |                  | 287,892    |                        |       |                            | 52,987     |             |       |             | 15,937     |   |   |   | (57,904 | ) |   |   | 298,882 |   |   |
| Minority interest                                              |       |                  | —     |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | — |   |   |
| Total  Stockholders’ Equity (Deficit)                     |       |                  | 26,133     |                        |       |                            | 61,840     |             |       |             | 18,757     |   |   |   | (57,904 | ) |   |   | 48,826 |   |   |
| Total Liabilities  and Stockholders’ Equity (Deficit)     |       |                  | 287,862    |                        |       |                            | 52,987     |             |       |             | 15,937     |   |   |   | (57,904 | ) |   |   | 298,882 |   |   |

 

20

----

**CONDENSEDCONSOLIDATING BALANCE SHEET INFORMATIONAT MARCH 31, 2005(Successor)(in thousands)**

**(Asrestated, See Note 2)**

| ** **                                                             | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                             |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| CURRENT ASSETS:                                                        |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                              |       |                  | $          | 3,754                       |       |                            |       | $                | 1,113      |             |       |   | $ | 157 |   |   |   | $ | — |   |   |   | $ | 5,024 |   |   |
| Accounts receivable                                                    |       |                  | 22,377     |                        |       |                            | 769        |             |       |             | 591        |   |   |   | (457 | ) |   |   | 23,280 |   |   |
| Inventories                                                            |       |                  | 1,105      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 1,105 |   |   |
| Commodity derivatives                                                  |       |                  | 677        |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 677 |   |   |
| Prepaid expenses and  other current assets                             |       |                  | 6,613      |                        |       |                            | 298        |             |       |             | 409        |   |   |   | — |   |   |   | 7,320 |   |   |
| TOTAL CURRENT  ASSETS                                                  |       |                  | 34,526     |                        |       |                            | 2,180      |             |       |             | 1,157      |   |   |   | (457 | ) |   |   | 37,406 |   |   |
| CASH RESTRICTED FOR  INVESTMENT IN OIL AND NATURAL GAS PROPERTIES |       |                  | —     |                        |       |                            | 44,619     |             |       |             | —     |   |   |   | — |   |   |   | 44,619 |   |   |
| PROPERTY,  PLANT & EQUIPMENT, NET(*)                     |       |                  | 156,760    |                        |       |                            | 12,921     |             |       |             | 15,080     |   |   |   | (21.663 | ) |   |   | 163,098 |   |   |
| COMMODITY DERIVATIVES                                                  |       |                  | 1,146      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 1,146 |   |   |
| INVESTMENTS IN  AFFILIATES(*)                                          |       |                  | 77,239     |                        |       |                            | —     |             |       |             | —     |   |   |   | (77,239 | ) |   |   | — |   |   |
| OTHER                                                                  |       |                  | 7,594      |                        |       |                            | 46         |             |       |             | —     |   |   |   | — |   |   |   | 7,640 |   |   |
| TOTAL ASSETS(*)                                                        |       |                  | $          | 277,265                     |       |                            |       | $                | 59,766     |             |       |   | $ | 16,237 |   |   |   | $ | (99,359 | ) |   |   | $ | 253,909 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**           |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| CURRENT LIABILITIES:                                                   |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable and  accrued liabilities(*)                           |       |                  | $          | 20,501                      |       |                            |       | $                | 928        |             |       |   | $ | 431 |   |   |   | $ | (723 | ) |   |   | $ | 21,137 |   |   |
| Undistributed revenue  payable                                         |       |                  | 4,190      |                        |       |                            | 350        |             |       |             | —     |   |   |   | — |   |   |   | 4,540 |   |   |
| Current maturities of  long-term debt                                  |       |                  | —     |                        |       |                            | —     |             |       |             | 121        |   |   |   | — |   |   |   | 121 |   |   |
| Commodity derivatives                                                  |       |                  | 20,713     |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 20,713 |   |   |
| Repurchase of common  shares                                           |       |                  | 109        |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 109 |   |   |
| TOTAL CURRENT  LIABILITIES(*)                                          |       |                  | 45,513     |                        |       |                            | 1,278      |             |       |             | 552        |   |   |   | (723 | ) |   |   | 46,620 |   |   |
| LONG-TERM  DEBT                                                        |       |                  | 162,077    |                        |       |                            | —     |             |       |             | 9,857      |   |   |   | — |   |   |   | 171,934 |   |   |
| DEFERRED INCOME  TAXES(*)                                              |       |                  | 18,464     |                        |       |                            | (3,605     | )                |       |             | —     |   |   |   | — |   |   |   | 14,859 |   |   |
| ASSET RETIREMENT  OBLIGATIONS                                          |       |                  | 21,208     |                        |       |                            | 1,486      |             |       |             | 428        |   |   |   | — |   |   |   | 23,122 |   |   |
| INTERCOMPANY  PAYABLES (RECEIVABLES)                                   |       |                  | 32,629     |                        |       |                            | (17,557    | )                |       |             | (15,072    | ) |   |   | — |   |   |   | — |   |   |
| OTHER LIABILITIES                                                      |       |                  | 12,266     |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 12,266 |   |   |
| TOTAL  LIABILITIES(*)                                                  |       |                  | 292,157    |                        |       |                            | (18,398    | )                |       |             | (4,235     | ) |   |   | (723 | ) |   |   | 268,801 |   |   |
| TOTAL  STOCKHOLDERS’ EQUITY (DEFICIT)(*)                          |       |                  | (14,892    | )                           |       |                            | 78,164     |             |       |             | 20,472     |   |   |   | (98,636 | ) |   |   | (14,892 | ) |   |
| TOTAL LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)(*)     |       |                  | $          | 277,265                     |       |                            |       | $                | 59,766     |             |       |   | $ | 16,237 |   |   |   | $ | (99,359 | ) |   |   | $ | 253,909 |   |   |
|                                                                        |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| (*) As previously reported (see Note 2):                               |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Property, plant  and equipment, net                                    |       |                  | 156,458    |                        |       |                            | 13,288     |             |       |             | 15,080     |   |   |   | (21,361 | ) |   |   | 163,465 |   |   |
| Investments in  affiliates                                             |       |                  | 70,758     |                        |       |                            | 30,463     |             |       |             | —     |   |   |   | (101,221 | ) |   |   | — |   |   |
| Total Assets                                                           |       |                  | 270,482    |                        |       |                            | 90,596     |             |       |             | 16,236     |   |   |   | (123,038 | ) |   |   | 254,276 |   |   |
| Accounts payable  and accrued liabilities                              |       |                  | 20,501     |                        |       |                            | 927        |             |       |             | 431        |   |   |   | (722 | ) |   |   | 21,137 |   |   |
| Total Current  Liabilities                                             |       |                  | 45,513     |                        |       |                            | 1,277      |             |       |             | 552        |   |   |   | (722 | ) |   |   | 46,620 |   |   |
| Deferred income  taxes                                                 |       |                  | 18,463     |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 18,463 |   |   |
| Total Liabilities                                                      |       |                  | 291,833    |                        |       |                            | (14,793    | )                |       |             | (4,236     | ) |   |   | (399 | ) |   |   | 272,405 |   |   |
| Total  Stockholders’ Equity                                       |       |                  | (21,351    | )                           |       |                            | 105,389    |             |       |             | 20,472     |   |   |   | (122,639 | ) |   |   | (18,129 | ) |   |
| Total Liabilities  and Stockholders’ Equity                       |       |                  | 270,482    |                        |       |                            | 90,596     |             |       |             | 16,236     |   |   |   | (123,038 | ) |   |   | 254,276 |   |   |

 

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**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOW INFORMATIONFOR THE THREE MONTHS ENDED MARCH 31, 2004(Predecessor)(in thousands)**

| ** **                                                 | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| OPERATING ACTIVITIES                                       |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating  activities                 |       |                  | $          | 9,934                       |       |                            |       | $                | 1,189      |             |       |   | $ | 1,041 |   |   |   | $ | — |   |   |   | $ | 12,164 |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                     |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Expenditures for oil and gas  properties                   |       |                  | (1,474     | )                           |       |                            | (10        | )                |       |             | (159       | ) |   |   | — |   |   |   | (1,643 | ) |   |
| Proceeds from sale of oil and gas properties               |       |                  | 1,526      |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 1,526 |   |   |
| Other                                                      |       |                  | (53        | )                           |       |                            | —     |             |       |             | 228        |   |   |   | — |   |   |   | 175 |   |   |
| Net cash (used in) provided by investing activities        |       |                  | (1         | )                           |       |                            | (10        | )                |       |             | 69         |   |   |   | — |   |   |   | 58 |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                     |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Net proceeds from (repayments of) intercompany  borrowings |       |                  | 2,334      |                        |       |                            | (1,179     | )                |       |             | (1,155     | ) |   |   | — |   |   |   | — |   |   |
| Principal payments on long-term debt                       |       |                  | (7,333     | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (7,333 | ) |   |
| Net cash used in financing activities                      |       |                  | (4,999     | )                           |       |                            | (1,179     | )                |       |             | (1,155     | ) |   |   | — |   |   |   | (7,333 | ) |   |
| Net (decrease)  increase in cash and cash equivalents      |       |                  | 4,934      |                        |       |                            | —     |             |       |             | (45        | ) |   |   | — |   |   |   | 4,889 |   |   |
| Cash and cash  equivalents, beginning of period            |       |                  | 8,372      |                        |       |                            | —     |             |       |             | 45         |   |   |   | — |   |   |   | 8,417 |   |   |
| Cash and cash  equivalents, end of  period                 |       |                  | $          | 13,306                      |       |                            |       | $                | —     |             |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 13,306 |   |   |

 

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**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOW INFORMATIONFOR THE THREE MONTHS ENDED MARCH 31, 2005(Successor)(in thousands)**

**(As restatedSee Note 2)**

| ** **                                                 | ** ** | **Venoco, Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| OPERATING ACTIVITIES                                       |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities                  |       |                  | $          | 4,585                       |       |                            |       | $                | 4,642      |             |       |   | $ | 1,613 |   |   |   | $ | — |   |   |   | $ | 10,840 |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                     |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Expenditures for oil and gas properties                    |       |                  | (13,721    | )                           |       |                            | (581       | )                |       |             | —     |   |   |   | — |   |   |   | (14,302 | ) |   |
| Acquisition of Marquez Energy, LLC                         |       |                  | (14,628    | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (14,628 | ) |   |
| Notes receivable—officers and employees          |       |                  | (30        | )                           |       |                            | 1,420      |             |       |             | —     |   |   |   | — |   |   |   | 1,390 |   |   |
| Other                                                      |       |                  | (124       | )                           |       |                            | (15        | )                |       |             | —     |   |   |   | — |   |   |   | (139 | ) |   |
| Net cash (used in) provided by investing activities        |       |                  | (28,503    | )                           |       |                            | 824        |             |       |             | —     |   |   |   | — |   |   |   | (27,679 | ) |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                     |       |                  |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Net proceeds from (repayments of) intercompany  borrowings |       |                  | 2,094      |                        |       |                            | (552       | )                |       |             | (1,542     | ) |   |   | — |   |   |   | — |   |   |
| Proceeds from long-term debt                               |       |                  | 13,000     |                        |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | 13,000 |   |   |
| Principal payments on long-term debt                       |       |                  | —     |                        |       |                            | (4,684     | )                |       |             | 36         |   |   |   | — |   |   |   | (4,648 | ) |   |
| Distribution payments to Marquez Energy member             |       |                  | —     |                        |       |                            | (707       | )                |       |             | —     |   |   |   | — |   |   |   | (707 | ) |   |
| Payments of dividends                                      |       |                  | (35,000    | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (35,000 | ) |   |
| Repurchase of common shares                                |       |                  | (5,207     | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (5,207 | ) |   |
| Increase in deferred loan costs                            |       |                  | (290       | )                           |       |                            | —     |             |       |             | —     |   |   |   | — |   |   |   | (290 | ) |   |
| Net cash used in financing activities                      |       |                  | (25,403    | )                           |       |                            | (5,943     | )                |       |             | (1,506     | ) |   |   | — |   |   |   | (32,852 | ) |   |
| Net (decrease)  increase in cash and cash equivalents      |       |                  | (49,321    | )                           |       |                            | (477       | )                |       |             | 107        |   |   |   | — |   |   |   | (49,691 | ) |   |
| Cash and cash  equivalents, beginning of period            |       |                  | 53,075     |                        |       |                            | 1,590      |             |       |             | 50         |   |   |   | — |   |   |   | 54,715 |   |   |
| Cash and cash  equivalents, end of period                  |       |                  | $          | 3,754                       |       |                            |       | $                | 1,113      |             |       |   | $ | 157 |   |   |   | $ | — |   |   |   | $ | 5,024 |   |   |

 

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**Item2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis offinancial condition and results of operations gives effect to the restatementof our condensed consolidated financial statements as discussed in Note 2 tothe condensed consolidated financial statements included in Item 1.

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

***Overview***

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

We have benefited from strong oil and natural gasprices over the past two years and from increases in oil and natural gasproduction. The trends of both increasing production and increasing prices haveled to increased oil and natural gas sales in 2005 compared to 2004. We expectthat with the increased capital resources available from operating cash flow,and the additional time new management has to implement its strategy, we willachieve further increases in production throughout fiscal year 2005. This willresult in reductions in our operating costs and general and administrativecosts on a per barrel of oil equivalent (“BOE”) basis.

Since our June 2004 management changes we haveincreased our production from 10,183 barrels of oil equivalent per day (“BOE/d”)in the second quarter of 2004 to 12,857 BOE/d in the first quarter of 2005. OurBig Mineral Creek field, which was sold on March 31, 2005, contributed 547BOE/d of our first quarter 2005 production. We expect to produce approximately12,500 BOE/d in the second quarter of 2005 and to average 13,000 to 14,000BOE/d in 2005 as a whole, in each case from our existing portfolio ofproperties. While we continue to aggressively pursue additional acquisitionopportunities, we believe we are positioned to continue to increase ourproduction and proven reserves for the next several years through the continueddevelopment and exploitation of our currently owned inventory.

After the change in our management that took place in June 2004,we increased our exploitation and development activities in a manner consistentwith the strategy we pursued from inception through mid-2002. From June throughDecember 2004, we reworked or recompleted 30 wells, drilled five new wellsand installed an electric submersible pump on a well in the South Ellwoodfield. During the first quarter of 2005 we drilled seven new wells to totaldepth and we reworked or recompleted eighteen additional wells. This activityhas led to most of the increases in production. The increases in productionhave combined with increased product prices to result in continuing improvementin our performance. Total revenues for first quarter 2005 were$13.6 million, and included the effect of $29.2 million of commodityderivative losses in the quarter. Net loss for the quarter was$6.8 million.

Because of our anticipatedcontinued production increases and the effect of our active hedging program, weexpect our oil and natural gas sales to continue to increase in 2005 comparedto 2004 even if oil and natural gas prices decline moderately. Through acombination of price collars, swaps and purchased floors, we have currentlysecured a weighted average minimum price of $37.73 per barrel on 9,471 Bbl/d 

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and$6.09 per Mcf on 14,000 Mcf/d for the last nine months of 2005 beforeadjustments for basis differentials. We also have additional hedge positionswith regard to our 2006 and 2007 oil and natural gas production. See “—Qualitativeand Quantitative Disclosures about Market Risk.” Our disciplined hedgingstrategy has allowed us to lock in attractive prices over the next three years.Rising oil and natural gas prices have created substantial unrealized commodityderivative losses in the first quarter of 2005 which have served to suppressearnings reported in the period. In the first quarter of 2005 these unrealizedlosses resulting from mark-to-market valuations for non-highly effective orineffective portions of our derivative positions included in commodityderivative losses in the income statement totaled $25.6 million. Anypayments actually due to counterparties in the future on these derivatives willultimately be funded by higher prices received from the sale of our production.

***Development, Acquisitions and Divestitures***

In 2005, we plan to make aggregate capitalexpenditures totaling approximately $103 million. In the first quarter$10.7 million was spent on drilling and rework activities,$1.8 million on facilities and $0.8 million on exploration. We alsospent $14.6 million in the first quarter 2005 for the acquisition ofMarquez Energy. In the first quarter of 2005, Venoco drilled seven new wells tototal depth and recompleted eighteen additional wells. These exploitation anddevelopment projects include two offshore oil wells that were drilled to totaldepth, and one that was recompleted. In the Sockeye Field, we drilled one welland recompleted another well. One of the wells had an initial production rateover 1,150 BOE/D and the other’s gross production is approximately250 BOE/D. In the South Ellwood Field, we drilled an exploration well thattested wet in the deepest penetrated intervals and is being recompleted to testthe primary test objective. Onshore, we drilled five new wells in theSacramento Basin to total depth in the quarter. Four were brought on productionand the other one was waiting for pipeline access. We also recompletedseventeen wells in the Sacramento Basin in the quarter. As a result of thedrilling and recompletion projects we increased our net gas production by approximately2,500 MCF/d in the Sacramento Basin.

In the first quarter of 2005, we also expanded ourfield work regarding the return to production of Platform Grace in the SantaClara Unit. In March 2003, we granted an option to Crystal Energy LLC tolease or purchase platform Grace for use in accepting, vaporizing, transportingand selling liquid natural gas delivered to the platform by tanker. On April 18,2005, Crystal Energy informed us that it intends to exercise the option topurchase the platform for $10 million. It is unclear at this time whateffect, if any, the purchase will have on the potential return of the platformto production. The purchase is contingent upon, among other things, theexecution of a mutually acceptable purchase agreement and the receipt ofregulatory approvals.

On March 31, 2005, we completed the sale of ourBig Mineral Creek field, located in Grayson County, Texas, to BlackWell EnergyGroup, LLC for $45 million, an amount that will be adjusted to giveeconomic effect to the transaction as of February 1, 2005. As of December 31,2004, the field had proved reserves of approximately 3.4 MMBOE, according to areport by Netherland Sewell and Associates, Inc. (“NSAI”), most of whichwas comprised of oil. Average net production at the field was approximately 547BOE/d in the first quarter of 2005. On March 21, 2005, we completed ouracquisition of Marquez Energy, LLC. The transaction added proved reserves ofapproximately 2.0 MMBOE as of December 31, 2004 according to NSAI,substantially all of which consisted of natural gas. In order to facilitate apossible like-kind exchange of our Big Mineral Creek property under Section 1031of the Internal Revenue Code, the equity interests in Marquez Energy arecurrently being held by an independent entity acting on our behalf. We have andwill at all times maintain beneficial ownership of the interests, and willassume direct ownership of them within 180 days of the closing. Thepurpose of this structure is to give us the option of effecting a like-kindexchange of our Big Mineral Creek property pursuant to Section 1031 andthereby deferring a portion of the taxes payable with respect to the sale ofthe Big Mineral Creek property. We are currently pursuing 

25

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several acquisitionopportunities in this regard. To the extent we do not complete a tax freeexchange, the escrow funds would be available for general corporate purposesand we would incur income tax obligations applicable to the gain on sale.

During 2004, the Company’s CEO, Tim Marquez, increasedhis ownership in the Company from 41% to 100%. As a result of a transactionthat closed on July 12, 2004, Mr. Marquez purchased 53% of the commonshares (2,468 common shares) of the Company from two of the Company’s formerofficers and their respective affiliates. On December 22, 2004, theCompany merged with a corporation the sole stockholder of which was a trustcontrolled by Mr. Marquez. This merger had the effect of giving Mr. Marquezthe remaining 6% of the Company’s common stock.

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

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

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

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***Oil and GasProduction and Prices***

| ** **                                      | ** ** | **Three Months Ended March 31(1)**                                                   | ** ** | **Increase**                                                                                             | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **        2005        ** | ** ** | **        2004        ** | ** ** | **(Decrease)** | ** ** |
| **Production Volume**                           |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Natural Gas (Mcf)                               |       |                                                                                                     | 1,885,576  |                                                                                                     |       |   | 1,355,983 |   |   |   | 39 | % |   |
| Oil (Bbls)                                      |       |                                                                                                     | 842,845    |                                                                                                     |       |   | 802,918 |   |   |   | 5 | % |   |
| BOE                                             |       |                                                                                                     | 1,157,108  |                                                                                                     |       |   | 1,028,915 |   |   |   | 12 | % |   |
| **Daily Average Production Volume**             |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Natural Gas (Mcf/d)                             |       |                                                                                                     | 20,951     |                                                                                                     |       |   | 14,901 |   |   |   | 41 | % |   |
| Oil (Bbls/d)                                    |       |                                                                                                     | 9,365      |                                                                                                     |       |   | 8,823 |   |   |   | 6 | % |   |
| BOE/d                                           |       |                                                                                                     | 12,857     |                                                                                                     |       |   | 11,307 |   |   |   | 14 | % |   |
| **Oil Price per Barrel Produced  (in dollars)** |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Average NYMEX spot price                        |       |                                                                                                     | $          | 49.84                                                                                                    |       |   |   | $ | 35.15 |   |   |   | 42 | % |   |
| Differential to NYMEX  spot price               |       |                                                                                                     | (9.96      | )                                                                                                        |       |   | (4.71 | ) |   |   | 111 | % |   |
| Realized hedging loss                           |       |                                                                                                     | (4.03      | )                                                                                                        |       |   | (2.38 | ) |   |   | 69 | % |   |
| Net realized                                    |       |                                                                                                     | $          | 35.85                                                                                                    |       |   |   | $ | 28.06 |   |   |   | 28 | % |   |
| **Natural Gas Price per Mcf (in  dollars)**     |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Average NYMEX spot price                        |       |                                                                                                     | $          | 6.48                                                                                                     |       |   |   | $ | 5.73 |   |   |   | 13 | % |   |
| Differential to NYMEX  spot price               |       |                                                                                                     | (.42       | )                                                                                                        |       |   | (.28 | ) |   |   | 50 | % |   |
| Realized hedging loss                           |       |                                                                                                     | (.09       | )                                                                                                        |       |   | (.33 | ) |   |   | (73 | )% |   |
| Net realized                                    |       |                                                                                                     | $          | 5.97                                                                                                     |       |   |   | $ | 5.12 |   |   |   | 17 | % |   |
| Average Sales Price per BOE Sold                |       |                                                                                                     | $          | 36.14                                                                                                    |       |   |   | $ | 29.04 |   |   |   | 24 | % |   |

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(1)          Production in 2005includes Marquez Energy which was acquired in March of 2005. Inclusion isdue to the application of requirements for reporting combined statements forcompanies under common control.

*Bbl—Barrel*

*Mcf—Thousand cubicfeet*

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

Both oil and gas production increased from the firstquarter of 2004 to the first quarter of 2005 primarily because of our resumedfocus on project exploitation and development activities. Average productionnet to our Company’s interest increased from 11,307 BOE/d in the first quarterof 2004 to 12,857 BOE/d in the first quarter of 2005. Production from MarquezEnergy contributed 500 BOE/d of such amounts in the first quarter of 2005.

We use price hedging arrangements to reduce price riskon a portion of our oil and gas production. We have hedged a portion of ourexposure to variability in future cash flows from natural gas and oil salesthrough December 2007; see Note 4 to our interim condensedconsolidated financial statements. During the first quarter of 2005, ourrealized net losses on hedging activities decreased oil revenue by$3.4 million, or $4.03 per Bbl. and gas revenue by $0.02 million, or$0.09 per Mcf. During the first quarter 2004, our realized net losses onhedging activities decreased oil revenue by $1.9 million, or $2.38 perBbl. and gas revenue by $0.4 million, or $0.33 per Mcf. Unrealized netlosses on hedging activities decreased oil revenues by $23.5 million, or$27.92 per Bbl. and gas revenue by $2.1 million, or $1.09 per Mcf. in thefirst quarter 2005. Unrealized net losses on hedging activities decreased gasrevenue by $0.4 million, or $0.30 per Mcf. in the first quarter 2004.

Prices to be realized for hedged production are likelyto be less than NYMEX. The price we receive for our gas production is generallyless than the NYMEX price because of adjustments for delivery location (“basis”),relative quality and other factors. Prices to be realized for our hedged oilproduction are expected to be significantly less than the NYMEX price becauseof location, quality and other adjustments.

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

| ** **                                            | ** ** | **Three Months Ended March 31,**                                                     | ** ** | **Increase/**                                                                                            | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **        2005        ** | ** ** | **        2004        ** | ** ** | **Decrease** | ** ** |
| ** **                                            | ** ** | **(Successor)**                                                                                          | ** ** | **(Predecessor)**                                                                                        | ** ** | ** ** | ** ** |
| **Expense  per BOE**                                  |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Production  expenses(1)                               |       |                                                                                                     | $          | 10.31                                                                                                    |       |   |   | $ | 10.91 |   |   |   | (5 | )% |   |
| Transportation  expenses                              |       |                                                                                                     | .58        |                                                                                                     |       |   | .72 |   |   |   | (19 | )% |   |
| Depreciation,  depletion, amortization and impairment |       |                                                                                                     | 4.89       |                                                                                                     |       |   | 3.91 |   |   |   | 25 | % |   |
| General and  administrative expense(2)                |       |                                                                                                     | 2.69       |                                                                                                     |       |   | 2.37 |   |   |   | 14 | % |   |
| Interest expense, net                                 |       |                                                                                                     | 3.02       |                                                                                                     |       |   | .32 |   |   |   | 844 | % |   |
|                                                       |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |

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

(2)          Netof amounts capitalized.

***Results of Operations***

In the first quarter 2005 the Company incurred a netloss of $6.8 million compared to net income of $5.8 million for thefirst quarter of 2004. The first quarter 2005 loss includes $29.2 millionof commodity derivative losses ($3.6 million realized) versus$2.8 million of commodity derivative losses ($2.4 million realized)in the first quarter of 2004. The commodity derivative losses in the firstquarter 2005 include $25.6 million in unrealized losses that resulted from mark-to-marketadjustments to the value of our derivative contracts. In addition, due toincreased debt levels, net interest expense totaled $3.5 million in thefirst quarter of 2005 versus $0.3 million in the first quarter of 2004.

Total oil and natural gas sales increased$11.2 million while other revenues increased $0.1 million. This$11.2 million increase in oil and natural gas sales reflects higherproduction volumes and higher sales prices for both oil and gas. Oil salesincreased $7.2 million or 31% due to a 29% increase in average realizedper barrel sales prices and a 6% increase in average daily production. Gassales increased $4.0 million or 54% due to a 41% increase in average dailyproduction and an 18% increase in realized gas prices.

Expenses for the firstquarter 2005 increased $6.5 million or 34% to $25.7 million in thefirst quarter 2005 versus $18.8 million in the first quarter of 2004.Interest expense increased $3.2 million or 966% due to increased debtlevels. Depletion, depreciation, amortization and impairment expenses increased$1.6 million. Depletion increased on a per unit basis due to an increasein the estimate of future development costs and a reduction in proven reservesat December 31, 2004, thereby increasing the rate of depletion onremaining barrels and also due to increased production volumes. Oil and naturalgas production expenses increased $0.7 million due to increased number ofwells and increased field activity. Our production costs on a per BOE basishave declined due to our increased production rates which serve to spread fixedoil and natural gas production costs over a larger number of equivalentbarrels. General and administrative expenses increased $0.7 million. Thisincrease was substantially caused by the consolidation of Marquez Energy,increased consulting fees related to certain systems conversions and higherprofessional fees. Amortization of deferred loan costs increased$0.3 million due to amortization of costs associated with the$150 million in senior notes issued by the Company in December 2004(see Note 6 to our interim condensed consolidated financial statements). Werecorded an income tax benefit of $4.9 million in the the first quarter of 2005compared to income tax expense of $4.1 million in the first quarter of 2004primarily as a result of the change in income (loss) before income tax.

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**Liquidity and Capital Resources**

***Cash Flows***

| ** **                                       | ** ** | **Three Months Ended March 31,**                                                     | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **        2005        ** | ** ** | **        2004        ** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                                                                                       | ** ** |
| Cash provided by  operating activities           |       |                                                                                                     | $          | 10,840 |   |   |   | $ | 12,164 |   |   |
| Cash (used in)  provided by investing activities |       |                                                                                                     | (27,679    | ) |   |   | 58 |   |   |
| Cash used in financing  activities               |       |                                                                                                     | (32,852    | ) |   |   | (7,333 | ) |   |

 

Net cash provided by operating activities was$10.8 million for the first quarter 2005, compared with $12.2 millionin the first quarter 2004. Cash flows from operating activities as compared tothe prior year first quarter were favorably impacted by higher revenues fromoil and natural gas sales of $11.2 million. Oil and natural gas salesincreased due to increased production from development activity, theacquisition of Marquez Energy and increased prices. Cash flow from operatingactivities as compared to the prior year first quarter were negatively impactedby changes in operating assets and liabilities of $3.4 million, thepayment of premiums on commodity derivatives of $5.4 million, increases inoil and gas production expenses of $0.7 million, increases in general andadministrative expenses of $0.7 million and other net decreases of$3.4 million.

Net cash used in investing activities was $27.7 millionin the first quarter of 2005 and consisted of $14.6 million inexpenditures to acquire Marquez Energy, $13.3 million in costs incurred for oiland gas properties adjusted by a $1.0 million reduction in accrued amountspayable at March 31, 2005 as compared to December 31, 2004, whichwere partially offset by other investing activities providing cash of$1.3 million

Net cash used in financingactivities was $32.9 million and $7.3 million in the first quartersof 2005 and 2004, respectively. Net cash used in the first quarter 2005resulted from the payment of a $35 million dividend to our solestockholder, $5.2 million paid to purchase the interests of minorityshareholders and other uses of cash from financing activities of$1.1 million, partially offset by $13 million in new borrowings andprincipal payments on long-term debt of $4.6 million.

***Capital Resources and Requirements***

We plan to make substantial capital expenditures inthe future for the acquisition, exploitation, development and exploration ofoil and natural gas properties. For the year 2005 we expect to make aggregatecapital expenditures of approximately $103 million, of which amounts, wehad spent approximately $14.6 million for the acquisition of MarquezEnergy and $13.3 million through March 31, 2005, primarily ondrilling and facilities on platforms Holly and Gail and in the Grimes field. Asdiscussed above (See “—Development, Acquisitions and Divestitures”) the timingof approximately $8.6 million of budgeted 2005 expenditures regarding thereturn to production of platform Grace is being reviewed. Success innegotiating and closing significant new acquisitions would result in increasingthe aggregate 2005 capital expenditures.

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

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Our bank credit facility currently has a borrowingbase of $40 million, and the facility will mature on November 4,2007. Revolving loans made under the restated Credit Agreement are designated,at our option, as either “Base Rate Loans” or “LIBO Rate Loans”. Base RateLoans bear interest at a floating rate equal to (i) the greater of Bank ofMontreal’s announced base rate and the overnight federal funds rate plusone-half of 1.00% plus (ii) an applicable margin ranging from 0.25% to1.00%, based upon amounts borrowed under the restated Credit Agreement. LIBORate Loans bear interest at (i) LIBOR plus (ii) an applicable marginranging from 1.75% to 2.50%, based also upon amounts borrowed. At May 10,2005, there was $16 million outstanding under the facility. A commitmentfee of 0.50% per annum is payable with respect to unused borrowing availabilityunder the credit facility. The restated Credit Agreement contains a number ofrestrictive covenants with regard to leverage and current ratios and otherterms customary in a credit facility secured by oil and natural gas properties.As of March 31, 2005 we were in compliance with all of our debt covenants.

In December 2004, we sold $150.0 million inaggregate principal amount of the 8.75% senior notes due in 2011 in a privateplacement. In connection with the issuance of the notes, we entered into aregistration rights agreement with the initial purchasers pursuant to which weagreed to file and to use our reasonable best efforts to cause to be declaredeffective by the SEC a registration statement with respect to the exchange ofthe old notes for the new notes. We did so and our Registration Statement on Form S-4;became effective on April 20, 2005. The exchange offer commenced on April 25,2005 and is scheduled to expire on May 27, 2005. We will not receive anyproceeds from the exchange offer which we made to fulfill our obligations underthe registration rights agreement. Pursuant to the exchange offer, we willissue the new notes in exchange for outstanding notes. The terms of the newnotes are identical in all material respects to those of the old notes, exceptthat the new notes (i) have been registered under the Securities Act andtherefore will not be subject to certain restrictions on transfer applicable tothe old notes and (ii) will not have registration rights or provide forany additional interest related to the obligation to register Old notes thatare not tendered in the exchange offer will remain outstanding and willcontinue to accrue interest but will not retain any rights under theregistration rights agreement.

To date, we have financed our 2005 capitalexpenditures with a portion of the proceeds of the offering of our notes soldin December of 2004, cash on hand and short-term borrowings under our bankcredit facility. We anticipate funding the remainder of our capital program andmeeting our other needs for liquidity primarily with cash flow from operationsand from cash on hand. Our bank credit facility has undrawn funds availabilityof $24 million but we do not currently expect to use those funds tofinance our capital expenditures except with respect to short term workingcapital needs. As of May 10, 2005, $16 million of indebtedness wasoutstanding under the credit facility, substantially all of which related toshort-term financing for the Marquez Energy acquisition. We also receivedproceeds of approximately $45 million upon the sale of the Big MineralCreek property. However, we have placed those proceeds in escrow pending theirpotential use for the acquisition of other oil and gas properties in connectionwith a like-kind exchange under Section 1031 of the Internal Revenue Code.As a result, other than for certain new acquisitions we do not expect thoseproceeds to be available to fund our planned capital expenditures in 2005. Tothe extent we do not complete a tax free exchange, the escrow funds would beavailable for general corporate purposes and we would incur income taxobligations applicable to the gain on sale.

If cash flow from operationsdoes not meet our expectations, we may reduce the expected level of capitalexpenditures and/or fund a larger than expected portion of the expendituresusing borrowings under the Credit Agreement. We may also make acquisitions thatwill require additional capital resources. We may seek such additional capitalthrough a combination of funding sources that may include traditional reservebase borrowings, joint venture partnerships, production payment financings,asset sales and offerings of debt and equity securities and other sources. Wecannot assure you that needed capital will be available on acceptable terms orat all. If we are unable to obtain funds when needed or on acceptable terms, wemay not be able to complete acquisitions that may be favorable to us or financethe capital expenditures necessary to replace our reserves.

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***Forward-Looking Statements***

Certain informationincluded in this quarterly report and other materials filed or to be filed bythe Company with the Securities and Exchange Commission, as well as informationincluded in oral statements or other written statements made or to be made bythe Company, contain projections and forward-looking statements withinthe meaning of Section 21E of the Securities Exchange Act of 1934, asamended, and Section 27A of the Securities Act of 1933, as amended,relating to the Company and the oil and gas industry. Such forward-lookingstatements may be or may concern, among other things, capital expenditures,cash flow, drilling activity, drilling locations, acquisition and developmentactivities and funding thereof, pricing differentials, production and reservegrowth, reserve potential, operating costs, operating margins, productionactivities, oil, gas and natural gas liquids reserves and prices, hedging activitiesand the results thereof, liquidity, debt repayment, regulatory matters andcompetition. Such forward-looking statements are based on management’scurrent plans, expectations, assumptions, projections and estimates and areidentified by words such as “expects,” “intends,” “plans,” “projects,” “predicts,”“anticipates,” “believes,” “estimates,” “goal,” “should,” “could,” “assume,”and similar words that convey the uncertainty of future events. Thesestatements are not guarantees of future performance and involve certain risks,uncertainties and assumptions that are difficult to predict. In particular, thefactors discussed in our Registration Statement on Form S-4 filed onApril 20, 2004 could affect our actual results and cause our actualresults to differ materially from expectations, estimates, or assumptionsexpressed in, forecasted in, or implied in such forward-lookingstatements. The cautionary statements contained in our Registration Statementon Form S-4 filed on April 20, 2004 are incorporated herein byreference.

**Item3.**                        Qualitativeand Quantitative Disclosures About Market Risk

The discussion in this section provides informationabout derivative financial instruments we use to manage commodity pricevolatility. To the extent we borrow amounts under our credit agreement, we aresubject to interest rate risk because such amounts bear interest at variablerates. At May 10, 2005, $16 million of indebtedness was outstandingunder the credit agreement. A 1% change in interest rates would not have asignificant effect on our financial statements.

Due to the historical volatility of crude oil andnatural gas prices, we have implemented a hedging strategy aimed at reducingthe variability of the prices we receive for our production and providing a minimumrevenue stream. Currently, we use options and fixed price swaps for hedgingcommodity prices. All contracts are settled with cash and do not require thedelivery of a physical quantity to satisfy settlement. While this hedgingstrategy may result in us having lower revenues than we would have if we wereunhedged in times of higher oil and natural gas prices, management believesthat the stabilization of prices and protection afforded us by providing arevenue floor is beneficial. We had hedging contracts (excluding floors) inplace for 69% of our oil production and 19% of our natural gas productionduring the quarter ended March 31, 2005.

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As of March 31,2005, the Company has entered into option, swap and collar agreements toreceive average minimum and maximum New York Mercantile Exchange (NYMEX) WestTexas Intermediate (WTI) prices as summarized below. Location and qualitydifferentials attributable to the Company’s properties are not included in thefollowing prices. The agreements provide for monthly settlement based on thedifferential between the agreement price and the actual NYMEX crude oil price.

| ** **                                               | ** ** | **Minimum**     | ** ** | **Maximum**          | ** ** |
|----------------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| ** **                                               | ** ** | **Barrels/day** | ** ** | **Avg. Prices** | ** ** | **Barrels/day** | ** ** | **Avg. Prices** | ** ** |
| Crude oil hedges at  March 31, 2005 for production: |       |            |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| April 1-December 31, 2005                      |       |            | 9,471      |                 |       |   | $ | 37.73 |   |   |   | 5,471 |   |   |   | $ | 47.17 |   |   |
| January 1-December 31, 2006                    |       |            | 7,000      |                 |       |   | $ | 40.80 |   |   |   | 5,000 |   |   |   | $ | 50.70 |   |   |
| January 1-December 31,  2007                   |       |            | 3,000      |                 |       |   | $ | 40.00 |   |   |   | 3,000 |   |   |   | $ | 66.37 |   |   |

 

As of March 31,2005, the Company has entered into option, swap and collar agreements toreceive average minimum and maximum PG&E Citygate prices as follows:

| ** **                                                 | ** ** | **Minimum**   | ** ** | **Maximum**          | ** ** |
|------------------------------------------------------------|------------|---------------|------------|----------------------|------------|
| ** **                                                 | ** ** | **MMBtu/Day** | ** ** | **Avg. Prices** | ** ** | **MMBtu/Day** | ** ** | **Avg. Prices** | ** ** |
| Natural gas  hedges at March 31, 2005 for production: |       |          |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| April 1-December 31, 2005                        |       |          | 14,000     |                 |       |   | $ | 6.09 |   |   |   | 4,000 |   |   |   | $ | 6.77 |   |   |
| January 1-December 31, 2006                      |       |          | 12,000     |                 |       |   | $ | 6.10 |   |   |   | 6,000 |   |   |   | $ | 7.87 |   |   |
| January 1-December 31,  2007                     |       |          | 6,000      |                 |       |   | $ | 6.00 |   |   |   | 6,000 |   |   |   | $ | 8.40 |   |   |

 

Our portfolio of commodityderivative transactions as of March 31, 2005 is summarized below:

**CrudeOil**

| **Type of Contract** | ** ** | ** ** | ** ** | **Basis** | ** ** | **Quantity  (Bbl/d)** | ** ** | **Strike Price  ($/Bbl)** | ** **   | **Term**                        | ** **                      |
|--------------------------------|------------|------------|------------|-----------|------------|-----------------------|------------|--------------------------------|--------------|---------------------------------|---------------------------------|
| Collar                         |       | NYMEX      |       |      | 4,471      |                  |       | $                              | 38.00-$47.10 |                            | Jan 1,  05-Dec 31, 05 |   |
| Collar                         |       | NYMEX      |       |      | 1,000      |                  |       | $                              | 38.00-$47.50 |                            | Jan 1,  05-Dec 31, 05 |   |
| Put                            |       | NYMEX      |       |      | 2,000      |                  |       | $36.00 Floor                   |         | Jan 1,  05-Dec 31, 05 |                            |
| Put                            |       | NYMEX      |       |      | 2,000      |                  |       | $38.70 Floor                   |         | Jan 1,  05-Dec 31, 05 |                            |
| Swap                           |       | NYMEX      |       |      | 1,000      |                  |       | $42.70 Fixed                   |         | Jan 1,  06-Dec 31, 06 |                            |
| Collar                         |       | NYMEX      |       |      | 2,000      |                  |       | $                              | 40.00-$51.00 |                            | Jan 1,  06-Dec 31, 06 |   |
| Collar                         |       | NYMEX      |       |      | 1,000      |                  |       | $                              | 40.00-$51.05 |                            | Jan 1,  06-Dec 31, 06 |   |
| Collar                         |       | NYMEX      |       |      | 1,000      |                  |       | $                              | 40.00-$57.75 |                            | Jan 1,  06-Dec 31, 06 |   |
| Put                            |       | NYMEX      |       |      | 1,000      |                  |       | $40.00 Floor                   |         | Jan 1,  06-Dec 31, 06 |                            |
| Put                            |       | NYMEX      |       |      | 1,000      |                  |       | $42.90 Floor                   |         | Jan 1,  06-Dec 31, 06 |                            |
| Collar                         |       | NYMEX      |       |      | 2,000      |                  |       | $                              | 40.00-$65.80 |                            | Jan 1,  07-Dec 31, 07 |   |
| Collar                         |       | NYMEX      |       |      | 1,000      |                  |       | $                              | 40.00-$67.50 |                            | Jan 1, 07-Dec 31,  07 |   |

 

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**NaturalGas**

| **Type of Contract** | ** ** | ** **         | ** ** | **Basis** | ** ** | **Quantity  (MMBtu/d)** | ** ** | **Strike Price  ($/Mcf)** | ** ** | **Term**                        | ** ** |
|--------------------------------|------------|--------------------|------------|-----------|------------|-------------------------|------------|--------------------------------|------------|---------------------------------|------------|
| Physical Sale                  |       | SoCal              |       |      | 2,000      |                    |       | $4.47 Floor(1)                 |       | Oct 1,  04-Sep 30, 05 |       |
| Put                            |       | NYMEX              |       |      | 5,000      |                    |       | $5.80 Floor                    |       | Jan 1,  05-Dec 31, 05 |       |
| Basis Swap                     |       | PG&E  Citygate |       |      | 5,000      |                    |       | $(0.150)(2)                    |       | Jan 1,  05-Dec 31, 05 |       |
| Put                            |       | PG&E  Citygate |       |      | 5,000      |                    |       | $6.00 Floor                    |       | Jan 1,  05-Dec 31, 05 |       |
| Swap                           |       | PG&E  Citygate |       |      | 4,000      |                    |       | $6.765 Fixed                   |       | Apr 1,  05-Dec 31, 05 |       |
| Swap                           |       | NYMEX              |       |      | 2,000      |                    |       | $6.71 Fixed                    |       | Jan 1,  06-Dec 31, 06 |       |
| Collar                         |       | NYMEX              |       |      | 4,000      |                    |       | $6.00-$8.50                    |       | Jan 1,  06-Dec 31, 06 |       |
| Basis Swap                     |       | PG&E  Citygate |       |      | 6,000      |                    |       | $(0.035)(3)                    |       | Jan 1,  06-Dec 31, 06 |       |
| Put                            |       | PG&E  Citygate |       |      | 6,000      |                    |       | $6.00 Floor                    |       | Jan 1,  06-Dec 31, 06 |       |
| Collar                         |       | NYMEX              |       |      | 6,000      |                    |       | $6.00-$8.40                    |       | Jan 1, 07-Dec 31,  07 |       |

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(1)          Theprice of this contract is the monthly NGI SoCal Border Index less $0.10 perMMBtu, with a floor of $4.47.

(2)          Thisbasis swap locks the $5.80 NYMEX put into a $5.65 floor with a PG&ECitygate location for 2005.

(3)          Thisbasis swap locks the $6.71 NYMEX swap into a $6.675 PG&E Citygate locationswap and the $6.00-$8.50 collar into a $5.965-$8.465 collar with aPG&E Citygate location for 2006.

Since March 31,2005 and through May 10, 2005 we have entered into additional commodityprice hedging contracts as set forth in the following table:

| **Type of Contract** | ** ** | ** **        | ** ** | **Basis** | ** ** | **Quantity  (MMBtu/d)** | ** ** | **Strike Price  ($/Mcf)** | ** ** | **Term** | ** **                      |
|--------------------------------|------------|-------------------|------------|-----------|------------|-------------------------|------------|--------------------------------|------------|----------|---------------------------------|
| Collar                         |       | PG&E Citygate |       |      | 3,000      |                    |       | $                              | 7.00-$9.45 |     | Jan 1,  06-Dec 31, 06 |   |
|                                |            |                   |            |           |            |                         |            |                                |            |          |                                 |  |  |  |

 

***Changes in FairValue***

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

| ** **                                                                                                                    | ** ** | **March 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                    | ** ** | **Fair  Value**              | ** ** | **Effect of  $5.00/Bbl and  $1.00/MMbtu  Price  Increases** | ** ** |
| Effective portion  of derivatives designated as cash flow hedges                                                              |       | $                            | (14.5      | ) |   | $ | (13.6 | ) |   |
| Derivatives not  designated as hedging instruments and the ineffective portion of derivatives  designated as cash flow hedges |       | (18.5                        | )          |   | (14.0 | ) |   |
|                                                                                                                               |            |                              |            |  |  |  |  |  |  |

 

The fair value of the swaps and option contracts areestimated based on quoted prices from independent reporting services comparedto the contract price of the agreement, and approximate the cash gain or lossthat would have been realized if the contracts had been closed out at periodend. All hedge positions offset physical positions exposed to the cash market.None of these offsetting physical positions are included in the above table.Price risk sensitivities were calculated by assuming across-the-board increasesin price of $5.00 per barrel for oil and $1.00 per MMBtu for natural gasregardless of term or historical relationships between the contractual price ofthe instruments and the underlying commodity price. In the event of actualchanges in prompt month prices equal to the assumptions, the fair value of ourderivative portfolio would typically change less than that shown in the tabledue to lower volatility in out-month prices. In the event of actual changes inall months equal to the assumptions, the fair value of our derivative portfoliowould typically change less then that shown in the table due to the fact thatmany of 

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such changes would bewithin the range of our derivative collars where the movement in fair valuewould typically be less then the changes in commodity prices.

We have NYMEX put optionswith a weighted average strike price of $37.35 per barrel on 4,000 barrels ofoil per day in 2005 and $41.45 per barrel on 2,000 barrels of oil per day in2006. We also have put options with a weighted average strike price of $5.91per MMBtu on 11,000 MMBtus of natural gas per day in 2005 and $6.00 per MMBtulon 6,000 MMBtus of natural gas per day in 2006. These put options cost anaverage of $1.33 per barrel and $0.28 per MMBtu for 2005 and $2.71 perbarrel and $0.46 per MMBtu for 2006 (a total of $6.0 million), which was paidwhen the put options were contracted. Such amount is not included in the fairvalue of derivatives in the foregoing table.

**Critical AccountingPolicies and Estimates**

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

**Item4.**                        Controlsand Procedures

Under the supervision and with the participation ofour management, including the Chief Executive Officer and Chief FinancialOfficer, we have conducted an evaluation of the effectiveness of the design andoperation of our disclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) as of March 31,2005 (the “Evaluation Date”). There are inherent limitations to theeffectiveness of any system of disclosure controls and procedures, includingthe possibility of human error and the circumvention or overriding of thecontrols and procedures. Accordingly, even effective disclosure controls andprocedures can only provide reasonable assurance of achieving their controlobjectives. Based on such evaluation, the Chief Executive Officer and ChiefFinancial Officer have concluded that, as of the Evaluation Date, ourdisclosure controls and procedures were effective in alerting them on a timelybasis to material information relating to us required to be included in ourreports filed or submitted under the Exchange Act.

In connection with the restatement and the filing ofthis Form 10-Q/A, management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, re-evaluated the effectivenessof our disclosure controls and procedures as of the Evaluation Date. Based onthat evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of the EvaluationDate.

In concluding that our disclosure controls andprocedures were effective as of March 31, 2004, our management considered,among other things, the circumstances that resulted in the restatement of ourpreviously issued financial statements. We also considered the materiality ofthe restatement adjustments on our consolidated balance sheet and statement ofoperations (as more fully set forth in Note 2, “Restatement,” to theaccompanying condensed consolidated financial statements) and that thesenon-cash adjustments have no effect on historical or future cash flows and haveno material effect on our net income. In order to enhance our disclosurecontrols and procedures, particularly with respect to accounting and financialreporting, we have also commenced, and are currently engaged in, a review ofthe adequacy of our current levels of accounting staff with a view towardspotentially adding additional staff.

There was no change in our internal control overfinancial reporting during the quarter ended March 31, 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

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**PART II—OTHER INFORMATION**

**Item 1.**                        LegalProceedings

See Note 7 to ourinterim condensed consolidated financial statements.

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

Not applicable

**Item 3.**                        DefaultsUpon Senior Securities

Not Applicable

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

Not Applicable

**Item 5.**                        OtherInformation

Not Applicable

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

a.                  Exhibits
| Exhibit  Number | ** ** | ** **                                                                                                                                     | ** ** | **Exhibit** |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|
| 10.1            |       | Employment Agreement,  dated as of May 4, 2005, by and between Venoco, Inc. and Timothy  Marquez.*                                   |
| 10.2            |       | Employment Agreement,  dated as of May 4, 2005, by and between Venoco, Inc. and David  Christofferson.*                              |
| 10.3            |       | Employment Agreement,  dated as of May 4, 2005, by and between Venoco, Inc. and Greg  Schrage.*                                      |
| 10.4            |       | Employment Agreement,  dated as of May 4, 2005, by and between Venoco, Inc. and Roger  Hamson.*                                      |
| 10.5            |       | Employment Agreement,  dated as of May 4, 2005, by and between Venoco, Inc. and Terry  Anderson.*                                    |
| 10.6            |       | Non-Qualified  Stock Option Agreement, dated as of May 4, 2005, by and between  Venoco, Inc. and William Schneider.*                 |
| 10.7            |       | Non-Qualified  Stock Option Agreement, dated as of May 4, 2005, by and between  Venoco, Inc. and David Christofferson.*              |
| 10.8            |       | Non-Qualified  Stock Option Agreement, dated as of May 4, 2005, by and between  Venoco, Inc. and Greg Schrage.*                      |
| 10.9            |       | Non-Qualified  Stock Option Agreement, dated as of May 4, 2005, by and between  Venoco, Inc. and Roger Hamson.*                      |
| 10.10           |       | Non-Qualified  Stock Option Agreement, dated as of May 4, 2005, by and between  Venoco, Inc. and Terry Anderson.*                    |
| 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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*       Previouslyfiled

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b.                 Reports on Form 8-K

The Company filed the following reports on Form 8-Kduring the quarter ended March 31, 2005 and through May  13,2005:

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

On May  9, 2005, we filed a report on Form 8-Kdated May  4, 2005 announcing that we entered into employmentagreements with the following officers of the company: (i) TimothyMarquez, Chief Executive Officer, (ii) David Christofferson, ChiefFinancial Officer, (iii) Greg Schrage, Vice President, Northern Assets, (iv) RogerHamson, Vice President, Southern Assets and (v) Terry Anderson, GeneralCounsel.

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**SIGNATURES**

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

 

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