Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                              |
| ** ** | ** ** | **For the quarterly period ended: March 31,  2009**                                                |
| ** ** | ** ** | ** **                                                                                              |
| ** ** | ** ** | **or**                                                                                                  |
| ** ** | ** ** | ** **                                                                                              |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom         to         **

 

**CommissionFile Number: 001-12697**

 

**BPZRESOURCES, INC.**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **Texas**                                                       | ** ** | **33-0502730**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or Other Jurisdiction of Incorporation or Organization) |       | (I.R.S.  Employer Identification No.) |

 

**580 Westlake Park Blvd., Suite 525Houston, Texas 77079**(Address of Principal Executive Office)

 

Registrant’s Telephone Number, Including Area Code:** (281)556-6200**

 

**N/A**

(Former Name, Former Address and Former Fiscal Year, If Changed SinceLast Report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes oNo o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large  accelerated filer x                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yeso No x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:

 

As of May 04, 2009, there were 94,486,094shares of common stock, no par value, outstanding.

 

 

 

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Table ofContents

** **

**TABLE OF CONTENTS**

 
| **PART I**                                          |
|----------------------------------------------------------|
| ** **                                               | ** ** |
| Item 1.                                                  | Financial Statements | 3 |
|                                                     |   |   |
|                                                     | Consolidated Balance Sheets | 3 |
|                                                     |   |   |
|                                                     | Consolidated Statements of  Operations | 4 |
|                                                     |   |   |
|                                                     | Consolidated Statements of  Cash Flows | 5 |
|                                                     |   |   |
|                                                     | Notes to  Consolidated Financial Statements | 6 |
|                                                     |   |   |
| Item 2.                                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 16 |
|                                                     |   |   |
| Item 3.                                                  | Quantitative  and Qualitative Disclosures About Market Risk | 24 |
|                                                     |   |   |
| Item 4.                                                  | Controls and  Procedures | 25 |
|                                                     |   |   |
| **PART II**                                         |
|                                                     |   |   |
| Item 1.                                                  | Legal Proceedings | 27 |
|                                                     |   |   |
| Item 1A.                                                 | Risk Factors | 27 |
|                                                     |   |   |
| Item 2.                                                  | Unregistered  Sales of Equity Securities and Use of Proceeds | 27 |
|                                                     |   |   |
| Item 6.                                                  | Exhibits | 27 |
|                                                     |   |   |
| **       SIGNATURES** | 28 |

 

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Table ofContents

 

**PART I**

 

# **Item 1. Financial Statements**

#  

**BPZ Resources, Inc. and Subsidiaries**

**Consolidated BalanceSheets**

**(In thousands, exceptshare data)**

** **
| ** **                                                                                                                                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                    | ** ** | **(Unaudited)**    | ** ** | **(Audited)**         | ** ** |
| **ASSETS**                                                                                                                                                                    |       |               |       |                  |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Current assets:                                                                                                                                                               |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                     |       | $                  | 28,482     |                  | $          | 5,317 |   |
| Accounts receivable                                                                                                                                                           |       | 3,780              |       | 5,276                 |       |
| Value added tax receivable                                                                                                                                                    |       | 16,316             |       | 12,110                |       |
| Inventory                                                                                                                                                                     |       | 7,541              |       | 4,054                 |       |
| Prepaid and other current assets                                                                                                                                              |       | 7,536              |       | 3,268                 |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Total current assets                                                                                                                                                          |       | 63,655             |       | 30,025                |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Property, equipment and construction in progress, net                                                                                                                         |       | 201,887            |       | 193,934               |       |
| Restricted cash                                                                                                                                                               |       | 4,251              |       | 5,153                 |       |
| Prepaid and other non-current assets                                                                                                                                          |       | 1,572              |       | —                |       |
| Investment in Ecuador property, net                                                                                                                                           |       | 1,336              |       | 1,382                 |       |
| Deferred tax asset                                                                                                                                                            |       | 7,411              |       | 4,871                 |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Total assets                                                                                                                                                                  |       | $                  | 280,112    |                  | $          | 235,365 |   |
|                                                                                                                                                                          |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                |       |               |       |                  |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                          |       |               |       |                  |       |
| Accounts payable                                                                                                                                                              |       | $                  | 40,659     |                  | $          | 35,286 |   |
| Accrued liabilities                                                                                                                                                           |       | 8,460              |       | 9,920                 |       |
| Other liabilities                                                                                                                                                             |       | 1,287              |       | 720                   |       |
| Current income taxes payable                                                                                                                                                  |       | 7,845              |       | 6,841                 |       |
| Current maturity of long-term debt and capital lease obligation                                                                                                               |       | 5,984              |       | 7,820                 |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Total current liabilities                                                                                                                                                     |       | 64,235             |       | 60,587                |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Asset retirement obligation                                                                                                                                                   |       | 598                |       | 580                   |       |
| Long-term debt                                                                                                                                                                |       | 15,012             |       | 15,018                |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Total long-term liabilities                                                                                                                                                   |       | 15,610             |       | 15,598                |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Commitments and contingencies (Note 14)                                                                                                                                       |       |               |       |                  |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                                                    |       |               |       |                  |       |
| Preferred stock, no par value, 25,000,000 authorized; none issued and  outstanding                                                                                            |       | —             |       | —                |       |
| Common stock, no par value, 250,000,000 authorized; 94,486,094 and  78,748,390 shares issued and outstanding at March 31, 2009 and  December 31, 2008, respectively |       | 275,271            |       | 227,137               |       |
| Accumulated deficit                                                                                                                                                           |       | (75,004            | )          | (67,957               | )          |
|                                                                                                                                                                          |       |               |       |                  |       |
| Total stockholders’ equity                                                                                                                                               |       | 200,267            |       | 159,180               |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                               |       | $                  | 280,112    |                  | $          | 235,365 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**BPZ Resources, Inc. and Subsidiaries**

**Consolidated Statements of Operations****(Unaudited)**

**(In thousands, except per share data)**

** **
| ** **                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                                                                       |       |                                  |       |   |   |
| Revenue                                                                    |       | $                                     | 13,225     |   | $ | 4,367 |   |
|                                                                       |       |                                  |       |   |   |
| Operating and administrative expenses:                                     |       |                                  |       |   |   |
| Lease operating expense                                                    |       | 3,978                                 |       | 2,219 |   |
| General and administrative expense                                         |       | 8,483                                 |       | 8,315 |   |
| Geological, geophysical and engineering expense                            |       | 347                                   |       | 181 |   |
| Depreciation, depletion and amortization expense                           |       | 7,878                                 |       | 1,191 |   |
|                                                                       |       |                                  |       |   |   |
| Total operating expenses                                                   |       | 20,686                                |       | 11,906 |   |
|                                                                       |       |                                  |       |   |   |
| Operating loss                                                             |       | (7,461                                | )          | (7,539 | ) |
|                                                                       |       |                                  |       |   |   |
| Other income (expense):                                                    |       |                                  |       |   |   |
| Income (expense) from investment in Ecuador property, net of  amortization |       | (47                                   | )          | 253 |   |
| Interest income                                                            |       | 25                                    |       | 49 |   |
| Other expense                                                              |       | (772                                  | )          | (93 | ) |
|                                                                       |       |                                  |       |   |   |
| Total other income (expense)                                               |       | (794                                  | )          | 209 |   |
|                                                                       |       |                                  |       |   |   |
| Loss before income taxes                                                   |       | (8,255                                | )          | (7,330 | ) |
|                                                                       |       |                                  |       |   |   |
| Income tax expense (benefit)                                               |       | (1,207                                | )          | 92 |   |
|                                                                       |       |                                  |       |   |   |
| Net loss                                                                   |       | $                                     | (7,048     | ) | $ | (7,422 | ) |
|                                                                       |       |                                  |       |   |   |
| Basic and diluted net loss per share                                       |       | $                                     | (0.08      | ) | $ | (0.10 | ) |
|                                                                       |       |                                  |       |   |   |
| Weighted average common shares outstanding                                 |       | 88,620                                |       | 74,525 |   |
|                                                                       |       |                                  |       |   |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**BPZ Resources, Inc. andSubsidiaries**

**Consolidated Statements ofCash Flows (Unaudited)**

**(In thousands)**

** **
| ** **                                                                           | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                           | ** ** | **March 31,**             | ** ** |
| ** **                                                                           | ** ** | **2009**                       | ** ** | **2008** | ** ** |
|                                                                                 |       |                           |       |   |   |
| Cash flows from operating activities:                                                |       |                           |       |   |   |
| Net loss                                                                             |       | $                              | (7,048     | ) | $ | (7,422 | ) |
| Adjustments to reconcile net loss to net cash provided by operating  activities:     |       |                           |       |   |   |
| Stock-based compensation                                                             |       | 3,274                          |       | 4,562 |   |
| Depreciation, depletion and amortization                                             |       | 7,878                          |       | 1,191 |   |
| Amortization of investment in Ecuador property                                       |       | 47                             |       | 47 |   |
| Deferred income taxes                                                                |       | (2,541                         | )          | — |   |
| Changes in operating assets and liabilities:                                         |       |                           |       |   |   |
| Decrease in accounts receivable                                                      |       | 1,495                          |       | 2,950 |   |
| Increase in value added tax receivable                                               |       | (4,206                         | )          | (2,251 | ) |
| Increase in inventory                                                                |       | (2,874                         | )          | (1,890 | ) |
| Increase (decrease) in other assets                                                  |       | (69                            | )          | 236 |   |
| Increase in accounts payable                                                         |       | 5,373                          |       | 6,052 |   |
| Increase (decrease) in accrued liabilities                                           |       | (1,459                         | )          | 189 |   |
| Increase in other income taxes payable                                               |       | 1,004                          |       | — |   |
| Increase in other liabilities                                                        |       | 565                            |       | 17 |   |
| Net cash provided by operating activities                                            |       | 1,439                          |       | 3,681 |   |
|                                                                                 |       |                           |       |   |   |
| Cash flows from investing activities:                                                |       |                           |       |   |   |
| Property and equipment additions                                                     |       | (17,832                        | )          | (14,500 | ) |
| Decrease (increase) in restricted cash                                               |       | 902                            |       | (739 | ) |
| Net cash used in investing activities                                                |       | (16,930                        | )          | (15,239 | ) |
|                                                                                 |       |                           |       |   |   |
| Cash flows from financing activities:                                                |       |                           |       |   |   |
| Borrowings                                                                           |       | 1,000                          |       | 2,800 |   |
| Repayments of borrowings                                                             |       | (2,841                         | )          | (663 | ) |
| Proceeds from exercise of warrants, net                                              |       | —                         |       | 750 |   |
| Proceeds from exercise of stock options, net                                         |       | —                         |       | 491 |   |
| Proceeds from sale of common stock, net                                              |       | 40,497                         |       | 37,507 |   |
| Net cash provided by financing activities                                            |       | 38,656                         |       | 40,885 |   |
|                                                                                 |       |                           |       |   |   |
| Net increase in cash and cash equivalents                                            |       | 23,165                         |       | 29,327 |   |
| Cash and cash equivalents at beginning of period                                     |       | 5,317                          |       | 7,514 |   |
| Cash and cash equivalents at end of period                                           |       | $                              | 28,482     |   | $ | 36,841 |   |
|                                                                                 |       |                           |       |   |   |
| Supplemental cash flow information:                                                  |       |                           |       |   |   |
| **Cash paid for:**                                                                   |       |                           |       |   |   |
| Interest                                                                             |       | $                              | 879        |   | $ | 1,005 |   |
| Income tax                                                                           |       | 330                            |       | 92 |   |
| **Non — cash items:**                                                           |       |                           |       |   |   |
| Purchase and additions to equipment with the issuance of a capital  lease obligation |       | $                              | —     |   | $ | 6,915 |   |
| Issuance of common stock for subscription receivable                                 |       | 4,364                          |       | — |   |
| Accrued interest capitalized to construction in progress                             |       | 23                             |       | 370 |   |
| Depletion allocated to production inventory                                          |       | 613                            |       | (235 | ) |
| Depreciation on support equipment capitalized to construction in progress            |       | 339                            |       | 138 |   |
| Property and equipment transferred to other long term assets                         |       | (1,428                         | )          | — |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

**Note 1- Basis of Presentation and Significant Accounting Policies**

 

**Organization**

** **

BPZResources, Inc., (the “Company” or “BPZ”) a Texas corporation, is based inHouston, Texas with offices in Lima, Peru and Quito, Ecuador. The Company isfocused on the exploration, development and production of oil and natural gasin Peru and Ecuador. The Company also intends to utilize part of its plannedfuture natural gas production as a supply source for the complementarydevelopment of a gas-fired power generation facility which is expected to bepartially owned by the Company.

 

TheCompany maintains a subsidiary registered in Peru through its wholly-ownedsubsidiary BPZ Energy, LLC, a Texas limited liability company, formerlyBPZ Energy, Inc. (“BPZ — Texas”) and its subsidiary BPZ EnergyInternational Holdings, L.P., a British Virgin Islands Limited Partnership.Currently, the Company has exclusive rights and license agreements for oil andgas exploration and production covering a total of approximately 2.4 millionacres, in four blocks, in northwest Peru. The Company’s license contracts cover100% ownership of Block Z-1 (739,205 acres), Block XIX (472,860 acres), BlockXXII (948,000 acres) and Block XXIII (248,000 acres). The Block Z-1 contractwas signed in November 2001, the Block XIX contract was signed in December2003 and Blocks XXII and XXIII contracts were signed in November 2007.  The Company’s license contracts provide foran initial exploration period of seven and potentially up to thirteen years forBlock Z-1and seven and potentially up to ten years for Blocks XIX, XXII and XXIII.  The license contracts require the Company toconduct specified activities in the respective blocks during the explorationperiod. If the exploration activities are successful, the total contract termcan extend up to 30 years for oil exploration and production and up to 40 yearsfor gas exploration and production. In the event a Block contains both oil andgas, as is the case in the Company’s Block Z-1 contract, the 40 year termapplies to oil exploration and production as well.

 

Throughits wholly-owned subsidiary, SMC Ecuador Inc., a Delaware corporation, and itsregistered branch in Ecuador, the Company owns a 10% non-operated workinginterest in an oil and gas producing property, Block 2, located in thesouthwest region of Ecuador (the “Santa Elena Property”). The license agreementcovering the property extends through May 2016.

 

TheCompany is in the initial stages of developing its oil and natural gas reservesand has begun producing and selling oil from the CX-11 platform in the Corvinafield of Block Z-1 under an extended well testing program. Additionally, theCompany’s activities in Peru include analysis and evaluation of technical dataon its  properties, preparation of thedevelopment plans for the properties, including detailed engineering and designof the power plant and gas processing facilities, refurbishment of and designsfor platforms, procuring machinery and equipment for an extended drillingcampaign, obtaining all necessary environmental and operating permits, bringingadditional production on-line and securing the required capital and financingto conduct the current plan of operation.

 

**Basis of Presentation and Principles of Consolidation**

 

 The accompanying consolidated financialstatements of BPZ Resources, Inc. and its subsidiaries have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America (“GAAP”) for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosuresnormally included in financial statements prepared in accordance with GAAP havebeen condensed or omitted pursuant to such rules and regulations. Theunaudited financial statements reflect all adjustments which are, in the opinionof management, necessary for a fair presentation of the financial position andresults of operations for the interim periods presented on a basis consistentwith the annual audited financial statements. All such adjustments are of a normal recurring nature. All significant transactions betweenBPZ and its consolidated subsidiaries have been eliminated. Certain priorperiod amounts have been reclassified to conform to current year presentation.Results of operations for interim periods are not necessarily indicative of theresults of operations that may be expected for the entire year. The balancesheet at December 31, 2008 has been derived from the audited financialstatements at that date but does not include all of the information andfootnotes required by GAAP for complete financial statements. These interimfinancial statements should be read in conjunction with the audited financialstatements and notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

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**Table of Contents**

 

**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

**Use of Estimates**

** **

The preparation of the consolidated financialstatements in accordance with U.S. generally accepted accounting principlesrequires management to make certain estimates and assumptions. These estimatesand assumptions affect the reported amounts of assets, liabilities, revenuesand expenses in the consolidated financial statements, and the disclosure ofcontingent assets and liabilities. Actual results could differ from theseestimates.

 

**Summary of Significant AccountingPolicies**

 

The Company has provideda summary discussion of significant accounting policies, estimates andjudgments in Note 1 to the Notes to Consolidated Financial Statements includedin its Annual Report on Form 10-K for the year ended December 31,2008.

 

**Recent Accounting Pronouncements**

 

On December 31, 2008 the Securities andExchange Commission (“SEC”) adopted the final rules regarding amendmentsto current oil and gas reporting requirements. The amendments are designed tomodernize and update the oil and gas disclosure requirements to align them withcurrent practices and changes in technology and include the following:

 

·                  Requiring companies to report oiland gas reserves using an average price based upon the prior 12-month periodrather than year-end prices.

·                  Enabling companies to additionallydisclose their probable and possible reserves.

·                  Requiring previously nontraditionalresources, such as oil shales, to be classified as oil and gas reserves if thenontraditional resources are intended to be upgraded to synthetic oil and gas.

·                  Requiring companies to report theindependence and qualifications of a preparer or auditor, based on currentSociety of Petroleum Engineers criteria.

·                  Requiring the filing of reports forcompanies that rely on a third party to prepare reserves estimates or conduct areserves audit.

·                  Permitting the use of newtechnologies to determine proved reserves if those technologies have beendemonstrated empirically to lead to reliable conclusions about reservesvolumes.

 

The amendments are effective for registrationstatements filed on or after January 1, 2010, and for annual reports on Form 10-Kand for fiscal years ending on or after December 31, 2009. Early adoptionis not permitted in either annual or quarterly reports before the first annualreport in which the revised disclosures are required. The Company is currentlyevaluating the impact of the amendments on its consolidated financial position,results of operations and cash flows.

 

**Note 2 —Value Added Tax Receivable**

 

Value-added tax (referred to as “IGV”in Peru) is generally imposed on goods and services at a rate of 19%.

 

Peru currently has an IGV earlyrecovery program for oil and gas companies during the exploration phase. Underthis program, IGV paid on the acquisition of certain goods and services useddirectly in hydrocarbon exploration activities can be recovered prior to acommercial discovery taking place or the initiation of production and revenuebillings. Because the Company has oil sales in the Corvina Field underan extended well testing program,it is no longer eligible for the IGV early recovery program. Accordingly, the Company is recoveringits IGV receivable with IGV payables associated with future oil sales under thenormal IGV recovery process.

 

TheCompany’s value added tax receivable balance as of March 31, 2009 and December 31,2008 was $16.3 million and $12.1 million, respectively. For the three monthsended March 31, 2009 the Company accrued approximately $9.6 million forIGV related to expenditures during the first three months ended March 31,2009 offset by approximately ($5.4) million for IGV related to the sale of oilfor the same period.

 

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**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

**Note 3 — Inventories**

 

Inventories consistprimarily of crude oil, tubular goods, accessories and spare parts forproduction equipment, stated at the lower of average cost or market. Thebalance of inventory at March 31, 2009 and December 31, 2008 was $7.5million and $4.1 million, respectively.

 

Inventory associated withtubular goods, accessories and spare parts inventory at March 31, 2009 andDecember 31, 2008 was $6.2 million and $3.6 million, respectively.

 

The Company alsomaintains crude oil inventories in storage barges until the inventoryquantities are at a sufficient level that the refinery in Talara will acceptdelivery.  These inventories are also stated at the lower of average costor market value. Cost is determined on a weighted average basis based onproduction costs. The crude oil inventory at March 31, 2009 consisted ofapproximately 35,984 barrels at an estimated cost of $1,299,532 or $36.11 perbarrel. The crude oil inventory at December 31, 2008 consisted ofapproximately 11,656 barrels at an estimated cost of $437,765 or $37.56 perbarrel.

 

**Note 4 — Prepaid and Other Current Assets**

 

Below is a summary ofprepaid and other current assets as of March 31, 2009 and December 31,2008 (in thousands):

 
| ** **                     | ** ** | **March 31,  2009** | ** **  | **December 31,  2008** | ** ** |
|--------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
|                           |       |                     |        |                        |       |   |   |
| Prepaid expenses and other     |       | $                        | 2,081       |                        | $          | 1,981 |   |
| Deposits                       |       | 96                       |        | 86                          |       |
| Prepaid insurance              |       | 383                      |        | 590                         |       |
| Insurance receivable           |       | 612                      |        | 611                         |       |
| Stock subscription  receivable |       | 4,364                    |        | —                      |       |
|                           |       |                     |        |                        |       |
|                           |       | $                        |  7,536 |                        | $          | 3,268 |   |

 

Prepaid expenses andother are primarily related to prepayments for drilling services, equipmentrental and material procurement. In addition at March 31, 2009, includedin prepaid and other current assets is a $4.4 million stock subscriptionreceivable from the IFC for their participation in the 2009 private placementof Common Stock. See Note 10, “Stockholders’ Equity” for furtherdiscussion. The stock subscription receivable was received by the Company on April 2,2009. Deposits are primarily rent deposits in connection with the Company’soffices in Houston and Peru. Prepaid insurance consists of premiums related tothe Company’s operations as well as general liability and directors and officer’sinsurance policies. Insurance receivable is related to the barge incident whichoccurred in early August 2006. The Company incurred an operational delayof approximately three weeks resulting from a navigation incident which causedthe BPZ-01 barge to be grounded on a sand bank in Talara Bay in northwest Peruduring the second mobilization trip to the Corvina platform. As of March 31,2009, the Company has an insurance receivable of approximately $0.7 million forthe estimated insurance repair claims of $0.8 million expected to be filed withthe insurance carrier. A deductible of $75,000 will be applied to thisinsurance claim when reimbursed.  The hull claim will be finalized uponthe dry docking of the vessel, which is expected to occur during the lastquarter of 2009.

 

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**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

**Note 5— Property, Equipment and Construction in Progress**

 

Below is a summary of property, equipment and construction in progress as of March 31, 2009 and December 31, 2008 (in thousands):

 
| ** **                                              | ** ** | **March 31,   2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
|                                                    |       |                      |       |                        |       |
| Construction in progress:                               |       |                      |       |                        |       |
| Power plant and related equipment                       |       | $                         | 17,716     |                        | $          | 17,484 |   |
| Platforms and wells                                     |       | 50,405                    |       | 34,768                      |       |
| Pipelines and processing facilities                     |       | 5,110                     |       | 5,108                       |       |
| Producing properties                                    |       | 111,027                   |       | 110,230                     |       |
| Producing equipment                                     |       | 12,661                    |       | 18,399                      |       |
| Barge and related equipment                             |       | 30,763                    |       | 24,927                      |       |
| Office equipment, leasehold improvements, and  vehicles |       | 1,961                     |       | 1,960                       |       |
| Accumulated depreciation and amortization               |       | (27,756                   | )          | (18,942                     | )          |
|                                                    |       |                      |       |                        |       |
| Net property, equipment and construction in  process    |       | $                         | 201,887    |                        | $          | 193,934 |   |

 

During the three months ended March 31, 2009, the Company incurredcosts of approximately $18.2 million associated with its developmentinitiatives for the exploration and production of oil and natural gas reservesin Peru.

 

Of the incurred costs mentioned above, the Companyincurred capital expenditures related to the completion of the CX11-20XD welland the drilling and testing of the CX11-15D well of approximately $0.8 millionand $13.0 million, respectively. In preparation for the Company’s futuredrilling campaigns, the Company incurred costs of $1.3 million and $0.6 millionfor the refurbishment of the Albacora and Piedra Redonda platforms,respectively.   For the three monthsended March 31, 2009, the Company incurred capital costs of $0.5 millionrelated to initial drilling activity in the Albacora field and $0.3 millionrelated to the Caleta La Cruz dock refurbishment.

 

For the three monthsended March 31, 2009, in accordance with the “successful efforts” methodof accounting, the Company capitalized approximately $0.3 million ofdepreciation expense, mainly related to the tender assist barges serving assupport equipment to the Company’s drilling activities, and $0.9 million ofinterest expense to construction in progress. For the same period in 2008, theCompany capitalized approximately $0.1 million of depreciation expense and $0.9million of interest expense to construction in progress.

 

For the three monthsended March 31, 2009 and 2008, the Company recognized $7.9 million and$1.2 million of depreciation, depletion and amortization expense, respectively.

 

**Note 6— Asset Retirement Obligation**

 

An obligation was recordedfor the future plug and abandonment of the producing oil wells, the CX11-21XD,CX11-14D, CX11-20XD and the CX11-18XD, in accordance with the provisions ofSFAS No 143 “Accounting for Asset Retirement Obligations”.

 

Activity related to theCompany’s asset retirement obligation (“ARO”) for March 31, 2009 and December 31,2008 is as follows (in thousands):

 
| ** **                            | ** ** | **March 31,   2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
|                                  |       |                      |       |                        |       |
| ARO as of the beginning of the period |       | $                         | 580        |                        | $          | 273 |   |
| Liabilities incurred during period    |       | —                    |       | 268                         |       |
| Accretion expense                     |       | 18                        |       | 39                          |       |
|                                  |       |                      |       |                        |       |
| ARO as of the end of the period       |       | $                         | 598        |                        | $          | 580 |   |

 

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Table ofContents

 

**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

**Note 7 — Investment in Ecuador Property**

 

The Company has a 10% net investment interest in anoil and gas property in Ecuador (the “Santa Elena Property”) totaling $1.3million and $1.4 million as of March 31, 2009 and December 31, 2008,respectively. The Company accounts for this investment under the cost methodand records its share of cash received or paid as other income or expense.Since the Company’s investment represents ownership of an oil and gas property,which is a depleting asset, the Company is amortizing the cost of theinvestment on a straight-line basis over the remaining term of the licenseagreement which expires in May 2016. For the three months ended March 31, 2009, the Company did not receiveany income from its investment in Ecuador property, while receiving $0.3million during the same period in 2008. For both the three months ended March 31, 2009, and 2008,investment amortization expense of approximately $47,000 was recorded.

 

**Note 8— Restricted Cash and Performance Bonds**

 

As of March 31,2009, the Company has restricted cash deposits of $4.3 million, which partiallycollateralizes insurance and performance bonds. In connection with the Company’sproperties in Peru, it has obtained four performance bonds totaling $5.3million that are partially collateralized by restricted cash deposits of $2.9million to insure certain performance obligations and commitments under thelicense contracts for Blocks Z-1, XIX, XXII and XXIII. Additionally, theCompany has $1.4 million of restricted cash to collateralize insurance bondsfor import duties related to the Floating, Production, Storage and Offloadingvessel (“FPSO”) and transport tanker.

 

All of the performanceand insurance bonds are issued by Peruvian banks and their terms are governedby the corresponding license contracts or customs laws.

 

**Note 9 —Long-Term Debt and Capital Lease Obligations**

** **

***At March 31, 2009 and December 31, 2008 long-termdebt and capital lease obligations consist of the following (in thousands):***

*** ***
| ** **                                              | ** ** | **March 31,   2009** | ** **   | **December 31,  2008** | ** ** |
|---------------------------------------------------------|------------|---------------------------|--------------|-----------------------------|------------|
| ** **                                              | ** ** | ** **                | ** **   | ** **                  | ** ** |
| $15 million IFC Senior Note, Libor plus 2.75%, due 2012 |       | $                         | 15,000       |                        | $          | 15,000 |   |
| Capital Lease Obligations                               |       | 5,996                     |         | 7,838                       |       |
|                                                    |       | 20,996                    |         | 22,838                      |       |
| Less: Current Portion of Long-Term Debt                 |       | 5,984                     |         | 7,820                       |       |
|                                                    |       | $                         |  15,012 |                        | $          | 15,018 |   |

*** ***

*$15.0Million IFC Reserve-Based Credit Facility*

 

The Company has a $15.0million reserve-based lending facility (“$15.0 million Senior Note”) agreement(the “Loan Agreement”) with International Finance Corporation**(“**IFC”) through its subsidiaries BPZExploración & Producción S.R.L and BPZ Marine Peru S.R.L asborrowers. The reserve-based lending facility matures in December 2012and bears interest at an approximate rate of LIBOR plus 2.75%, currently equivalentto 4.56% based on the six month LIBOR rate of 1.81% at December 31,2008.  The maximum amount available under this facility begins at $15.0million and will be reduced by $2.5 million beginning on December 16, 2010and every six months thereafter during the term of the Loan Agreement. The amount available under the Loan Agreement is subject to a semi-annualborrowing base determination based on the value of oil reserves.  Inaddition, the Company is subject to various financial covenants calculated asof the last day of each quarter, including a life of field coverage ratio, lifeof loan coverage ratio, debt to equity ratio and interest coverage ratio. TheCompany was in compliance with all applicable covenants of the Loan Agreementas of March 31, 2009.

 

*NotePayable*

 

In January 2009, inexchange for receipt of $1.0 million from an individual (“Note Holder”), theCompany signed a promissory note (the “Note”). The Note originally provided formaturity in July 2009 with an annual interest rate of 12.0%. However, in March 2009the Company repaid the outstanding principal and accrued interest amounts tothe Note Holder.

 

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Table of Contents

 

**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

*CapitalLeases*

 

In February 2009,the Company made the final lease payment on the BPZ-02 deck barge, at whichpoint title to the barge was transferred to the Company.

 

**Note 10— Stockholders’ Equity**

 

The Company has 25,000,000 sharesof preferred stock, no par value, and 250,000,000 shares of common stock, nopar value, authorized for issuance.

 

**2009Private Placement of Common Stock**

 

On February 23, 2009, the Company closed aprivate placement of approximately14.3 million shares of common stock, no parvalue, to institutional and accredited investors pursuant to a Stock PurchaseAgreement dated February 19, 2009. Additionally, in March 2009, theIFC exercised its pre-emptive right to elect to participate in the privateplacement offering resulting in an additional 1.4 million shares of commonstock which brought the total to approximately 15.7 million shares of commonstock sold in the private placement offering. The common stock was priced at$3.05 per share resulting in net proceeds to the Company, after placement agentand financial advisory fees, of approximately $45.2 million. No warrants ordilutive securities were issued in connection with the private placement. Afinancial advisory fee of $0.7 million was paid to Morgan Keegan and Company, Inc.  for investment services and consultingrelated to the offering. Additionally a private placement fee of $2.2 millionwas paid to Pritchard Capital Partners, LLC for placement services related tothe offering.

 

Under the Stock PurchaseAgreement, the Company committed to file a registration statement with the SECand obtain the registration statement’s effectiveness within the time-framesoutlined in the Stock Purchase Agreement. On April 27, 2009, the Companyobtained effectiveness of the registration statement related to the StockPurchase Agreement in compliance with such time-frames.

 

**Potentially Dilutive Securities**

 

In addition to the shares issued and outstanding, the Company has the following potentially dilutive securities at March 31, 2009 and December 31, 2008.  None of these potentially dilutive shares have been included in the calculation of earnings per share, for the three months ended March 31, 2009 or for the year ended December 31, 2008, as the effect would be anti-dilutive.

 

The potentially dilutive shares are as follows (in thousands):

 
| ** **                                                         | ** ** | **March 31,   2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| Stock options outstanding                                          |       | 3,894                     |       | 3,894                       |       |
| Total potentially dilutive securities issued                       |       | 3,894                     |       | 3,894                       |       |
|                                                               |       |                      |       |                        |       |
| Shares available pursuant to Long-Term Incentive Compensation Plan |       | 2,541                     |       | 2,541                       |       |

 

The Company has in effect the 2007 Long-Term IncentiveCompensation Plan (the “2007 LTIP”) and the 2007 Directors’ CompensationIncentive Plan (the “Directors’ Plan”). The 2007 LTIP and Directors’ Planprovides for awards of options, stock appreciation rights, restricted stock,restricted stock units, performance awards, other stock-based awards andcash-based awards to any of the Company’s officers, employees, consultants andthe employees of certain of the Company’s affiliates as well as non-employeedirectors. The number of shares authorized under the 2007 LTIP and Directors’Plan is 4.0 million and 2.5 million, respectively. As of March 31,2009, 916,450 shares remain available for future grants under the 2007 LTIP and1,625,000 shares remain available for future grants under the Directors’ Plan.For the three month period ended March 31, 2009, the Company did not issueany equity awards to its employees or directors.

 

The following tablesummarizes stock-based compensation costs recognized under SFAS 123(R) forthe three months ended March 31, 2009 and 2008, respectively, and isincluded in “General and administrative expense” on the Consolidated Statementsof Operations (in thousands):

 

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**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 
| ** **                                   | ** ** | **Three Months Ended** | ** **  |
|----------------------------------------------|------------|----------------------------------|-------------|
| ** **                                   | ** ** | **March  31,**         | ** **  |
| ** **                                   | ** ** | **2009**                         | ** **  | **2008** | ** ** |
|                                         |       |                             |        |   |   |
| Employee stock—based compensation costs |       | $                                | 1,348       |   | $ | 3,253 |   |
| Director stock—based compensation costs |       | 1,926                            |        | 1,309 |   |
|                                         |       | $                                |  3,274 |   | $ | 4,562 |   |

 

**Note 11**—**Revenue**

 

TheCompany is currently producing oil from four wells in the Corvina Field underan extended well testing program. The oil is delivered by barge to the Petroperurefinery in Talara, located approximately 70 miles south of theplatform.  Produced oil is kept in production inventory until the Companyincreases the inventory quantities to a sufficient level that the refinery inTalara will accept delivery.

 

In January 2009, the Company, through itswholly-owned subsidiary BPZ Exploración & Producción S.R.L., enteredinto a long-term oil supply agreement with Petroperu. Under the terms of thecontract, the Company agrees to sell, and Petroperu agrees to purchase, all ofthe Company’s crude oil production originating from the Corvina oilfield inBlock Z-1. The contract term is for approximately seven years or until 17million barrels of crude oil has been delivered to the Petroperu refinerylocated in Talara, whichever comes first. The price per barrel of oil under theagreement is determined using a basket of crude oils based on a 15-day averageof Forties, Oman, and Suez blend crude oil prices, as quoted in the Spot CrudePrices Assessment published in Platt’s Crude Oilgram Price Report, minus $1 perbarrel and other customary purchase price adjustments.

 

During the three months ended March 31, 2009and 2008 the Company produced approximately 355,175 barrels and 45,176 barrels,respectively. For the three months ended March 31, 2009 and 2008 theCompany sold approximately 330,847 barrels and 55,886 barrels at an averageprice, net of royalties, of $39.97 per barrel and $78.15 per barrel,respectively.

 

The Company’s revenues are reported net of royaltiesowed to the government of Peru. Royalties are calculated by Perupetro asstipulated in the Block Z-1 license agreement based on the same basket of crudeoils prices discussed above, however, their calculation is based on the pastfive-day average price before the crude oil delivery date. For the three monthsended March 31, 2009 and 2008 the revenues received by the Company are netof royalty costs of approximately 6% and 5% of gross revenues or $0.8 millionand $0.3 million, respectively.

 

**Note 12 —Income Tax**

** **

For the three monthsended March 31, 2009, the Company recognized an income tax benefit ofapproximately $1.2 million on a net loss before income tax of approximately$8.3 million resulting in an effective tax rate of 15%.  The Company recognized an income taxprovision of approximately $0.1 million on pre-tax loss of approximately $7.3million for the same period in 2008.  Thedifference between the effective tax rate recognized and the 22% statutory rateprovided for under the Block Z-1 License Contract is largely due to:

 

·                  The Company has a 100% allowance on itsnet operating losses generated in the United States - The Company has avaluation allowance for the full amount of the domestic deferred tax assetresulting from the income tax benefit generated from net losses in the U.S., asit believes, based on the weight of available evidence, that it is more likelythan not that the deferred tax asset will not be realized prior to theexpiration of net operating loss carryforwards in various amounts through 2027.

 

·                  Certain U.S. expenses are not deductiblein Peru - The tax benefit is based on a taxable Peruvian loss that excludescertain U.S. expenses that are not deductible at the Peruvian level.

 

Estimated interest andpenalties related to potential underpayment on unrecognized tax benefits, ifany, are classified as a component of tax expense in the Consolidated Statementof Operations. For the three months ended March 31, 2009 and 2008,respectively, the Company did not have any accrued interest or penalties associatedwith any unrecognized tax benefits, nor was any interest expense recognizedduring those periods.

 

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Tableof Contents

 

**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

**Note 13 — Business Segment Information**

 

The Company determines and discloses its segments inaccordance with SFAS No. 131 “Disclosures about Segments of an Enterprise andRelated Information” which uses a “management” approach for determiningsegments. The management approach designates the internal organization that isused by management for making operating decisions and assessing parlance as thesource of the Company’s reportable segments. SFAS No. 131 also requiresdisclosures about products or services, geographic areas, and major customers.The Company’s management reporting structure provided for only one segment forthe three months ended March 31, 2009 and 2008 and accordingly, no separatesegment information is presented. In addition, the Company operates only inPeru and has only one customer for its oil production. The majority of ourlong-lived assets are located in Peru.

 

**Note 14 — Commitments and Contingencies**

 

*ProfitSharing*

 

The Constitution of Peru and Legislative Decree Nos.677 and 892 gives Peru employees working in private companies engaged inactivities generating income classified as third category income by the IncomeTax Law the right to share in the Company’s Peruvian subsidiaries profits. Therate set for oil and gas companies is 5% of net income subject to taxation. The5% of net income is determined by calculating a percentage of the Company’sPeruvian subsidiaries annual total revenues subject to income tax less theexpenses required to produce revenue or maintain the source of revenues. Thebenefit granted by the law to employees is calculated on the basis of “incomesubject to taxation” per the Peruvian tax code and not based on income/(loss)before incomes taxes as reported under GAAP. For the three months ended March 31,2009  profit sharing expense of $0.3million is included in “General and administrative expense” on the ConsolidatedStatement of Operations as the Company’s Peruvian subsidiaries have “incomesubject to taxation” per the Peruvian tax code. For the three months ended March 31,2008 the Company did not recognize profit sharing expense as the Company’sPeruvian subsidiaries did not have “income subject to taxation” per the Peruviantax code during this period.

 

*BargeIncident*

 

In August 2006, theCompany incurred an operational delay resulting from a navigation incidentwhich caused the BPZ-01 barge to be grounded on a sand bank in Talara Bay innorthwest Peru.  The Company expects to file an insurance claim after thedry docking of the vessel.  The dry dock of the BPZ-01 is scheduled duringthe last quarter of 2009.  As of March 31, 2009, the Company has notpresented a final claim to its insurance carrier for the barge repairs.

 

The Company believes thatthe majority of the costs associated with the grounding incident will bereimbursed through insurance or through a third party.  No assurances canbe given, however, that any such recoveries will be sufficient to cover all costsassociated with the incident or to the timing of any such recoveries.  TheCompany intends to file an insurance claim with its underwriters after it hasfully assessed the damages and estimated repair costs as well as finalized thereimbursement agreement with the third party.

 

*PeruProperties*

 

As of March 31,2009, the Company has total restricted cash deposits of $4.3 million. Inconnection with the Company’s  propertiesin Peru, it  has obtained fourperformance bonds totaling $4.9 million that are partially collateralized byrestricted cash deposits of $2.9 million to insure certain performanceobligations and commitments under the license contracts for Blocks Z-1, XIX,XXII and XXIII. Additionally, the Company has $1.4 million of restricted cashto collateralize insurance bonds for import duties related to the FPSO andtransport tanker.  See Note 8, “RestrictedCash and Performance Bonds” for further discussion.

 

*GETurbine Purchase Agreement and Amendment*

 

On September 26,2008, the Company, through its subsidiary, entered into a $51.5 millioncontract (the “Agreement”) for the purchase of three LM6000 gas-fired turbinesfrom GE Packaged Power, Inc. and GE International, Inc. Sucursal dePeru (collectively “GE”).  In January 2009 the Company and GE enteredinto an amendment of the contract. Under the terms of the amendment, both GEand BPZ agreed to a suspension period under the Agreement from and including December 15,2008 through November 15, 2009, whereby no failure on the part of BPZ orGE to perform any obligations under the Agreement will give rise to a breach ofcontract or give right to terminate the contract, provided the Company makes a$3.4 million progress payment no later than February 25, 2009 and a $3.5million progress payment to GE no later than November 16, 2009.  On February 24, 2009, the Company paidthe first 

 

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Table ofContents

 

**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

progress payment of $3.4million. Failure to make the second payment in full will result in immediatetermination of the Agreement with no cure period or time to correct the breach.

 

Once the Companydetermines to bring the Agreement out of the suspension period, it will provideevidence that payment security has been established and new delivery dates,pricing and payment terms may be determined by the Company and GE. All previouspayments made by the Company on the Agreement will be applied against any suchnew terms.

 

*Reserve-BasedCredit Facility*

 

In February 2009,the Company signed a revised Mandate Letter and Facility Term Sheet withNatixis, a major French bank, to arrange and structure, on an exclusive basis,a $75.0 million reserve-based credit facility, excluding the $15.0 millionreceived under the $15.0 million IFC Senior Note. Once the facility is closed,the Company expects the initial available borrowing capacity to be approximately$30.0 million, excluding the $15.0 million received under the $15.0 million IFCSenior Note. The existing Natixis credit committee approval remains in effectand Natixis is engaged in syndication activities. Both the Natixis and IFCfacilities would be governed by a single Common Terms Agreement. Terms of thereserve-based credit facility are expected to be commensurate with similartransactions in the market at the time of closing.

 

The Company expects tocomplete this financing towards the end of the second quarter of 2009. However,the closing of the credit facility is dependent upon the successful syndicationof approximately 50% of the facility and successful negotiation of the relatedloan documents, and funding is predicated on the satisfaction of certainconditions precedent as will be specified in the loan documents.

 

*Gas-to-PowerProject Financing*

 

The Corvina gas-to-power project entails theinstallation of a 10-mile gas pipeline from the CX-11 platform to shore,construction of gas processing facilities and an approximately 135 megawatt (“MW”)simple-cycle electric generating plant.  The proposed power plant site islocated adjacent to an existing substation and power transmission lines which,with certain upgrades, are expected to be capable of handling up to 360 MW ofpower.

 

The Company currentlyestimates the gas-to-power project will cost approximately $150.0 million,excluding 19% value added tax which will be recovered via early recovery and/orfuture revenue billings.  Through discussions with IFC, approximately 60%of the project’s costs can be expected to be financed with traditional projectfinancing, given current market conditions. Accordingly, the Company has commenced discussions with potential jointventure partners for the gas-to-power project in an attempt to secureadditional equity for the project.  As of March 31, 2009, the Companyhas identified several potential joint venture partners for the gas-to-powerproject and has begun the selection process for the most suitable partner forthe project. Following the identification and selection of a partner andconsummation of project contracts, the Company will enter into negotiationswith the IFC regarding restructuring of the gas-to-power project financing. TheCompany is expecting terms with interest rates to reflect the current marketconditions at the time of closing along with typical covenants for this type offinancing.  The closing of this joint venture and related financing, whichis targeted for late 2009, will be subject to the satisfactory negotiation ofjoint venture and related financing documentation.

 

**Note 15 — Legal Proceedings**

 

*NavyTanker Litigation*

 

On October 24, 2007,Tecnomarine, the Company’s former primary marine transportation contractor,entered into two short term agreements with the commercial division of thePeruvian Navy to charter two small tankers for use in the Company’s offshoreoil production operation.  On January 30, 2008, one of the tankers,the Supe, sank after catching fire. Although neither of the governmentalagencies charged with investigating the incident found fault with the Companyor the Company’s marine contractor, a lawsuit was filed against the Company inthe 152nd Judicial District Court of Harris County, Texas by two crewmembers and the familyand estate of two of the deceased sailors injured in the incident claimingnegligence and gross negligence on the part of the Company.  Since none ofthe Peruvian government sanctioned investigations into the Supe incident foundfault on the part of Tecnomarine, the Company or the Company’s subsidiary, BPZExploración and Producción S.R.L., the Company does not currently believe,based upon the known facts relating to the incident, that the outcome of thelegal proceeding will have a material adverse effect on its financialcondition, results of operations or cash flows. Additionally, the Companybelieves the incident would be covered by its insurance policies, after acustomary deductible.

 

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**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

*Disputed Contract Settlement*

 

Towards the end of the first quarter of 2009, the Company was notified of an alleged breach of a contractual obligation to a former consultant of the Company related to services provided to both the Company and its predecessor at the time the Company became publicly traded.  The Company has settled this dispute and as a result of the settlement, the Company has agreed to pay $0.8 million in exchange for a release of all claims against the Company for damages related to the disputed contract obligation.  The payment is included in “Other income/(expense)” in the Consolidated Statements of Operations.  The Company paid the $0.8 million settlement in April 2009.

 

**Note 16 — Subsequent Events**

 

Mr. E.Barger Miller III, a member of the Board of Directors of the Company, resignedfrom the Board effective as of April 24, 2009.  Subsequent to his resignation from the Board,the Company and Mr. Miller have agreed on a separation arrangement wherebythe Company can ensure the availability of Mr. Miller to continue toadvise and consult with the Company on technical matters within his specialarea of expertise, and to benefit from his unique knowledge of theCompany   Mr. Miller was one of four independent directors ofBPZ Resources, Inc. and served as a Class I Director for a term originallyset to expire at the Annual Meeting of Shareholders in 2011.  Prior to Mr. Miller’sresignation, he served on the Company’s Audit Committee and served as Chairmanof the Company’s Nominating Committee.  The Board is currently in theprocess of identifying a suitable replacement for Mr. Miller. The searchwill be led by Mr. Gordon Gray as Chairman of the NominatingCommittee.  Mr. Gray will also temporarily serve as a member of theAudit Committee (both positions which would have been left vacant due to Mr. Miller’sdeparture) until such time as a suitable replacement can be found.  Under the terms of the Directors CompensationIncentive Plan, all of Mr. Miller’s stock grants under the plan vestedimmediately.  Vested stock options remainexercisable for a period of 5 years from the respective vesting date.  In April of 2009 the Company willrecognize approximately $0.7 million in compensation expense related to theacceleration of unvested stock options and restricted stock.  The Company intends to contract Mr. Miller’sconsulting services as needed in the future.

 

Inconsideration of valuable services previously provided to the Company, andagreed to be provided in the future, the Company has agreed to pay Mr. Miller$30,000 each year in 2009 and 2010 and award Mr. Miller 100,000 options topurchase the Company’s common stock.  25%of the awards will vest on the first anniversary from the date of grant, 50% ofthe awards will vest on the second anniversary from the date of grant and theremaining 25% will vest on the third anniversary from the date of grant. As of May 6,2009, the total value of the option award is approximately $0.3 million.

 

Thefair value of the option award is estimated using a Black-Scholes optionpricing model. The Black-Scholes option valuation model was developed for usein estimating the fair value of traded options, which have no vestingrestrictions and are fully transferable and negotiable in a free tradingmarket. This model does not consider the employment, transfer or vestingrestrictions that are inherent in the Company’s stock options.  Use of an option valuation model includeshighly subjective assumptions based on long-term predictions, including theexpected stock price volatility and expected option term of each stock optiongrant.

 

Subsequent to March 31, 2009, the Company received$4.4 million from the IFC for their participation in the 2009 private placementof Common Stock. See Note 10 “Stockholders’ Equity” and Note 4 “Prepaid andOther Current Assets” for further information.

 

Subsequent to March 31, 2009, the Company paid $0.8million to settle a disputed contact obligation to a former consultant. SeeNote 15 “Legal Proceedings” for further information.

 

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**Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**Overview**

 

You should read the following discussion andanalysis together with our consolidated financial statements and notes theretoand the discussion Item 7. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” Item 7A, “Quantitative and QualitativeDisclosures About Market Risk” and Item 1A.  “Risk Factors” includedin our Annual Report on Form 10-K, for the year ended December 31,2008.  The following information containsforward-looking statements that involve risks, uncertainties andassumptions.  Should one or more of theserisks or uncertainties materialize, our actual results may differ from thoseexpressed or implied by the forward-looking statements.  See “Disclosure Regarding Forward-LookingStatements” below.

 

BPZ Resources, Inc., a Texas corporation, is based in Houston, Texaswith offices in Lima, Peru and Quito, Ecuador. We are focused on theexploration, development and production of oil and natural gas in Peru andEcuador. We also intend to utilize part of our planned future natural gasproduction as a supply source for the complementary development of a gas-firedpower generation facility in Peru which is expected to be partially owned byus.

 

We maintain a subsidiary registered in Peru through our wholly-ownedsubsidiary BPZ Energy, LLC, a Texas limited liability company, formerlyBPZ Energy, Inc. (“BPZ — Texas”) and its subsidiary BPZ EnergyInternational Holdings, L.P., a British Virgin Islands Limited Partnership.Currently, we have exclusive rights and license agreements for oil and gasexploration and production covering a total of approximately 2.4 million acres,in four blocks, in northwest Peru. Our license contracts cover 100% ownershipof Block Z-1 (739,205 acres), Block XIX (472,860 acres), Block XXII (948,000acres) and Block XXIII (248,000 acres). The Block Z-1 contract was signed in November 2001,the Block XIX contract was signed in December 2003 and Blocks XXII andXXIII contracts were signed in November 2007. Our license contractsprovide for an initial exploration period of seven and potentially up to thirteenyears for Block Z-1 and seven and potentially up ten years for Blocks XIX, XXIIand XXIII. The license contracts require us to conduct specifiedactivities in the respective blocks during the exploration period. If the exploration activities are successful,our total contract term can extend up to 30 years for oil exploration andproduction and up to 40 years for gas exploration and production. In the eventa Block contains both oil and gas, as is the case in our Block Z-1, the 40 yearterm applies to oil exploration and production as well.

 

Additionally, through our wholly-owned subsidiary, SMC Ecuador Inc., aDelaware corporation, and its registered branch in Ecuador, we own a 10%non-operated working interest in an oil and gas producing property, Block 2,located in the southwest region of Ecuador (the “Santa Elena Property”). Thelicense agreement covering the property extends through May 2016.

 

We are in the initial stages of developing our oil and natural gasreserves and have begun producing and selling oil from the CX-11 platform inthe Corvina field of Block Z-1 under an extended well testing program.Additionally our activities in Peru include analysis and evaluation oftechnical data on our Blocks, preparation of the development plans for the Blocks,including detailed engineering and design of the power plant and gas processingfacilities, refurbishment of and designs for platforms to perform our drillingcampaigns in the Corvina and Albacora fields in Block Z-1, procuring machineryand equipment for an extended drilling campaign, obtaining all necessaryenvironmental and operating permits, bringing additional production on-line andsecuring the required capital and financing to conduct the current plan ofoperation.

 

At December 31, 2008, we had estimated net proved oil reserves of17.2**MMBbls all ofwhich were in the Corvina field in Block Z-1 located offshore northwestPeru. Of our total proved reserves, 4.2 MMBbls (25%) are classified asproved developed producing reserves and 12.9 MMBbls (75%) are classified asproved undeveloped reserves.

 

We have determined our reporting structure providesfor only one operating segment as we only operate in Peru and have only onecustomer for our production.

 

**Our Business Plan**

 

Our business plan is to enhance shareholder value primarily throughapplication of our unique knowledge of our targeted areas in Peru andleveraging management’s relationship with the local suppliers and regulatoryauthorities to effectively and efficiently (i) develop the value of ouroil and gas holdings in Peru; (ii) increase production from our holdings;and (iii) create a revenue stream through implementation of ourgas-to-power project.

 

Our focus is to re-appraise and develop properties in northwest Peruthat have been explored by other companies and have reservoirs that appear tocontain commercially productive quantities of oil and gas, as well as otherareas that have geological formations that we believe potentially containcommercial amounts of hydrocarbons.

 

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Two of the four blocks, for which we currently have exclusive rightsand license agreements for oil and gas exploration and production, containstructures drilled by previous operators who encountered hydrocarbons. However,at the time the wells were drilled, the operators did not consider iteconomically feasible to produce those hydrocarbons.  Having found oil inour first well in the Corvina field in offshore Block Z-1 in 2007, we areprimarily focused on development of the proved oil reserves in Corvina, as wellas  re-developing the Albacora oil fieldwhich has a platform in place with three shut in oil wells drilled and producedby Belco Oil and Gas Company in the 1980’s.

 

In addition, our business plan includes a gas-to-power project, whichentails the installation of a 10-mile gas pipe from the CX-11 platform toshore, construction of gas process facilities and an approximately 135 megawatt(“MW”) simple cycle electric generating plant. The proposed power plant site islocated adjacent to an existing substation and power transmission lines which,with certain upgrades, are expected to be capable of handling up to 360 MW ofpower. See the discussion below under “Gas-to-Power Project” for additionalinformation.

 

Our management team has extensive engineering, geological, geophysical,technical and operational experience. Additionally our management team hasextensive knowledge of international oil and gas operations throughout LatinAmerica and in particular, Peru.

 

We will concentrate our efforts on areas we believe contain proven oiland gas reserves that can be economically developed and produced in commercialquantities and leverage our knowledge of oil and gas operations in the areas weoperate.  We believe this strategy will allow us to develop the oil andgas effectively and efficiently to enhance the profitability of the Company,and thus increase shareholder value.

 

**OilDevelopment**

 

***Corvina Field***

 

In November 2008, we commenced drilling on the CX11-15D well andreached total drilling depth in January 2009. However, during the testingit was confirmed that the deeper prospective sands were found lower thanexpected and were located below the estimated oil-water contact, thus testingformation water. Subsequently we commenced sidetracking the CX11-15D well,targeting a location higher in the geological formation and reached totaldrilling depth of 9,390 feet in March 2009.  The Company began testing the sands thatpreviously tested water and found them to be oil bearing. We expected to addthe CX11-15D to the wells currently under our long-term oil testing program andto complete the CX11-15D well as an oil-producing well with two productionstrings. The long production string targets the lower zones and the shortproduction string targets zones higher in the formation. The long productionstring targeting the deeper oil zones produced oil over a three-day periodbeginning April 19, 2009 and was stopped on April 21, 2009 in orderto complete and test the short production string. During the completion andtesting of the short production string, we encountered mechanical difficultiesresulting in the stopping of production of both strings until we are able toresolve the difficulties encountered in the short string. The well is currentlybeing completed and will be ready to be placed into the long-term testingprogram shortly thereafter.

 

Followingthe completion of the CX11-15D well in Corvina, we intend to work over theCX11-20XD well to maximize oil production from the oil producing zone in thereservoir. The work over should be completed in approximately one month afterthe start date.

 

***Albacora Field***

 

The Albacora Field is located in the northern part of our offshoreBlock Z-1.  It consists of approximately6,000 acres and, like the Corvina Field, Albacora is located in water depths ofless than 200 feet. Once the new drilling rig has been moved from Talara andset in place at the Albacora A-1 platform, which is currently beingrefurbished, we plan to drill the A-14XD well, a twin well to Albacora’s  8-X-2 discovery well drilled in 1972.  The first well in Albacora will qualify as anexploratory well as we plan on testing the prospective Lower Zorritos formationsands.  The 8-X-2 discovery well, drilled35 years ago, tested oil and gas in the upper Zorritos formation sands atquantities we believe to be commercially producible.  We expect to commence drilling on the A-14XD wellduring the third quarter of 2009.

 

**Reserve-Based Credit Facility**

 

InFebruary 2009, we signed a revised Mandate Letter and Facility Term Sheetwith Natixis, a major French bank, to arrange and structure, on an exclusivebasis, a $75.0 million reserve-based credit facility, excluding the $15.0million received under the $15.0 million IFC Senior Note. Once the facility isclosed, we expect the initial available borrowing capacity to be approximately$30.0 million, excluding the $15.0 million received under the $15.0 million IFCSenior Note. The existing Natixis credit committee approval remains in effectand Natixis is engaged in syndication activities. Both the Natixis and IFCfacilities would be governed by a single 

 

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CommonTerms Agreement. Terms of the reserve-based credit facility are expected to becommensurate with similar transactions in the market at the time of closing.

 

Weexpect to complete this financing towards the end of the second quarter of2009. However, the closing of the credit facility is dependent upon thesuccessful syndication of approximately 50% of the facility and successfulnegotiation of the related loan documents, and funding is predicated on thesatisfaction of certain conditions precedent as will be specified in the loandocuments.

 

**Gas-to-PowerProject**

 

The Corvina gas-to-power project entails the installation of a 10-milegas pipeline from the CX-11 platform to shore, construction of gas processingfacilities and an approximately 135 megawatt (“MW”) simple-cycle electricgenerating plant.  The proposed power plant site is located adjacent to anexisting substation and power transmission lines which, with certain upgrades,are expected to be capable of handling up to 360 MW of power.

 

OnSeptember 26, 2008, we, through our subsidiary, entered into a $51.5million contract (the “Agreement”) for the purchase of three LM6000 gas-firedturbines from GE Packaged Power, Inc. and GE International, Inc.Sucursal de Peru (collectively “GE”).  In January 2009 BPZ and GEentered into an amendment of the contract. Under the terms of the amendment,both GE and BPZ agreed to a suspension period under the Agreement from andincluding December 15, 2008 through November 15, 2009, whereby nofailure on the part of BPZ or GE to perform any obligations under the Agreementwill give rise to a breach of contract or give right to terminate the contract,provided we make a $3.4 million progress payment no later than February 25,2009 and a $3.5 million progress payment to GE no later than November 16,2009.  On February 24, 2009, we paidthe first progress payment of $3.4 million. Failure to make the second paymentin full will result in immediate termination of the Agreement with no cureperiod or time to correct the breach.

 

Oncewe determine to bring the Agreement out of the suspension period, we willprovide evidence that payment security has been established and new deliverydates, pricing and payment terms may be determined by us and GE. All previouspayments made by us on the Agreement will be applied against any such newterms.

 

Wecurrently estimate the gas-to-power project will cost approximately $150.0 million,excluding value added tax which will be recovered via early recovery programand/or future revenue billings.  Through discussions with IFC,approximately 60% of the project’s costs can be expected to be financed withtraditional project financing, given current market conditions. Accordingly, we have commenced discussions with potential joint venturepartners for the gas-to-power project in an attempt to secure additional equityfor the project.  As of March 31, 2009, we have identified several potentialjoint venture partners for the gas-to-power project and have begun theselection process for the most suitable partner for the project. Following theidentification and selection of a partner and consummation of projectcontracts, we will enter into negotiations with the IFC regarding restructuringof the gas-to-power project financing. We are expecting terms with interestrates to reflect the current market conditions at the time of closing alongwith typical covenants for this type of financing. The closing of this jointventure and related financing, which is targeted for late 2009, will be subjectto the satisfactory negotiation of joint venture and related financingdocumentation.

 

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**Resultsof Operations**

 

*ThreeMonths Ended March 31, 2009 Compared to Three Months Ended March 31,2008*

* *
| ** **                                       | ** ** | **Three Months Ended  March 31,**  | ** ** | **Increase/** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------|------------|---------------|------------|
| ** **                                       | ** ** | **2009**                                          | ** ** | **2008**      | ** ** | **(Decrease)** | ** ** |
| ** **                                       | ** ** | **(in thousands except for per Bbl information)** | ** ** | ** **    | ** ** |
| Net sales volume:                                |       |                                              |       |          |       |   |   |
| Oil and condensate (MBbls)                       |       | 331                                               |       | 56            |       | 275 |   |
| ** **                                       | ** ** | ** **                                        | ** ** | ** **    | ** ** | ** ** | ** ** |
| Net revenue:                                     |       |                                              |       |          |       |   |   |
| Oil and condensate                               |       | $                                                 | 13,225     |          | $          | 4,367 |   | $ | 8,858 |   |
| ** **                                       | ** ** | ** **                                        | ** ** | ** **    | ** ** | ** ** | ** ** |
| Average sales price (approximately):             | ** ** | ** **                                        | ** ** | ** **    | ** ** | ** ** | ** ** |
| Oil (per Bbl)                                    |       | $                                                 | 39.95      |          | $          | 77.98 |   | $ | (38.03 | ) |
| ** **                                       | ** ** | ** **                                        | ** ** | ** **    | ** ** | ** ** | ** ** |
| Operating expenses                               | ** ** | ** **                                        | ** ** | ** **    | ** ** | ** ** | ** ** |
| Lease operating expense                          |       | 3,978                                             |       | 2,219         |       | $ | 1,759 |   |
| General and administrative expense               |       | 8,483                                             |       | 8,315         |       | 168 |   |
| Geological, geophysical and engineering expense  |       | 347                                               |       | 181           |       | 166 |   |
| Depreciation, depletion and amortization expense |       | 7,878                                             |       | 1,191         |       | 6,687 |   |
| Total operating expenses                         |       | $                                                 | 20,686     |          | $          | 11,906 |   | $ | 8,780 |   |
|                                             |       |                                              |       |          |       |   |   |
| Operating loss                                   |       | $                                                 | (7,461     | )             | $          | (7,539 | ) | $ | 78 |   |

 

*NetRevenue*

 

For the three months ended March 31,2009, our net revenue increased by $8.8 million to $13.2 million from $4.4million for the same period in 2008. The increase in net revenue is primarilydue to the 275 MBbls of increased oil production from the CX-11 platformlocated in the Corvina field within Block Z-1 in northwest Peru. For the threemonths ended March 31, 2009, we had four producing wells, CX11-20XD,CX11-18XD, CX11-21XD and the CX11-14D, compared to two producing wells, theCX11-21XD and the CX11-14D, during the same period in 2008. Additionally in2008, our oil production operations were voluntarily suspended after January 30,2008 and our oil sales did not resume until June 2008, due to an incidentinvolving a small tanker leased from the Peruvian Navy. Offsetting the increasein production is an overall 49.0% decrease, quarter on quarter, in per barrelaverage sales price received. For both the three months ended March 31,2009 and 2008, all oil production in the Corvina field was produced under anextended well testing program.

 

The revenues above arereported net of royalties owed to the government of Peru. Royalties arecalculated by Perupetro as stipulated in the Block Z-1 license agreement basedon a blend of crude oil prices.  However, the royalty calculation is basedon the prior five-day average price before the crude oil delivery date, asopposed to the price we receive for oil which is based on the prior two-weekaverage price before the crude oil delivery date. For the three months ended March 31,2009 and 2008, the revenues received by us are net of royalty costs ofapproximately 6% and 5% of gross revenues or $0.8 million and $0.3 million,respectively.

 

*LeaseOperating*

 

For the three months ended March 31,2009, lease operating expenses increased by $1.8 million to $4.0 million($12.02 per Bbl) from $2.2 million ($39.63 per Bbl) for the same period in2008. The increase was primarily attributable to the production increases notedabove. The primary reason for the decrease in the per Bbl amounts is due to oursuspended oil production and sales in the first quarter of 2008 as a result ofthe incident involving a small tanker leased from the Peruvian Navy.

 

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*General andAdministrative*

 

For the three months ended March 31,2009, general and administrative expenses increased $0.2 million to $8.5million from $8.3 million for the same period in 2008. A subset of compensationexpense, stock-based compensation expense decreased by ($1.2) million to $3.3million for the three months ended March 31, 2009 from $4.6 million forthe same period in 2008. The decrease in stock-based compensation expense isprimarily due to not granting equity awards to either employees or non-employeedirectors in 2009 and the vesting, for expense purposes, of previously issuedawards compared to the same period in 2008. Offsetting the decrease in stock-compensation expense is an increase inother general and administrative expenses of $1.4 million related to salarycompensation, legal, rent and tax fees. The $0.6 million increase in salary compensation is primarily due toprofit sharing expense incurred for the three months ended March 31, 2009compared to no profit sharing expense for the same period in 2008.Additionally, salary compensation increased due to the higher number ofemployees employed by the Company for the three months ended March 31,2009 compared to the same period in 2008. The $0.6 million increase in legaland tax expense is primarily due to fees incurred for reorganizationactivities, negotiation and settlement of claims and expenses related tofinding and evaluating a potential joint venture partner for our gas—to—powerproject. Additionally we incurred increased rent expense of approximately $0.2million for additional office space for our corporate headquartersoffice located in Houston, Texasand our administrative offices in Peru.

 

*Geological,Geophysical and Engineering*

 

For the three months ended March 31,2009, geological, geophysical and engineering expenses increased $0.1 millionto $0.3 million compared to $0.2 million for the same period in 2008, due toincreased activities in our properties.

 

*Depreciation,Depletion and Amortization*

 

For the three months ended March 31,2009, depreciation, depletion and amortization expense increased $6.7 millionto $7.9 million from $1.2 million for the same period in 2008. The increase wasdue primarily to increased production discussed above.

 

*OtherIncome/(Expense)*

 

For the three months ended March 31,2009, income from our investment in Ecuador property, net of investmentamortization, decreased by $0.4 million to an expense of $0.1 million fromincome of $0.3 million in 2008. The decrease is primarily due to not receivingpayments from our investment in the Santa Elena Property during the firstquarter of 2009 while we received $0.3 million during the same period in 2008.Income/(expense) from our investment in Ecuador is net of investmentamortization expense.  For both the threemonths ended March 31, 2009 and 2008, investment income / (expense)includes amortization expense of approximately $47,000.

 

For the three months ended March 31,2009 and 2008, we capitalized interest expense of $0.9 million for bothperiods, respectively, and capitalized depreciation expense of $0.3 million and$0.1 million, respectively.

 

For the three months ended March 31,2009 and 2008, we received interest income of approximately $25,000 and$49,000, respectively. The decrease in interest income is primarily due to thedecreased cash balances in 2009 compared to the cash balances during the sameperiod in 2008.

 

Other expense increased by$0.7 million to $0.8 million for the three months ended March 31, 2009from $0.1 million in 2008. The primary reason for the increase in expense isdue to the settlement of a disputed contractual obligation with a formerconsultant of ours related to services provided to both BPZ and its predecessorat the time BPZ became publicly traded. We were notified of this allegeddispute towards the end of the first quarter of 2009. As a result of thesettlement, we recorded $0.8 million of expense during the first quarter of2009. The settlement was paid in April 2009.

 

Forthe three months ended March 31, 2009, we recognized an income tax benefitof approximately $1.2 million on a net loss before income tax of approximately$8.3 million resulting in an effective tax rate of 15%.  We recognized an income tax provision ofapproximately $0.1 million on pre-tax loss of approximately $7.3 million forthe same period in 2008.  The differencebetween the effective tax rate recognized and the 22% statutory rate providedfor under the Block Z-1 License Contract is largely due to:

 

·                  Wehave a 100% allowance on our net operating losses generated in the UnitedStates - We have a valuation allowance for the full amount of the domesticdeferred tax asset resulting from the income tax benefit generated from netlosses in the U.S., as we believe, based on the weight of available evidence,that it is more likely than not that the deferred tax asset will not berealized prior to the expiration of net operating loss carryforwards in variousamounts through 2027.

 

·                  CertainU.S. expenses are not deductible in Peru - The tax benefit is based on ataxable Peruvian loss that excludes certain U.S. expenses that are notdeductible at the Peruvian level.

 

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Estimatedinterest and penalties related to potential underpayment on unrecognized taxbenefits, if any, are classified as a component of tax expense in theConsolidated Statement of Operations. For both the three months ended March 31,2009 and 2008, we did not have any accrued interest or penalties associatedwith any unrecognized tax benefits, nor was any interest expense recognizedduring those periods.

 

Forthe three months ended March 31, 2009, our net loss decreased ($0.4)million to ($7.0) million or ($0.8) per basic and diluted share from ($7.4)million or ($0.10) per basic and diluted share for the same period in 2008.

 

**Liquidity,Capital Resources and Capital Expenditures**

 

AtMarch 31, 2009, we had cash and cash equivalents of $28.5 million andcurrent accounts receivable related to our March oil sales of $3.8million. We also had $16.3 million in Value Added Tax receivable which we willcollect over time as we invoice our oil sales. At December 31, 2008, wehad cash and cash equivalents of $5.3 million, current accounts receivable  of $5.3 million and a Value Added Taxreceivable of $12.1 million.

 

At March 31, 2009 and December 31,2008, we had a working capital deficit balance of ($0.6) million and ($45.0)million, respectively.

 

At March 31, 2009 and December 31,2008, our outstanding long-term debt consisted of a $15.0 million Reserve-BasedLending Facility bearing interest at LIBOR plus 2.75% due December 31,2012. Additionally our capital lease obligations, primarily related to thebarges used in our marine operations, was $6.0 million and $7.8 million,respectively, most of which matures by end of 2009.

 
| ** **                  | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|-----------------------------|------------|------------------------------------------------|------------|
| **Cash Flows**              | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
| ** **                  | ** ** | **(in thousands)**                             | ** ** |
| Cash provided by (used in): |       |                                           |       |   |   |
| Operating activities        |       | $                                              | 1,439      |   | $ | 3,681 |   |
| Investing activities        |       | (16,930                                        | )          | (15,239 | ) |
| Financing activities        |       | 38,656                                         |       | 40,885 |   |
|                             |            |                                                |            |  |  |  |  |

 

*Operating Activities*

 

Cash provided by operatingactivities decreased by ($2.3) million to $1.4 million for the three monthsended March 31, 2009 from $3.7 million for the same period in 2008. Cashflow before changes in operating assets and liabilities increased by$3.2 million reflecting the increase in production activity and changes inoperating assets and liabilities provided a use of cash of ($5.5) millionprimarily due to the increase in current assets and decreases in currentliabilities.

 

*Investing Activities*

 

Netcash used in investing activities increased by $1.7 million to ($16.9)million for the three months ended March 31, 2009 from ($15.2) million forthe same period in 2008 and is primarily due to increased capital expenditurespartially offset by the change in restricted cash proceeds.

 

*2009Equipment Activity*

 

During the threemonths ended March 31, 2009, we incurred costs of approximately $18.2million associated with our development initiatives for the exploration andproduction of oil and natural gas reserves in Peru.

 

Of the incurred costs mentioned above, we incurred capital expendituresrelated to the completion of the CX11-20XD well and the drilling and testing ofthe CX11-15D well of approximately $0.8 million and $13.0 million, respectively.In preparation for our future drilling campaigns, we incurred costs of $1.3million and $0.6 million for the refurbishment of the Albacora and PiedraRedonda 

 

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platforms,respectively.   For the three monthsended March 31, 2009, we incurred capital costs of $0.5 million related toinitial drilling activity in the Albacora field and $0.3 million related to theCaleta La Cruz dock refurbishment.

 

Forthe three months ended March 31, 2009, in accordance with “successfulefforts” method of accounting, we capitalized approximately $0.3 million ofdepreciation expense, mainly related to the tender assist barges serving assupport equipment to our drilling activities, and $0.9 million of interestexpense to construction in progress. For the same period in 2008, wecapitalized approximately $0.1 million of depreciation expense and $0.9 millionof interest expense to construction in progress.

 

Forthe three months ended March 31, 2009 and 2008, we recognized $7.9 millionand $1.2 million of depreciation, depletion and amortization expense,respectively.

 

*Financing Activities*

 

Cash provided by financingactivities decreased by ($2.2) million to $38.7 million for the threemonths ended March 31, 2009 from $40.9 million for the same period in2008. The decrease in cash provided by financing activities reflects increasedcash used on principal payments for capital lease and debt obligations combinedwith less cash received from borrowings which more than offset the increase incash received from equity issuances.

 

*Long-Term Debt and Capital Lease Obligations*

 

***At March 31, 2009 and December 31, 2008 long-termdebt and capital lease obligations consist of the following (in thousands):***

*** ***
| ** **                                               | ** ** | **March 31,   2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|----------------------------|------------|
| ** **                                               | ** ** | ** **                | ** ** | ** **                 | ** ** |
| $15 million IFC Senior Note, Libor plus  2.75%, due 2012 |       | $                         | 15,000     |                       | $          | 15,000 |   |
| Capital Lease Obligations                                |       | 5,996                     |       | 7,838                      |       |
|                                                     |       | 20,996                    |       | 22,838                     |       |
| Less: Current Portion of Long-Term Debt                  |       | 5,984                     |       | 7,820                      |       |
|                                                     |       | $                         | 15,012     |                       | $          | 15,018 |   |

*** ***

*$15.0 Million IFC Reserve-Based Credit Facility*

 

Wehave a $15.0 million reserve-based lending facility (“$15.0 million Senior Note”)agreement (the “Loan Agreement”) with International Finance Corporation****(“IFC”)through our subsidiaries BPZ Exploración & Producción S.R.L and BPZMarine Peru S.R.L as borrowers. The reserve-based lending facility maturesin December 2012 and bears interest at an approximate rate of LIBOR plus2.75%, currently equivalent to 4.56% based on the six month LIBOR rate of 1.81%at December 31, 2008.  The maximum amount available under thisfacility begins at $15.0 million and will be reduced by $2.5 million beginningon December 16, 2010 and every six months thereafter during the term ofthe Loan Agreement.  The amount available under the Loan Agreement issubject to a semi-annual borrowing base determination based on the value of oilreserves.  In addition, we are subject to various financial covenantscalculated as of the last day of each quarter, including a life of fieldcoverage ratio, life of loan coverage ratio, debt to equity ratio and interestcoverage ratio. We were in compliance with all applicable covenants of the LoanAgreement as of March 31, 2009.

 

*Note Payable*

 

InJanuary 2009, in exchange for receipt of $1.0 million from an individual (“NoteHolder”), we signed a promissory note (the “Note”). The Note originallyprovided for maturity in July 2009 and bore an annual interest rate of12.0%. However, in March 2009 we repaid the principal amount and accruedinterest to the Note Holder.

 

*Capital Leases*

 

In February 2009, wemade the final lease payment on the BPZ-02 deck barge at which point title tothe barge was transferred to us.

 

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*PerformanceBonds*

 

Asof March 31, 2009, we have restricted cash deposits of $4.3 million, whichpartially collateralizes insurance and performance bonds. In connection withour properties in Peru, we have obtained four performance bonds totaling $5.3million that are partially collateralized by restricted cash deposits of $2.9million to insure certain performance obligations and commitments under thelicense contracts for Blocks Z-1, XIX, XXII and XXIII. Additionally we have$1.4 million of restricted cash to collateralize insurance bonds for importduties related to the FPSO and transport tanker.

 

Allof the performance and insurance bonds are issued by Peruvian banks and theirterms are governed by the corresponding license contracts or customs laws.

 

*LiquidityOutlook*

 

Weestimate for 2009 our required principal and interest payments for ouroutstanding debt to be approximately $0.7 million, our required principaland interest payments for our capital lease obligations to be approximately$11 million and capital expenditures to be approximately $86 million;which includes $66 million for the drilling, development and production in theCorvina field and Albacora field, both fields are located in Block Z-1 innorthwest Peru, and  approximately $20 million of capital expenditures forother facilities and activities within Block Z-1.

 

Ourmajor sources of funding to date have been through oil sales, equity financingand, to a lesser extent, debt financing activities. With our current cashbalance, proceeds from the expected IFC and Natixis debt facilities, as discussedabove, current and prospective Corvina and Albacora oil development cash flow,other potential third-party financing and potential financing from future salesof equity, we believe we will have sufficient capital resources to execute ourcurrent Corvina and Albacora oil development projects, service our current debtobligations, and execute our gas-to-power project once a suitable joint venturepartner is selected and project funding becomes available. However, the timingand execution of our projects are dependent on a variety of factors, includingthe technical design of facilities, permitting approval, availability ofequipment, time and costs required for delivery of materials and constructionoperations, performance by contractors and the success of finding a suitablejoint venture partner and planned financing, many of which factors are outsideour control and the success of which cannot be assured.

 

**Off-BalanceSheet Arrangements**

 

As of March 31, 2009, we had no transactions, agreements or othercontractual arrangements with unconsolidated entities or financialpartnerships, often referred to as special purpose entities, which generallyare established for the purpose of facilitating off-balance sheet arrangements.

 

**Critical Accounting Estimates**

 

In our annual report on Form 10-K for the year ended December 31,2008, we identified our most critical accounting policies. In preparing thefinancial statements, we make assumptions, estimates and judgments that affectthe amounts reported. We periodically evaluate our estimates and judgments thatare most critical in nature which are related to oil reserves, successfulefforts method of accounting, revenue recognition, impairment of long-livedassets, future dismantlement, restoration, and abandonment costs, as well asstock-based compensation. Our estimates are based on historical experience andon our future expectations that we believe are reasonable. Those estimates andassumptions affect the reported amounts of assets, liabilities, revenues andexpenses in the consolidated financial statements, and the disclosure ofcontingent assets and liabilities. Actual results are likely to differfrom our current estimates and those differences may be material.

 

In addition,******on December 31, 2008the SEC adopted the final rules regarding amendments to current Oil andGas reporting requirements. The amendments are designed to modernize and updatethe oil and gas disclosure requirements to align them with current practicesand changes in technology and include the following:

 

·                  Requiring companies to report oiland gas reserves using an average price based upon the prior 12-month periodrather than year-end prices.

·                  Enabling companies to additionallydisclose their probable and possible reserves.

·                  Requiring previously nontraditionalresources, such as oil shales, to be classified as oil and gas reserves if thenontraditional resources are intended to be upgraded to synthetic oil and gas.

 

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·                  Requiring companies to report theindependence and qualifications of a preparer or auditor, based on currentSociety of Petroleum Engineers criteria.

·                  Requiring the filing of reports forcompanies that rely on a third party to prepare reserves estimates or conduct areserves audit.

·                  Permitting the use of newtechnologies to determine proved reserves if those technologies have beendemonstrated empirically to lead to reliable conclusions about reservesvolumes.

 

The amendments are effectivefor registration statements filed on or after January 1, 2010, and forannual reports on Form 10-K and for fiscal years ending on or after December 31,2009. Early adoption is not permitted in either annual or quarterly reportsbefore the first annual report in which the revised disclosures are required.We are currently evaluating the impact of the amendments on our consolidatedfinancial position, results of operations and cash flows.

 

**DisclosureRegarding Forward-Looking Statements**

 

We cautionthat this document contains forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995, Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  All statements, other thanstatements of historical facts, included in or incorporated by reference intothis Form 10-Q which address activities, events or developments which weexpect, believe or anticipate will or may occur in the future areforward-looking statements.  The words “believes,”“intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts,” “plans”and similar expressions, or the negative thereof, are also intended to identifyforward-looking statements.  Inparticular, statements, expressed or implied, concerning future operatingresults, the ability to replace or increase reserves, or to increaseproduction, or the ability to generate income or cash flows are by nature,forward-looking statements.  Thesestatements are based on certain assumptions and analyses made by the managementof BPZ in light of its experience and its perception of historical trends,current conditions and expected future developments as well as other factors itbelieves are appropriate in the circumstances. However, forward-looking statements are not guarantees of performanceand no assurance can be given that these expectations will be achieved.

 

Importantfactors that could cause actual results to differ materially from theexpectations reflected in the forward-looking statements include, but are notlimited to any of the following in the jurisdictions in which BPZ or itssubsidiaries are doing business:  Marketconditions, uncertainties inherent in oil and gas production operations andestimating reserves, unexpected future capital expenditures, the timing andextent of changes in commodity prices for crude oil, natural gas and relatedproducts, currency exchange rates, interest rates, inflation, the availabilityof goods and services, drilling and other operational risks, successfulinstallation and operation of the new turbines, availability of capitalresources, timing of syndication of and disbursements under the anticipateddebt financing with IFC and Natixis, legislative or regulatory changes,political developments, acts of war and terrorism.  A more detailed discussion on risks relatingto the oil and natural gas industry and to us is included in our Annual Reporton Form 10-K for the year ended December 31, 2008.

 

In light ofthese risks, uncertainties and assumptions, we caution the reader that theseforward-looking statements are subject to risks and uncertainties, many ofwhich are beyond our control, which could cause actual events or results todiffer materially from those expressed or implied by the statements.  All subsequent written and oralforward-looking statements attributable to us or persons acting on our behalfare expressly qualified in their entirety by the cautionary statements.  We undertake no obligations to update orrevise our forward-looking statements, whether as a result of new information,future events or otherwise.

 

**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

 

The primary objective of the following information is to provideforward-looking quantitative and qualitative information about our potential exposureto market risks.  The term “market risk”refers to the risk of loss arising from adverse changes in interest rates, oiland natural gas prices and foreign currency exchange rates.  The disclosures are not meant to be preciseindicators of expected future losses, but rather indicators of reasonablepossible losses.  This forward-lookinginformation provides indicators of how we view and manage our ongoing marketrisk exposures.  All of our market risksensitive instruments were entered into for purposes other than speculativetrading.

 

*InterestRate Risk.*

 

As of March 31, 2009,we had long-term debt and capital lease obligations of approximately $15.0million and current maturities of long-term debt and capital lease obligationsof approximately $6.0 million, consisting of capital lease obligations for theFPSO, barges and production equipment and two loans for office furniture.

 

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The $15.0 millionreserve-based lending facility is variable rate debt and bears interest at anapproximate rate of LIBOR plus 2.75%. The variable rate debt exposes us to therisk of increased interest expense in the event of increases in short-terminterest rates. If the variable interest rate were to increase by 1% from December 2008levels, interest expense would increase by approximately $0.2 millionannually. The carrying value of the variable interest rate debt approximatesfair value as it bears interest at current market rates.

 

The capital lease obligationfor the FPSO and transportation barges began in August 2007 and is set toexpire in November 2009. Lease payments are variable based on the workingstatus of the barges, with a purchase option of $5.0 million after the firstyear of the lease and $4.0 million after the maturity date of the lease. The capital lease obligation for the production equipment on board the FPSObarge, the Namoku, contains a purchase option at the end of twelve months andstipulates an interest rate of 18.0%.  We have two additional loans foroffice equipment containing a term of 60 months and bearing fixed interestrates of 5.94% and 9.44%, respectively, with principal and interest paymentsdue on a monthly basis.

 

We do not expect asignificant change in the market interest rate to impact the interest on ourterm debt.  However, significant changes in market interest rates maysignificantly affect the level of financing that the IFC and Natixis will structurewith respect to our project in Peru.

 

*CommodityPrice Risk.*

 

With respect to our oil andgas business, any revenues, cash flow, profitability and future rate of growthwe achieve will be greatly dependent upon prevailing prices for oil andgas.  Our ability to maintain or increase our borrowing capacity and toobtain additional capital on attractive terms is also expected to be dependenton oil and gas prices.  Historically, oil and gas prices and markets havebeen volatile and are likely to continue to be volatile in the future. Prices for oil and gas are subject to potentially wide fluctuations in responseto relatively minor changes in supply of and demand for oil and gas, marketuncertainty, and a variety of additional factors that are beyond our control.

 

Lower oil and natural gasprices may not only decrease our revenues on a per unit basis, but may alsoreduce the amount of oil and natural gas we can produce economically, ifany.  A substantial or extended decline in oil and natural gas prices maymaterially affect our future business, financial condition, results ofoperations, liquidity and borrowing capacity, and we may require a reduction inthe carrying value of our oil and gas properties.  While our revenues mayincrease if prevailing oil and gas prices increase significantly, explorationand production costs and acquisition costs for additional properties andreserves may also increase.

 

With respect to our plannedelectricity generation business, the price we can obtain for the sale of powermay not rise at the same rate, or may not rise at all, to match a rise in theCompany’s cost to produce and transport gas reserves to our initial 135MW powerplant in Caleta Cruz.  Prices for both electricity and natural gas havebeen very volatile in the past year and have increased significantly over thepast two years.  The profitability of this business depends in large parton the difference between the price of power and the price of fuel used togenerate power, or “spark spread.”

 

*ForeignCurrency Exchange Rate Risk.*

 

The U.S. Dollar is thefunctional currency for our oprations in both Peru and Ecuador.  Ecuadorhas adopted the U.S. Dollar as its official currency.  Peru, however, usesits local currency, Nuevo Sol, in addition to the U.S. Dollar, and therefore,our financial results are subject to favorable or unfavorable fluctuations inthe exchange rate and inflation in that country.  Transaction differenceshave been nominal to-date but are expected to increase as our activities in Perucontinue to escalate.  For the three months ended March 31, 2009 and2008, we recognized exchange rate losses of approximately $0.1 million for bothperiods, respectively.

 

**Item 4. Controls and Procedures**

 

**(a) Evaluation of Disclosure Controls and Procedures**

 

As of the end of the period covered by this report, we carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) ofthe Exchange Act.  Based upon thatevaluation our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures as defined in Rule 13a-15(e) ofthe Exchange Act were effective as of the end of the period covered by thisreport to ensure that information required to be disclosed by the Company inthe reports that the Company files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.  Our disclosure controls and proceduresinclude controls and procedures designed to ensure that information required tobe disclosed in reports filed or submitted under the Exchange Act is 

 

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accumulatedand communicated to our management, including our principal executive officerand principal financial officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

**(b) Changes in Internal Control over Financial Reporting**

 

During the quarter ended March 31, 2009,there was no change in internal control over financial reporting that materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II**

 

**Item 1. Legal Proceedings**

 

See Note 15, “Legal Proceedings”,of the Notes to Unaudited ConsolidatedFinancial Statements included in this Form 10-Qand Item 3 of Part I of our 2008 Annual Report for additionaldiscussion of legal proceedings which are incorporated into Part II, Item1. “Legal Proceedings” by reference.

 

**Item 1A.Risk Factors**

 

Item 1A, “Risk Factors” of our Annual Reporton Form 10-K for the year ended December 31, 2008, includes adetailed discussion of our risk factors. For the three months ended March 31, 2009 there are no materialchanges in our risk factors as previously described in our Annual Report on Form 10-K.

 

**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds**

 

OnFebruary 23, 2009, the Company closed a private placement ofapproximately14.3 million shares of common stock, no par value, toinstitutional and accredited investors pursuant to a Stock Purchase Agreementdated February 19, 2009. Additionally, in March 2009, the IFCexercised its pre-emptive right to elect to participate in the privateplacement offering resulting in an additional 1.4 million shares of commonstock which brought the total to approximately 15.7 million shares of commonstock sold in the private placement offering. The common stock was priced at$3.05 per share resulting in net proceeds to the Company, after placement agentand financial advisory fees, of approximately $45.2 million. No warrants ordilutive securities were issued in connection with the private placement. Afinancial advisory fee of $0.7 million was paid to Morgan Keegan and Company, Inc.for investment services and consulting related to the offering.  Additionally a private placement fee of $2.2million was paid to Pritchard Capital Partners, LLC for placement servicesrelated to the offering. The Company plans on using the proceeds of thisoffering to develop its properties under its existing license contracts. On April 2,2009, the Company received $4.4 million for the stock subscription receivablefrom the IFC for their participation in the 2009 private placement of CommonStock.

 

In connection with the offerand sale of the common stock in the private placement, the Company relied on anexemption from registration under Section 4(2) of the Securities Actof 1933, as amended, and Regulation D, Rule 506 promulgated thereunder.The sale of common stock was made to accredited investors as defined inRegulation D, Rule 501(a), each of whom had adequate access to informationpertaining to the Company. Furthermore, no advertisements or generalsolicitation activities were made or undertaken by the Company and thesecurities issued in the private placement are restricted as defined in Rule 144of the Securities Act of 1933.

 

Underthe Stock Purchase Agreement, the Company committed to file a registrationstatement with the SEC and obtain the registration statement’s effectivenesswithin the time-frames outlined in the Stock Purchase Agreement. On April 27,2009, the Company obtained effectiveness of the registration statement relatedto the Stock Purchase Agreement in compliance with such time-frames.

 

**Item 6.Exhibits**

 
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of  2002. (Filed herewith)                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                             |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of  2002. (Filed herewith)                                                    |
|   |   |                                                                                                                                                                             |
| 32.1   |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant  to Section 906 of the Sarbanes - Oxley Act of 2002. (Filed herewith) |
|   |   |                                                                                                                                                                             |
| 32.2   |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant  to Section 906 of the Sarbanes - Oxley Act of 2002. (Filed herewith) |

 

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**SIGNATURES**

 

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

 
|                    | BPZ  RESOURCES, INC.                                        |
|-------------------------|-------------------------------------------------------------|
|                    |                                                        |
|                    |                                                        |
| Date: May 11, 2009 | /s/  MANUEL  PABLO ZÚÑIGA-PFLÜCKER |
|                    | Manuel  Pablo Zúñiga-Pflücker                |
| * *                | *President, Chief Executive Officer and Director*           |

 

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