**Table of Contents**

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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

** **

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended: September 30, 2009**

** **

**or**

** **

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition periodfrom         to         **

 

**Commission File Number: 001-12697**

 

**BPZRESOURCES, INC.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o No o

 

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

 

| 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). Yes o No x

 

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

 

Asof November 6, 2009, there were 115,079,760 shares of common stock, no parvalue, outstanding.

 

 

 

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Table ofContents

 

**TABLEOF 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                             | 19         |
|       |                                                                                                                    |       |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                                             | 32         |
|       |                                                                                                                    |       |
| Item 4.    | Controls and  Procedures                                                                                                | 33         |
|       |                                                                                                                    |       |
| ** ** | **PART II**                                                                                                        | ** ** |
|       |                                                                                                                    |       |
| Item 1.    | Legal Proceedings                                                                                                       | 34         |
|       |                                                                                                                    |       |
| Item 1A.   | Risk Factors                                                                                                            | 34         |
|       |                                                                                                                    |       |
| Item 2.    | Unregistered  Sale of Equity Securities and Use of Proceeds                                                             | 34         |
|       |                                                                                                                    |       |
| Item 4.    | Submission  of Matters to a Vote of Security Holders                                                                    | 34         |
|       |                                                                                                                    |       |
| Item 5.    | Market for  Registrant’s Common Equity, and Related Stockholder Matters and Issuer  Purchases of Equity Securities | 35         |
|       |                                                                                                                    |       |
| Item 6.    | Exhibits                                                                                                                | 35         |
|       |                                                                                                                    |       |
| ** ** | **SIGNATURES**                                                                                                          | 36         |

 

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Table ofContents

 

**PART I**

 

# **Item 1. Financial Statements**

#  

**BPZ Resources, Inc. and Subsidiaries**

**Consolidated BalanceSheets**

**(In thousands, exceptshare data)**

** **
| ** **                                                                                                                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                         | ** ** | **(Unaudited)**        | ** ** | **(Audited)**         | ** ** |
| **ASSETS**                                                                                                                                                                         |       |                   |       |                  |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| Current assets:                                                                                                                                                                    |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                          |       | $                      | 66,651     |                  | $          | 5,317 |   |
| Accounts receivable                                                                                                                                                                |       | —                 |       | 5,276                 |       |
| Value added tax receivable                                                                                                                                                         |       | 21,254                 |       | 12,110                |       |
| Inventory                                                                                                                                                                          |       | 14,972                 |       | 4,054                 |       |
| Prepaid and other current assets                                                                                                                                                   |       | 2,290                  |       | 3,268                 |       |
| Total current assets                                                                                                                                                               |       | 105,167                |       | 30,025                |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| Property, equipment and construction in progress,  net                                                                                                                             |       | 223,028                |       | 193,934               |       |
| Restricted cash                                                                                                                                                                    |       | 4,812                  |       | 5,153                 |       |
| Other non-current assets                                                                                                                                                           |       | 1,545                  |       | —                |       |
| Investment in Ecuador property, net                                                                                                                                                |       | 1,242                  |       | 1,382                 |       |
| Deferred tax asset                                                                                                                                                                 |       | 13,316                 |       | 4,871                 |       |
| Total assets                                                                                                                                                                       |       | $                      | 349,110    |                  | $          | 235,365 |   |
|                                                                                                                                                                               |       |                   |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                     |       |                   |       |                  |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                                               |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                   |       | $                      | 35,722     |                  | $          | 35,286 |   |
| Accrued liabilities                                                                                                                                                                |       | 8,014                  |       | 9,920                 |       |
| Other liabilities                                                                                                                                                                  |       | 1,099                  |       | 720                   |       |
| Current income taxes payable                                                                                                                                                       |       | —                 |       | 6,841                 |       |
| Accrued interest payable                                                                                                                                                           |       | 164                    |       | —                |       |
| Current maturity of long-term debt and capital  lease obligations                                                                                                                  |       | 5,386                  |       | 7,820                 |       |
| Total current liabilities                                                                                                                                                          |       | 50,385                 |       | 60,587                |       |
| Asset retirement obligation                                                                                                                                                        |       | 777                    |       | 580                   |       |
| Long-term debt and capital lease obligations                                                                                                                                       |       | 19,106                 |       | 15,018                |       |
| Total long-term liabilities                                                                                                                                                        |       | 19,883                 |       | 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;  115,079,760 and 78,748,390 shares issued and outstanding at  September 30, 2009 and December 31, 2008, respectively |       | 372,622                |       | 227,136               |       |
| Accumulated deficit                                                                                                                                                                |       | (93,780                | )          | (67,956               | )          |
| Total stockholders’ equity                                                                                                                                                    |       | 278,842                |       | 159,180               |       |
| Total liabilities and stockholders’ equity                                                                                                                                    |       | $                      | 349,110    |                  | $          | 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 September 30,** | ** ** | **Nine Months   Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                    | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Revenue                                                                    |       | $                                           | 13,088     |                                       | $          | 33,440 |   | $ | 37,362 |   | $ | 44,843 |   |
|                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Operating and administrative expenses:                                     |       |                                        |       |                                       |       |   |   |   |   |
| Lease operating expense                                                    |       | 9,591                                       |       | 3,582                                      |       | 21,445 |   | 6,942 |   |
| General and administrative expense                                         |       | 8,474                                       |       | 10,407                                     |       | 24,956 |   | 28,644 |   |
| Geological, geophysical and engineering expense                            |       | 297                                         |       | 211                                        |       | 1,195 |   | 507 |   |
| Depreciation, depletion and amortization expense                           |       | 5,881                                       |       | 5,673                                      |       | 19,267 |   | 7,947 |   |
|                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Total operating expenses                                                   |       | 24,243                                      |       | 19,873                                     |       | 66,863 |   | 44,040 |   |
|                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Operating income (loss)                                                    |       | (11,155                                     | )          | 13,567                                     |       | (29,501 | ) | 803 |   |
|                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Other income (expense):                                                    |       |                                        |       |                                       |       |   |   |   |   |
| Income (expense) from investment in Ecuador  property, net of amortization |       | 172                                         |       | 153                                        |       | 79 |   | 659 |   |
| Interest income                                                            |       | 159                                         |       | 10                                         |       | 187 |   | 206 |   |
| Other income (expense)                                                     |       | 70                                          |       | (68                                        | )          | (1,243 | ) | 157 |   |
|                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Total other income (expense)                                               |       | 401                                         |       | 95                                         |       | (977 | ) | 1,022 |   |
|                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Income (loss) before income taxes                                          |       | (10,754                                     | )          | 13,662                                     |       | (30,478 | ) | 1,825 |   |
|                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Income tax expense (benefit)                                               |       | (1,792                                      | )          | 5,051                                      |       | (4,654 | ) | 5,292 |   |
|                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Net income (loss)                                                          |       | $                                           | (8,962     | )                                          | $          | 8,611 |   | $ | (25,824 | ) | $ | (3,467 | ) |
|                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Basic net income (loss) per share                                          |       | $                                           | (0.08      | )                                          | $          | 0.11 |   | $ | (0.26 | ) | $ | (0.05 | ) |
| Basic weighted average common shares outstanding                           |       | 113,929                                     |       | 78,585                                     |       | 99,391 |   | 76,933 |   |
|                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Diluted net income (loss) per share                                        |       | $                                           | (0.08      | )                                          | $          | 0.11 |   | $ | (0.26 | ) | $ | (0.05 | ) |
| Diluted weighted average common shares outstanding                         |       | 113,929                                     |       | 80,323                                     |       | 99,391 |   | 76,933 |   |

 

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 Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                 | ** ** | **September 30,**        | ** ** |
| ** **                                                                                 | ** ** | **2009**                      | ** ** | **2008** | ** ** |
|                                                                                       |       |                          |       |   |   |
| Cash flows from operating activities:                                                      |       |                          |       |   |   |
| Net loss                                                                                   |       | $                             | (25,824    | ) | $ | (3,467 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                          |       |   |   |
| Stock-based compensation                                                                   |       | 10,342                        |       | 13,419 |   |
| Depreciation, depletion and amortization                                                   |       | 19,267                        |       | 7,947 |   |
| Amortization of investment in Ecuador property                                             |       | 140                           |       | 141 |   |
| Deferred income taxes                                                                      |       | (8,445                        | )          | (1,910 | ) |
| Changes in operating assets and liabilities:                                               |       |                          |       |   |   |
| Decrease (increase) in accounts receivable                                                 |       | 5,276                         |       | (438 | ) |
| Increase in value added tax receivable                                                     |       | (9,144                        | )          | (2,632 | ) |
| Increase in inventory                                                                      |       | (9,874                        | )          | (1,927 | ) |
| Decrease in other assets                                                                   |       | 824                           |       | 174 |   |
| Increase in accounts payable                                                               |       | 436                           |       | 12,025 |   |
| (Decrease) increase in accrued liabilities                                                 |       | (1,744                        | )          | 1,496 |   |
| (Decrease) increase in income taxes payable                                                |       | (6,841                        | )          | 6,425 |   |
| Increase in other liabilities                                                              |       | 379                           |       | 1,158 |   |
| Net cash provided by (used in) operating activities                                        |       | (25,208                       | )          | 32,411 |   |
|                                                                                       |       |                          |       |   |   |
| Cash flows from investing activities:                                                      |       |                          |       |   |   |
| Property and equipment additions                                                           |       | (50,597                       | )          | (67,196 | ) |
| Decrease (increase) in restricted cash                                                     |       | 341                           |       | (3,068 | ) |
| Net cash used in investing activities                                                      |       | (50,256                       | )          | (70,264 | ) |
|                                                                                       |       |                          |       |   |   |
| Cash flows from financing activities:                                                      |       |                          |       |   |   |
| Borrowings                                                                                 |       | 6,533                         |       | 2,819 |   |
| Repayments of borrowings                                                                   |       | (4,879                        | )          | (8,087 | ) |
| Proceeds from exercise of warrants, net                                                    |       | —                        |       | 750 |   |
| Proceeds from exercise of stock options, net                                               |       | 113                           |       | 2,458 |   |
| Proceeds from sale of common stock, net                                                    |       | 135,031                       |       | 40,925 |   |
| Net cash provided by financing activities                                                  |       | 136,798                       |       | 38,865 |   |
|                                                                                       |       |                          |       |   |   |
| Net increase in cash and cash equivalents                                                  |       | 61,334                        |       | 1,012 |   |
| Cash and cash equivalents at beginning of period                                           |       | 5,317                         |       | 7,514 |   |
| Cash and cash equivalents at end of period                                                 |       | $                             | 66,651     |   | $ | 8,526 |   |
|                                                                                       |       |                          |       |   |   |
|                                                                                       |       |                          |       |   |   |
| Supplemental cash flow information:                                                        |       |                          |       |   |   |
| **Cash paid for:**                                                                         |       |                          |       |   |   |
| Interest                                                                                   |       | $                             | 3,137      |   | $ | 2,902 |   |
| Income tax                                                                                 |       | 12,441                        |       | 777 |   |
| **Non — cash items:**                                                                 |       |                          |       |   |   |
| Purchase and additions to equipment with the  issuance of a capital lease obligation       |       | $                             | —     |   | $ | 9,243 |   |
| Conversion of long-term debt to common stock                                               |       | —                        |       | 15,500 |   |
| Accrued interest capitalized to construction in  progress                                  |       | 41                            |       | 230 |   |
| Depletion allocated to production inventory                                                |       | 1,045                         |       | 260 |   |
| Depreciation on support equipment capitalized to  construction in progress                 |       | 1,098                         |       | 658 |   |
| Asset retirement obligation capitalized to property  and equipment                         |       | 144                           |       | 134 |   |
| Property and equipment transferred to other  non-current assets                            |       | (1,428                        | )          | — |   |

 

The accompanying notes arean integral part of 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**

** **

BPZ Resources, Inc., (together with itssubsidiaries, collectively referred to as the “Company” or “BPZ” unless thecontext requires otherwise) a Texas corporation, is based in Houston, Texaswith offices in Lima, Peru and Quito, Ecuador. The Company is focused on theexploration, development and production of oil and natural gas in Peru andEcuador. The Company also intends to utilize part of its planned future naturalgas production as a supply source for the complementary development of a gas-firedpower generation facility which is expected to be partially owned by theCompany.

 

The Company maintains a subsidiary, BPZ Exploración & ProducciónS.R.L. (“BPZ E&P”), registered in Peru through its wholly-ownedsubsidiary BPZ Energy, LLC, a Texas limited liability company, formerlyBPZ Energy, Inc., and its subsidiary BPZ Energy International Holdings,L.P., a British Virgin Islands limited partnership. Currently, the Company,through BPZ E&P, has exclusive rights and license contracts for oil and gasexploration and production covering a total of approximately 2.4 million acres,in four blocks, in northwest Peru. The Company’s license contracts cover 100%ownership of Block Z-1 (0.8 million acres), Block XIX (0.5 million acres),Block XXII (0.9 million acres) and Block XXIII (0.2 million acres). The BlockZ-1 contract was signed in November 2001, the Block XIX contract wassigned in December 2003 and Blocks XXII and XXIII contracts were signed inNovember 2007.  The Company’slicense contracts provide for an initial exploration period of seven andpotentially up to thirteen years for Block Z-1and seven and potentially up toten years for Blocks XIX, XXII and XXIII. The license contracts require the Company to conduct specifiedactivities in the respective blocks during the exploration period. If theexploration activities are successful, the total contract term can extend up to30 years for oil exploration and production and up to 40 years for gasexploration and production. In the event a block contains both oil and gas, asis the case in the Company’s Block Z-1 contract, the 40 year term applies tooil exploration and production as well.

 

Through its wholly-owned subsidiary, SMC EcuadorInc., a Delaware corporation, and its registered branch in Ecuador, the Companyowns 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”).The license agreement covering the property extends through May 2016.

 

TheCompany is in the process of developing its oil and natural gas reserves and isproducing and selling oil from the CX-11 platform in the Corvina field of BlockZ-1 under an extendedwell testing program.From the time the Company first began producing from the CX-11 platformin the Corvina field in November of 2007, through September 30, 2009,it has produced approximately 1.6 MMBbls of oil. The Company is also in the initial stages of appraising, exploringand developing the potential oil and natural gas reserves from the A platformin the Albacora field of Block Z-1 and plans to develop any such reserves underan extended well testing program similar to that of Corvina. Additionally,the Company’s activities in Peru include analysis and evaluation of technicaldata on its  other properties,preparation of the development plans for the properties, refurbishment of anddesigns for platforms, procuring machinery and equipment for an extendeddrilling campaign, obtaining all necessary environmental and operating permits,bringing additional production on-line, seismic acquisition, obtaining detailedengineering and design of the power plant and gas processing facilities andsecuring the required capital and financing to conduct the current plan ofoperation.

 

**Basis of Presentation and Principles of Consolidation**

 

The accompanyingconsolidated financial statements of BPZ Resources, Inc. and itssubsidiaries have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) for interimfinancial information and with the instructions to Form 10-Q and Article 10of Regulation S-X. Accordingly,certain information and footnote disclosures normally included in financialstatements prepared in accordance with GAAP have been condensed or omittedpursuant to such rules and regulations. The unaudited financial statementsreflect all adjustments which are, in the opinion of management, necessary fora fair presentation of the financial position and results of operations for theinterim periods presented on a basis consistent with the annual auditedfinancial statements.  All suchadjustments are of a normal recurring nature. All significant transactions between BPZ and itsconsolidated subsidiaries have been eliminated. Certain prior period amountshave been reclassified to conform to current year presentation. Results ofoperations for interim periods are not necessarily indicative of the results ofoperations that may be expected for the entire year. The balance sheet at December 31,2008 has been derived from the audited financial statements at that date butdoes not include all of the information and footnotes required by GAAP forcomplete financial statements. These interim financial statements should beread in conjunction with the audited financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year ended December 31,2008. Management has evaluated all subsequent events through November 6,2009, the date the financial statements were available to be issued.

 

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**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated Financial Statements**

**(Unaudited)**

 

**Useof 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.

 

**Summaryof Significant Accounting Policies**

 

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**

 

In June 2009, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) SFASNo. 168, now codified as Accounting Standard Codification (“ASC”) Topic105, “Generally Accepted AccountingPrinciples” (“ASC Topic 105”)*.*  ASCTopic 105 provides the FASB ASC as the single source of authoritative GAAPrecognized by the FASB to be applied by nongovernmental entities. The FASB ASCchanges GAAP from a standards based model, with thousands of standards, to atopically based model. Rules and interpretive releases of the Securitiesand Exchange Commission (“SEC”) under authority of federal securities laws arealso sources of authoritative GAAP for SEC registrants. On the effective dateof ASC Topic 105 the ASC supersedes all then-existing non-SEC accounting andreporting standards. All other nongrandfathered non-SEC accounting literaturenot included in the ASC will become nonauthoritative.   The provisions ofFASB ASC Topic 105 are effective for interim and annual periods ending after September 15,2009 and, accordingly, are effective for the Company for the current fiscalreporting period. The adoption of the ASC did not have an impact on the Company’sfinancial position, results of operations or cash flows.

 

In May 2009, theFASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), nowcodified as ASC Topic 855, “SubsequentEvents” (“ASC Topic 855”). This standard establishes the accounting forand disclosure of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued. It requires thedisclosure of the date through which an entity has evaluated subsequent eventsand the basis for that date, that is, whether that date represents the date thefinancial statements were issued or were available to be issued. The Companyadopted ASC Topic 855 in the second quarter of 2009. The adoption of ASC Topic855 did not have a material impact on the Company’s consolidated financialposition, results of operations or cash flows. See Note 1, “Basis ofPresentation and Significant Accounting Policies”, to the accompanyingconsolidated financial statements for the related disclosure.

 

On December 31, 2008 the Securities and Exchange Commission (“SEC”)adopted the final rules regarding amendments to current oil and gasreporting requirements. The amendments are designed to modernize and update theoil and gas disclosure requirements to align them with current practices andchanges 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

 

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**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated Financial Statements**

**(Unaudited)**

 

before the first annual report in which the reviseddisclosures are required. The Company is currently evaluating the impact of theamendments on its consolidated financial position, results of operations andcash flows.

 

**Note 2 —Value Added Tax Receivable**

 

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

 

Perucurrently has an IGV early recovery program for oil and gas companies duringthe exploration phase. Under this program, IGV paid on the acquisition ofcertain goods and services used directly in hydrocarbon exploration activitiescan be recovered prior to a commercial discovery taking place or the initiationof production and revenue billings. Because the Company has oil sales in the Corvinafield under an extended well testing program,it is no longer eligible for the IGV early recovery program. Accordingly the Company is recovering itsIGV receivable with IGV payables associated with future oil sales under thenormal IGV recovery process.

 

The Company’s value-added tax receivable balance asof September 30, 2009 and December 31, 2008 was $21.3 million and$12.1 million, respectively. For the three and nine months ended September 30,2009 the Company accrued approximately $7.0 million and $22.0 million,respectively, for IGV related to expenditures, reduced by approximately ($4.1)million and ($12.8) million, respectively, for IGV related to the sale of oilfor the same periods.

 

**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 September 30, 2009 and December 31, 2008 was$15.0 million and $4.1 million, respectively.

 

Inventory associated withtubular goods, accessories and spare parts inventory at September 30, 2009and December 31, 2008 was $12.7 million and $3.6 million, respectively.

 

The Company maintainscrude oil inventories in storage barges until the inventory quantities are at asufficient level that the refinery in Talara will accept delivery.  Theseinventories are also stated at the lower of average cost or market value. Costis determined on a weighted average basis based on production costs. The crudeoil inventory at September 30, 2009 consisted of approximately 46,064barrels at an estimated cost of $2.3 million or $49.94 per barrel. The crudeoil inventory at December 31, 2008 consisted of approximately 11,656barrels at an estimated cost of $0.4 million or $37.56 per barrel.

 

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

 

Belowis a summary of prepaid and other current assets as of September 30, 2009and December 31, 2008 (in thousands):

 
| ** **                 | ** ** | **September 30,   2009** | ** **  | **December 31,  2008** | ** ** |
|----------------------------|------------|-------------------------------|-------------|-----------------------------|------------|
| Prepaid expenses and other |       | $                             |  450   |                        | $          |  1,981 |   |
| Deposits                   |       | 92                            |        | 86                          |       |
| Prepaid insurance          |       | 1,136                         |        | 590                         |       |
| Insurance receivable       |       | 612                           |        | 611                         |       |
|                       |       | $                             |  2,290 |                        | $          |  3,268 |   |

 

Prepaid expenses andother are primarily related to prepayments for drilling services, equipmentrental and material procurement. Deposits are primarily rent deposits inconnection with the Company’s offices in Houston and Peru. Prepaid insuranceconsists of premiums related to the Company’s operations as well as generalliability and directors and officer’s insurance policies. Insurance receivableis related to the barge incident which occurred in early August 2006. TheCompany incurred an operational delay of approximately three weeks resultingfrom a navigation incident which caused the BPZ-01 barge to be grounded on asand bank in Talara Bay in northwest Peru during the second mobilization tripto the Corvina platform. As of September 30, 2009, the Company has aninsurance receivable of approximately $0.7 million for the estimated insurancerepair claims of $0.8 million expected to be filed with the insurance carrier.A deductible of $75,000 will be applied to this insurance claim whenreimbursed.  The hull claim will be finalized upon the dry docking of thevessel, which is expected to occur during the first quarter of 2010.

 

8

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Table ofContents

 

**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated Financial Statements**

**(Unaudited)**

 

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

 

Below is a summary of property, equipment and construction in progress as of September 30, 2009 and December 31, 2008 (in thousands):

 
| ** **                                             | ** ** | **September 30,   2009** | ** **    | **December 31,  2008** | ** ** |
|--------------------------------------------------------|------------|--------------------------|---------------|------------------------|------------|
| ** **                                             | ** ** | ** **               | ** **    | ** **             | ** ** |
| Construction in progress:                              |       |                     |          |                   |       |
| Power plant and related equipment                      |       | $                        |  18,352  |                   | $          |  17,484 |   |
| Platforms and wells                                    |       | 44,435                   |          | 34,768                 |       |
| Pipelines and processing facilities                    |       | 5,298                    |          | 5,108                  |       |
| Producing properties                                   |       | 147,200                  |          | 110,230                |       |
| Producing equipment                                    |       | 13,160                   |          | 18,399                 |       |
| Barge and related equipment                            |       | 32,987                   |          | 24,927                 |       |
| Office equipment, leasehold improvements, and vehicles |       | 1,895                    |          | 1,960                  |       |
| Accumulated depreciation and amortization              |       | (40,299                  | )             | (18,942                | )          |
| Net property, equipment and construction in process    |       | $                        |  223,028 |                   | $          |  193,934 |   |

 

During the ninemonths ended September 30, 2009, the Company incurred costs ofapproximately $50.5 million associated with its development initiatives for theexploration and production of oil and natural gas reserves in Peru.

 

Of the incurred costs mentioned above, the Company incurred $1.0million of capital expenditures related to the completion of the CX11-20XDwell, $23.4 million for the drilling and testing of the CX11-15D well, $9.9million for drilling of the Albacora A-14XD well and$1.7 million for the drilling of the CX11-19D well. In preparation for theCompany’s current and future drilling campaigns, the Company incurred costs of$5.7 million, $0.6 million and $0.4 million for the inspection andrefurbishment of the Albacora, Piedra Redonda and Corvina platforms,respectively, and $1.0 million related to the Caleta La Cruz dockrefurbishment.  Additionally, the Companyincurred $3.4 million in construction in process equipment purchases, $1.0million for the Company’s gas to power project, $0.5 million in Corvinaproduction facility additions, $0.4 million on the Albacora productionfacilities additions and $0.3 million on barge improvements.

 

For the three and ninemonths ended September 30, 2009, in accordance with the “successfulefforts” method of accounting, the Company capitalized approximately $0.4million and $1.1 million of depreciation expense, respectively, mainly relatedto the tender assist barges serving as support equipment to the Company’sdrilling activities, and $1.2 million and $3.3 million of interest expense,respectively, to construction in progress. For the same periods in 2008, theCompany capitalized approximately $0.2 million and $0.7 million of depreciationexpense, respectively, and $0.9 million and $2.9 million of interest expense,respectively, to construction in progress.

 

For the three and ninemonths ended September 30, 2009, the Company recognized $5.9 million and$19.3 million of depreciation, depletion and amortization expense,respectively. For the same periods in 2008, the Company recognized $5.7 millionand $7.9 million of depreciation, depletion and amortization expense,respectively.

 

**Note 6— Asset Retirement Obligation**

 

An obligation wasrecorded for the future plug and abandonment of the producing oil wells, theCX11-21XD, CX11-14D, CX11-20XD, CX11-18XD and the CX11-15D, in accordance withthe provisions of ASC Topic 410, “Asset Retirement and EnvironmentalObligations”, previously accounted for in accordance with SFAS No 143 “Accountingfor Asset Retirement Obligations”.

 

Activity related to theCompany’s asset retirement obligation (“ARO”) for September 30, 2009 and December 31,2008 is as follows (in thousands):

 

9

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Table ofContents

 

**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 
| ** **                            | ** ** | **September 30,   2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
|                                  |       |                          |       |                        |       |
| ARO as of the beginning of the period |       | $                             |  580  |                        | $          |  273 |   |
| Liabilities incurred during period    |       | 144                           |       | 268                         |       |
| Accretion expense                     |       | 53                            |       | 39                          |       |
| ARO as of the end of the period       |       | $                             |  777  |                        | $          |  580 |   |

 

**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 $1.2million and $1.4 million as of September 30, 2009 and December 31,2008, respectively. The Company accounts for this investment under the costmethod and records its share of cash received or paid as other income orexpense. Since the Company’s investment represents ownership of an oil and gasproperty, 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 both the three and nine months ended September 30, 2009, theCompany received $0.2 million of cash from its investment in Ecuador property,while receiving $0.2 million and $0.8 million during the same periods in 2008,respectively.  For both the three andnine months ended September 30, 2009, and 2008, the Company recordedinvestment amortization expense of approximately $47,000 and $141,000,respectively.

 

Subsequent to September 30, 2009, the Companyreceived $0.9 million of cash from its investment in Ecuador.

 

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

 

As of September 30,2009, the Company has restricted cash deposits of $4.8 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 $0.8 million of restricted cash to collateralize insurance bondsfor import duties related to the BPZ-01 barge and crane on board the BPZ-01.The Company also has $1.0 million and $0.1 million of restricted cash held intrust accounts in order to secure financing to support its operations.  For more information concerning the $1.0million of restricted cash held in a trust account, see Note 9, “Long-Term Debtand Capital Lease Obligations”.

 

As of December 31, 2008, the Company hadrestricted cash deposits of $5.2 million, which partially collateralizedinsurance bonds and four performance bonds. The four performance bonds totaling$5.3 million that were partially collateralized by restricted cash deposits of$2.9 million are to insure certain performance obligations and commitmentsunder the license contracts for Blocks Z-1, XIX, XXII and XXIII. Additionallythe Company had $2.3 million of restricted cash to collateralize insurancebonds for import duties related to the FPSO and transport tanker.

 

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

 

10

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**Tableof Contents**

 

**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

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

** **

***At September 30, 2009 and December 31, 2008long-term debt and capital lease obligations consist of the following (inthousands):***

 
| ** **                                               | ** ** | **September 30,   2009** | ** **   | **December 31,  2008** | ** ** |
|----------------------------------------------------------|------------|-------------------------------|--------------|----------------------------------|------------|
|                                                     |       |                          |         |                             |       |
| $15 million IFC Senior Note, Libor plus 2.75%, due  2012 |       | $                             |  15,000 |                             | $          |  15,000 |   |
| Capital Lease Obligations                                |       | 5,350                         |         | 7,838                            |       |
| Other                                                    |       | 4,142                         |         | —                           |       |
|                                                     |       | 24,492                        |         | 22,838                           |       |
| Less: Current Portion of Long-Term Debt                  |       | 5,386                         |         | 7,820                            |       |
|                                                     |       | $                             |  19,106 |                             | $          |  15,018 |   |

*** ***

*$15.0Million IFC Reserve-Based Credit Facility*

 

The Company has a $15.0million reserve-based lending facility (“IFC Facility”) agreement (the “LoanAgreement”) with International Finance Corporation**(“**IFC”) through its subsidiaries BPZ E&P and BPZ MarinePeru S.R.L. as borrowers. The reserve-based lending facility matures in December 2012and bears interest at an approximate rate of LIBOR plus 2.75%, currentlyequivalent to 3.85% based on the six month LIBOR rate of 1.1% at June 30,2009.  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 material covenants of the Loan Agreement asof September 30, 2009.  The Company requested andreceived a waiver and amendment from IFC which (i) extended the date bywhich it was required to satisfy certain conditions precedent with respect tothe pending credit facility currently still under negotiations with Natixis andother institutions from September 30, 2009 to December 31, 2009, and (ii) extendedthe period of time to assign a first priority lien on Empresa Electrica NuevaEsperanza S.R.L.’s interest in the Agreement with GE (see Note 14, “Commitmentsand Contingencies” for further information) to IFC until December 2010.

 

*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 2009,the Company repaid the outstanding principal and accrued interest in full tothe Note Holder.

 

*Capital Lease Obligations*

 

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.

 

In May 2009, theCompany entered into an amendment of its lease agreement for two bargescurrently under charter, the Namoku and the Nu’uanu. Under the terms of theamended lease agreement, the current charter, originally set to expire in November 2009,is extended for five years commencing on May 1, 2009.  During the first 18 months of the amendedlease term, the daily charter rate for the use of both barges isfixed. Commencing on November 2010, the daily charter rate for theuse of both vessels will be based on a tiered structure with the daily ratedependent upon  the amount of theprevious month’s average daily per barrel price of West Texas IntermediateCrude Oil (“WTI”), as indicated on the New York Mercantile Exchange. Any amountpaid by the Company after November 2010 over the initial daily rate as aresult of the escalated tiered structure based on the price of WTI will beconsidered contingent rental payments. The amended lease agreement contains a $3.0 million purchase optionafter the third year of the lease, a $2.0 million purchase option after thefourth year of the lease and a mandatory $1.0 million purchase obligation bythe Company after the fifth year of the lease.

 

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Table ofContents

 

**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

The Company accounted for the amended lease agreementin accordance with ASC Topic 840, “Leases”, previously accounted for under SFASNo. 13, “Accounting for Leases (As Amended)”. Under the guidance, thelease agreement continues to be accounted for as a capital lease and theimputed interest rate necessary to reduce the net minimum lease payments topresent value over the lease term is 34.9%.

 

The following is a summary of scheduled minimum leasepayments under the amended barge lease agreement at September 30, 2009 (inthousands):

 
| 2009                                                      |   | $     |  460   |   |
|-----------------------------------------------------------|--------|-------|-------------|--------|
| 2010                                                      |   | 1,825 |        |
| 2011                                                      |   | 1,825 |        |
| 2012                                                      |   | 1,830 |        |
| 2013                                                      |   | 1,825 |        |
| Therafter                                                 |   | 1,600 |        |
| Total Minimum Lease Payments                              |   | 9,365 |        |
| Less: Amounts Representing Interest                       |   | 4,889 |        |
| Present Value of Minimum Lease Payments                   |   | 4,476 |        |
| Less: Current Portion of Obligations Under Capital  Lease |   | 371   |        |
| Long-Term Portion of Obligations Under Capital  Lease     |   | $     |  4,105 |   |

 

*Other*

 

In July 2009, the Company, through itssubsidiary, BPZ E&P, entered into a $5.1 million short-term loan agreementto finance the purchase of casing and accessories for use in the Company’scurrent and future operations. The $5.1 million short-term loan bears an annualinterest rate of 5.45% and is to be repaid in five monthly installments ofapproximately $1.0 million starting September 2009.  In connection with the $5.1 millionshort-term loan agreement, the Company was required to deposit $1.0 millionwith the lending institution as a guaranty for the loan.  The $1.0 million will be applied to the lastinstallment of the loan repayments. See Note 8, “Restricted Cash andPerformance Bonds” for further information.

 

**Note10 — Stockholders’ Equity**

 

TheCompany has 25,000,000 shares of preferred stock, no par value, and 250,000,000shares of common stock, no par value, authorized for issuance.

 

**September 2009Private Placement of Common Stock**

 

On September 15, 2009, the Company closed a private placement ofapproximately 1.6 million shares of common stock, no par value, to IFC pursuantto a Subscription Agreement dated September 15, 2009. This privateplacement was related to the Company’s registered direct offering ofapproximately 18.8 million shares of Common Stock at a price of $4.66 per sharethat closed on June 30, 2009. Pursuant to the Subscription Agreement datedDecember 16, 2006 (the “Subscription Agreement”) by and between IFC andthe Company, IFC has the right, within 45 days of notice of the offering, topurchase shares of the Company’s Common Stock for the same price and terms asthe participants in an offering to retain its proportionate ownership in theCompany. IFC exercised its pre-emptive right to purchase approximately 1.6million shares of Common Stock at the offering price of $4.66 per share towhich it was entitled under the Subscription Agreement, resulting in grossproceeds to the Company of approximately $7.6 million. The transaction wassubmitted to and approved by the shareholders of the Company at a SpecialMeeting of Shareholders on August 24, 2009. No warrants or dilutivesecurities were issued to IFC in connection with the private placement. Theshares were placed directly by the Company. The Company plans on using the proceedsof this offering to develop its properties under its existing license contractsand other general corporate purposes consistent with the Company’s operatingplans.

 

Under the September 15, 2009 SubscriptionAgreement, the Company committed to file a registration statement with the SECcovering the shares no later than 45 days after the closing with respect tosuch shares, and will use its reasonable best efforts to obtain itseffectiveness no later than the earlier of (i) 90 days after the closingwith respect to such shares, or in the event of SEC review of the registrationstatement, 120 days after the closing and (ii) the third business dayfollowing the date on which the Company is notified (orally or in writing,whichever is earlier) by the SEC that the registration statement will not bereviewed or is no longer subject to further review and comment unless, upon theadvice of legal counsel, it is advisable not to accelerate the 

 

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Tableof Contents

 

**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

effectiveness of such registration statement. On October 21,2009, the Company filed a registration statement with the SEC covering theshares and will use its reasonable best efforts to obtain the registrationstatement’s effectiveness in accordance with the terms of the September 15,2009 Subscription Agreement.

 

**June 2009Registered Direct Offering of Common Stock**

 

On June 30, 2009, the Company closed its sale of approximately18.8 million shares of its common stock, no par value, in a registered directoffering under an effective shelf registration statement.  The sharesof common stock were priced at $4.66 per share resulting in net proceeds to theCompany, after placement agent fees and other fees, of approximately $82.9million. In connection with the registered direct offering, the Company enteredinto a placement agency agreement with Canaccord Adams Inc. as lead placementagent for the offering along with Pritchard Capital Partners, LLC, and RaymondJames and Associates, Inc. In addition, Rodman & Renshaw, LLC,and Wunderlich Securities, Inc. assisted as agents in the transaction. TheCompany paid approximately $4.4 million as a 5% placement agency fee of thegross proceeds received by the Company in accordance with the terms of theplacement agency agreement. The Company plans on using the proceeds of thisoffering to develop its properties under its existing license contracts andother general corporate purposes consistent with the Company’s operating plans.

 

**February 2009Private Placement of Common Stock**

 

On February 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, IFC exercisedits pre-emptive right to elect to participate in the private placement offeringresulting in an additional 1.4 million shares of common stock which brought thetotal to approximately 15.7 million shares of common stock sold in the privateplacement offering. The common stock was priced at $3.05 per share resulting innet proceeds to the Company, after placement agent and financial advisory fees,of approximately $45.2 million. No warrants or dilutive securities were issuedin connection with the private placement. A financial advisory fee of $0.7million 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. The Company plans on using the proceeds of this offering todevelop its properties under its existing license contracts and other generalcorporate purposes consistent with the Company’s operating plans.

 

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 September 30, 2009 and December 31, 2008.  None of these potentially dilutive shares have been included in the calculation of earnings per share, for the three and nine months ended September 30, 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):

 
| ** **                                                          | ** ** | **September 30,   2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| Stock options outstanding                                           |       | 4,657                         |       | 3,894                       |       |
| Total potentially dilutive securities issued                        |       | 4,657                         |       | 3,894                       |       |
| Shares available pursuant to Long-Term Incentive  Compensation Plan |       | 1,571                         |       | 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,

 

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Tableof Contents

 

**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

respectively. As of September 30, 2009, 195,900shares remain available for future grants under the 2007 LTIP and 1,375,000shares remain available for future grants under the Directors’ Plan.

 

Thefollowing table summarizes stock-based compensation costs recognized under ASCTopic 718, “Stock Compensation”, previously recognized under SFAS123(R), for the three and nine months ended September 30, 2009 and2008, respectively, and is generally included in “General and administrativeexpense” on the Consolidated Statements of Operations (in thousands):

 
| ** **                                                      | ** ** | **Three Months Ended** | ** **  | **Nine  Months Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|-------------|-----------------------------------------|------------|
| ** **                                                      | ** ** | **September 30,**           | ** **  | **September 30,**                  | ** ** |
| ** **                                                      | ** ** | **2009**                         | ** **  | **2008**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                            |       |                             |        |                                    |       |   |   |   |   |
| Employee stock—based compensation costs                    |       | $                                |  1,984 |                                    | $          |  3,349 |   | $ |  5,909 |   | $ |  9,154 |   |
| Director stock—based compensation costs  (a) (b) |       | 895                              |        | 1,611                                   |       | 4,433 |   | 4,265 |   |
|                                                            |       | $                                |  2,879 |                                    | $          |  4,960 |   | $ |  10,342 |   | $ |  13,419 |   |

 

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(a)               For the nine months ended September 30, 2009approximately $0.4 million of stock-based compensation is included in “Otherincome (expense)” on the Consolidated Statements of Operations. Theamount relates to 100,000 stock options awarded to a former member of the Board of Directors to purchasethe Company’s common stock. The grant date fair value of the award wasrecognized upon issuance of the award.

 

(b)              For the nine months ended September 30,2009 additional stock-based compensation of approximately $0.7 million was recognizedprimarily related to the accelerated vesting for certain restricted stock andstock option awards granted to a former member of the Board of Directors. 

 

**Restricted Stock Awards andPerformance Shares**

 

During the nine months ended September 30, 2009,the Company awarded 179,900 shares of restricted stock to officers and otherkey employees under the Company’s 2007 LTIP.  The restricted stock awards generally vest on the second anniversary ofthe grant date. The fair value of these awards is based on the closing marketprice on the date of Board approval of the grant.

 

**Stock Options**

 

During the nine months ended September 30, 2009,the Company awarded a former member of the Board of Directors 100,000 optionsto purchase the Company’s common stock under the Company’s Directors’Plan.  Vesting of the awards will be asfollows: 25% of the awards will vest on the first anniversary from the date ofgrant, which was May 7, 2009, 50% of the awards will vest on the secondanniversary from the date of grant and the remaining 25% will vest on the thirdanniversary from the date of grant. The total value of the option award is approximately $0.4 million.The Company recognized the entire amount of expense on the grant date and theamount is included in “Otherincome (expense)” on the Consolidated Statements of Operations.

 

During the nine months ended September 30, 2009,the Company awarded officers and other key employees540,650 options to purchase the Company’s common stockunder the Company’s 2007 LTIP.  These optionsgenerally vest in equal annual installments over a three-year period from thegrant date. Additionally the Company also awarded its non-employee directors150,000 options to purchase the Company’s common stock under the Directors’ Plan. These options generally vest in equal annual installments over atwo-year period from the grant date. The exercise price of all awards is basedon the closing market price on the date of Board approval of the grant.

 

The stock options were granted with a weighted averageexercise price of $5.46 and the fair value of the stock options was estimatedusing the Black-Scholes options pricing model with the following assumptions:

 

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**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 
| ** **                                          | ** ** | **2009** | ** ** |
|-----------------------------------------------------|------------|----------|------------|
| Expected life (years) (a)                           |       | 4.5      |       |
| Risk-free interest rate  (c)                   |       | 2.5      | %          |
| Volatility (b)                                      |       | 91.9     | %          |
| Dividend yield (d)                                  |       | —   |       |
| Weighted-average fair value per share at grant date |       | $        |  3.76 |   |
|                                                     |            |          |            |  |

 

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(a)                   The expected life was derived based on a weightingbetween (a) the Company’s historical exercise and forfeiture activity and (b) theaverage midpoint between vesting and the contractual term and (c) from theanalysis of other companies of a similar size and operational life cycle.

 

(b)                  The volatility is based on the historical volatilityof our stock for a period approximating the expected life.

 

(c)                   The risk-free interest rate is based on the observedU.S. Treasury yield curve in effect at the time the options were granted.

 

(d)                  The dividend yield is based on the fact the Companydoes not anticipate paying any dividends.

 

**Note 11**—**Revenue**

 

TheCompany is currently producing oil from five 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 its wholly-owned subsidiaryBPZ E&P, entered into a long-term oil supply agreement with Petroperu.Under the terms of the contract, the Company agrees to sell, and Petroperuagrees to purchase, all of the Company’s crude oil production originating fromthe Corvina oilfield in Block Z-1. The contract term is for approximately sevenyears or until 17 million barrels of crude oil has been delivered to thePetroperu refinery located in Talara, whichever comes first. The price perbarrel of oil under the agreement is determined using a basket of crude oilsbased on a 15-day average of Forties, Oman, and Suez blend crude oil prices, asquoted in the Spot Crude Prices Assessment published in Platt’s Crude OilgramPrice Report, minus $1 per barrel and other customary purchase priceadjustments.

 

During the three and nine months ended September 30,2009, the Company produced approximately 213,943 barrels and 778,509 barrels,respectively.  For the same periods in 2008, the Company producedapproximately 329,089 barrels and 455,840 barrels, respectively.  For thethree and nine months ended September 30, 2009, the Company soldapproximately 207,418 barrels and 744,101 barrels at an average price, net ofroyalties, of $63.10 per barrel and $50.21 per barrel, respectively. Forthe same periods in 2008, the Company sold approximately 322,171 barrels and437,243 barrels at an average price, net of royalties, of $103.80 per barreland $102.56 per barrel, respectively.

 

The Company’s revenues are reported net of royalties owed to thegovernment of Peru. Royalties are calculated by Perupetro as stipulated in theBlock Z-1 license agreement based on the same basket of crude oils pricesdiscussed above, however their calculation is based on the past five-dayaverage price before the crude oil delivery date. For both the three and ninemonths ended September 30, 2009 the revenues received by the Company arenet of royalty costs of approximately 5% of gross revenues or $0.7 million and$2.1 million, respectively. For the same periods in 2008 the revenues receivedby the Company are net of royalty costs of approximately 5% of gross revenuesor $1.9 million and $2.5 million, respectively.

 

**Note 12 — Income Tax**

** **

For the three and ninemonths ended September 30, 2009, the Company recognized an income taxbenefit of approximately $1.8 million and $4.7 million, respectively, on a netloss before income tax of approximately $10.8 million and $30.5 million,respectively, resulting in an effective tax rate of 17% and 15%,respectively.  For the same periods in2008, the Company recognized an income tax provision of approximately $5.1million and $5.3 million, respectively, on pre-tax income of approximately$13.7 million and $1.8 million, respectively. The difference between the effective tax rate recognized and the 22%statutory rate provided for under the Block Z-1 License Contract is largely dueto:

 

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**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated FinancialStatements**

**(Unaudited)**

 

·                  The Company has a 100% allowance on itsnet operating losses generated in the United States  -  TheCompany has a valuation allowance for the full amount of the domestic deferredtax asset resulting from the income tax benefit generated from net losses inthe U.S., as it believes, based on the weight of available evidence, that it ismore likely than not that the deferred tax asset will not be realized prior tothe expiration of net operating loss carryforwards in various amounts through2027.

 

·                  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 and nine months ended September 30, 2009 and2008, respectively, the Company did not have any accrued interest or penalties associatedwith any unrecognized tax benefits, nor was any interest expense recognizedduring those periods.

 

**Note 13 — Business Segment Information**

 

The Company determines and discloses its segments in accordance withASC Topic 280, “Segment Reporting” (“ASC Topic 280”) , previously in accordancewith SFAS No. 131 “Disclosures about Segments of an Enterprise and RelatedInformation”,  which uses a “management”approach for determining segments. The management approach designates theinternal organization that is used by management for making operating decisionsand assessing parlance as the source of the Company’s reportable segments. ASCTopic 280 also requires disclosures about products or services, geographicareas, and major customers. The Company’s management reporting structureprovided for only one segment for the three and nine months ended September 30,2009 and 2008 and accordingly, no separate segment information is presented. Inaddition, the Company operates only in Peru and has only one customer for itsoil production. The majority of the Company’s long-lived assets are located inPeru.

 

**Note 14 — Commitments and Contingencies**

 

*ProfitSharing*

 

The Constitution of Peru and Legislative Decree Nos. 677 and 892 givesPeru employees working in private companies engaged in activities generatingincome classified as third category income by the Income Tax Law the right toshare in the Company’s Peruvian subsidiaries profits. According to Article 3of the United Nations International Standard Industrial Classification, BPZE&P’s tax category is classified under the “mining companies” section,which sets the rate at 8%. However, in Peru, the Hydrocarbons’ Law states, andthe Supreme Court ruled, that hydrocarbons are not related to miningactivities. Hydrocarbons are included under “Companies Performing otherActivities” thus Oil and Gas Companies pay profit sharing at a rate of 5%. The5% of 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 and nine monthsended September 30, 2009  profitsharing expense of $0.3 million and $0.9 million, respectively, is included in “Generaland administrative expense” on the Consolidated Statement of Operations as theCompany’s Peruvian subsidiaries have “income subject to taxation” per thePeruvian tax code. For the three and nine months ended September 30, 2008,the Company did not recognize profit sharing expense as the Company’s Peruviansubsidiaries did not have “income subject to taxation” per the Peruvian taxcode 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 bar 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 first quarter of 2010.  As of September 30, 2009, the Company hasnot presented a final claim to its insurance carrier for the barge repairs.

 

The Company believes themajority of the costs associated with the grounding incident will be reimbursedthrough insurance or through a third party.  No assurances can be 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.

 

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**BPZ Resources, Inc. and Subsidiaries**

**Notes To Consolidated Financial Statements**

**(Unaudited)**

 

*PeruProperties*

 

As of September 30,2009, the Company has total restricted cash deposits of $4.8 million. Inconnection with the Company’s  propertiesin Peru, it  has obtained fourperformance bonds totaling $5.3 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 $0.8 million of restricted cashto collateralize insurance bonds for import duties related to the BPZ-01 bargeand the crane on board the BPZ-01. Further, the Company also has $1.0 millionand $0.1 million of restricted cash held in trust accounts in order to securefinancing to support its operations.  SeeNote 8, “Restricted Cash and Performance Bonds” and Note 9, “Long-Term Debtand Capital Lease Obligations” for further information.

 

*GETurbine Purchase Agreement and Amendment*

 

On September 26,2008, the Company, through its subsidiary Empressa Electrica Nueva EsperanzaS.R.L., entered into a $51.5 million contract (the “Agreement”) for thepurchase of three LM6000 gas-fired turbines from GE Packaged Power, Inc.and GE International, Inc. Sucursal de Peru (collectively “GE”).  TheAgreement required an initial down payment of $5.1 million and monthly progresspayments of $1.1 million per unit. In January 2009 the Company and GEentered into an amendment of the Agreement. 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 the right to terminate the contract,provided the Company makes 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, theCompany paid the first progress payment of $3.4 million. As of September 30,2009, the Company has  made payments toGE totaling $12.0 million. Failure to make the second progress payment in fullwould result in immediate termination of the Agreement with no cure period ortime to correct the breach and a charge-off of the $12.0 million of progresspayments. If the second progress payment of $3.5 million is made by November 16,2009, the Company may be required to resume making monthly progress payments inamounts yet to be determined. As of November 9, 2009, the Company is innegotiations with GE to modify the terms of the Agreement.

 

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 July 2009, theCompany, through its subsidiary, BPZ E&P, secured formal commitments for a$70.0 million reserve based credit facility. The syndication of this facility is led by Natixis, a major Frenchbank.  The other institutionsparticipating in the syndicate include IFC, Scotiabank and Banco de Crédito delPerú.

 

The credit facility willprovide the Company’s subsidiary, BPZ E&P, with a revolving line of creditfor capital expenditures and working capital. Subject to final negotiations anddocumentation, the facility is expected to: (i) be secured by a pledge ofthe ownership units of the borrower; (ii) be a senior secured revolvingcredit facility maturing June 30, 2013; (iii) bear interest at LIBORplus 7.0%; (iv) be subject to a commitment fee of 3.50% on the unutilizedportion of the borrowing base.   The$70.0 million credit facility will include the $15.0 million previouslyreceived under the IFC Facility and the initial borrowing base available underthe facility is expected to be approximately $35.0 million, subject tocompliance with loan covenants, inclusive of the $15.0 million already fundedunder the IFC Facility.  The borrowingbase will be redetermined effective February 28, 2010 and thereafter on asemi-annual basis beginning June 30, 2010 based on the value of oilreserves from the Corvina field and may include future reserves booked from theAlbacora field. Both fields are located offshore in northwest Peru in BlockZ-1.

 

Closing of the creditfacility is dependent upon the successful negotiation of the related loandocuments, and funding is predicated on the satisfaction of certain customaryconditions precedent as will be specified in the loan documents.  Both the Commercial Banks and IFC facilitieswill be governed by a single Common Terms Agreement ensuring the efficientadministration of the Facility.  Closingof this financing is expected during the fourth quarter of this year. However,the Company cannot provide assurance that the financing will close whenanticipated, if at all.

 

*Gas-to-PowerProject Financing*

 

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 

 

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**BPZ Resources, Inc. and Subsidiaries**

**Notes To ConsolidatedFinancial Statements**

**(Unaudited)**

 

proposedpower plant site is located adjacent to an existing substation and powertransmission lines which, after the Peruvian government completes theirexpansion, are expected to be capable of handling up to 320 MW of power. Theexisting substation and transmission lines are owned and operated by thirdparties.

 

The Company currently estimates the gas-to-powerproject will cost approximately $135.0 million, excluding 19% value-added taxwhich will be recovered via early recovery and/or future revenuebillings.  The $135.0 million includes $115.0 million for the estimatedcost of the power plant and $20.0 million for the estimated cost of the constructionof the natural gas pipeline. Accordingly, the Company commenced discussionswith potential joint venture partners for the gas-to-power project in anattempt to secure additional equity for the project.  After receivingproposals for the Corvina gas-to-power project, management selected a potentialjoint venture partner in June 2009 and negotiations with that party havebegun.  The joint venture will be subject to the satisfactory negotiationof a joint venture agreement and related documents. The Company expectsany joint venture to result in it holding a minority position in theproject.  The Company expects to retain the responsibility for theconstruction of the pipeline as well as retain ownership of the pipeline.Decisions regarding project financing will be determined after the consummationof a joint venture agreement.

 

**Note 15 — Legal Proceedings**

 

*NavyTanker Litigation*

 

On October 24, 2007,Tecnomarine SAC, a contractor to BPZ E&P entered into two short termagreements with the commercial division of the Peruvian Navy to charter twosmall tankers for use in the Company’s offshore oil production operation. On January 30, 2008, one of the tankers, the Supe, sank after catchingfire. Neither of the Peruvian governmental agencies charged withinvestigating the incident found fault with Tecnomarine SAC or the Company’ssubsidiary, BPZ E&P. A lawsuit was nonetheless filed in the 152nd JudicialDistrict Court of Harris County, Texas by two crewmembers and the family andestate of two deceased sailors injured in the incident, claiming negligence andgross negligence on the part of the BPZ Resources, Inc. and BPZ EnergyLLC., parent entities of BPZ E&P that were not parties to the charteroperation.  Based on the Company’s assessment of the available factsincluding the fact that none of the Peruvian government-sanctionedinvestigations into the Supe incident found fault on the part of Tecnomarine orBPZ E&P, the Company does not believe the outcome of the legal proceedingwill have a material adverse effect on its financial condition, results ofoperations or cash flows. The Company intends to vigorously defend this actionbut cautions that there is inherent risk in litigation, which is difficult toquantify, especially at the early stage of litigation proceedings.   The Company believes in any event that anymonetary damages arising from the incident would be adequately covered by itsinsurance policies, after a customary deductible.

 

*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 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**

 

Subsequent to September 30, 2009, the Companyreceived $0.9 million of cash from its investment in Ecuador.

SeeNote 7, “Investment in Ecuador Property” for further information.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

**Overview**

 

You should read the following discussion andanalysis together with our consolidated financial statements and notes theretoand the discussion contained in Item 7. “Management’s Discussion and Analysisof Financial Condition and Results of Operations,” Item 7A, “Quantitative andQualitative Disclosures About Market Risk” and Item 1A.  “RiskFactors” included in 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., (together with its subsidiaries,collectively referred to as the “we”, “our” or “BPZ” and other similar terms unlessthe context requires otherwise) aTexas corporation, is based in Houston, Texas with offices in Lima, Peru andQuito, Ecuador. We are focused on the exploration, development and productionof oil and natural gas in Peru and Ecuador. We also intend to utilize part ofour planned future natural gas production as a supply source for thecomplementary development of a gas-fired power generation facility in Peruwhich we expect will be partially owned by us.

 

We maintain a subsidiary, BPZ Exploración & Producción S.R.L.(“BPZ E&P”), registered in Peru through our wholly-ownedsubsidiary BPZ Energy, LLC, a Texas limited liability company, formerlyBPZ Energy, Inc., and its subsidiary BPZ Energy International Holdings,L.P., a British Virgin Islands limited partnership. Currently, we, through BPZE&P, have exclusive rights and license contracts 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 (0.8 million acres), Block XIX (0.5 million acres), Block XXII(0.9 million acres) and Block XXIII (0.2 million acres). The Block Z-1 contractwas signed in November 2001, the Block XIX contract was signed in December 2003and Blocks XXII and XXIII contracts were signed in November 2007. Ourlicense contracts provide for an initial exploration period of seven andpotentially up to thirteen years for Block Z-1 and seven and potentially up toten years for Blocks XIX, XXII and XXIII. The license contracts requireus to conduct specified activities in the respective blocks during theexploration period. If the explorationactivities are successful, our total contract term can extend up to 30 yearsfor oil exploration and production and up to 40 years for gas exploration andproduction. In the event a block contains both oil and gas, as is the case inour Block Z-1, the 40 year term applies to oil exploration and production aswell.

 

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 arein the process of developing our oil and natural gas reserves and have begunproducing and selling oil from the CX-11 platform in the Corvina field of BlockZ-1 under an extended well testing program. From the time we first beganproducing from the CX-11 platform in the Corvina field in November of2007, through September 30, 2009, we have produced approximately 1.6MMBbls of oil. We are also in the initial stages of appraising, exploring and developingour potential oil and natural gas reserves from the A platform in the Albacorafield of Block Z-1 and plan to develop any such reserves under an extended welltesting program similar to that of Corvina. Additionally our activities in Peruinclude analysis and evaluation of technical data on our other properties,preparation of the development plans for the properties, refurbishment of anddesigns for platforms to perform our drilling campaigns in the Corvina andAlbacora fields in Block Z-1, procuring machinery and equipment for an extendeddrilling campaign, obtaining all necessary environmental and operating permits,bringing additional production on-line, seismic acquisition, obtaining detailedengineering and design of the power plant and gas processing facilities,  and securing the required capital and financingto conduct the current plan of operation.

 

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.

 

Wehave determined our reporting structure provides for only one operating segmentbecause we currently operate solely in Peru and have only one customer for ourproduction.

 

**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 

 

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efficiently(i) develop the value of our oil and gas holdings in Peru; (ii) increaseproduction from our holdings; and (iii) create a revenue stream throughimplementation of our gas-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.

 

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 arecurrently primarily focused on development of the proved oil reserves inCorvina, as well as re-developing the Albacora oil field which has a platformin place with three shut in oil wells drilled and produced by Belco Oil and GasCompany around 1980.

 

In addition, our business plan includes a gas-to-power project, whichentails the installation of a 10-mile gas pipe line from the CX-11 platform toshore, construction of gas processing facilities and an approximately 135megawatt (“MW”) simple cycle electric generating plant. The proposed powerplant site is located adjacent to an existing substation and power transmissionlines which, with certain upgrades, are expected to be capable of handling upto 320 MW of power. See the discussion below under “Gas-to-Power Project” foradditional information.

 

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 BPZ, and thusincrease shareholder value.

 

**OilDevelopment**

 

***General***

 

We will conduct additional drilling activities basedin part on an ongoing assessment of economic efficiencies, likely success andlogistical issues such as license requirements, scheduling, requiredmaintenance and replacement of equipment.  This assessment could result inincreased emphasis and activities on a given prospect and conversely, couldresult in decreased emphasis on a given prospect for a period of time.  Inparticular, we will assess allocation of our current resources among theCorvina, Albacora, and Delfin fields and certain onshore prospects as theydevelop.

 

***Seismic Data Acquisition***

 

We are in the initial process of acquiring seismicdata to assist us in exploring, appraising and developing certain areas ofinterest within our blocks located in Peru. The purpose of the seismic surveyis to improve the subsurface imaging of certain areas within the blocks inorder to better define the position of future wells as well as to comply withour exploration commitments under our license contracts.

 

For Block Z-1, we intend to acquire approximately 950square kilometers of three dimensional (“3D”) seismic data.  The 3D seismic data survey will include areasof interest within the Corvina, Albacora, and Delfin fields as well as certainprospects and leads located within the Mero and Piedra Redonda regions andcertain deep water leads located within Block Z-1. Additionally, the 3D seismicsurvey will include data underneath four existing platforms in the Albacora,Corvina and Piedra Redonda fields.  Theseismic data survey will fulfill our commitments under the fourth explorationperiod of the Bock Z-1 license contract. We expect the 3D seismic data surveyto be completed in the first quarter of 2010.

 

For Block XXIII, we intend to acquire approximately400 square kilometers of 3D seismic data and 200 kilometers of two dimensional(“2D”) seismic data which will include certain areas of interest within thePaloSanto region and four other prospects that are part of the Mancora gasplay.  We expect the 3D and 2D seismicdata survey to be completed in the second quarter of 2010.

 

For Bock XXII, we intend to acquire approximately 200kilometers of 2D seismic data on four potential prospects. We expect the 2Dseismic data survey to be completed in the second quarter of 2010.

 

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***Corvina Field***

 

We are producing oil from our recent discoveries atthe CX-11 platform, located in the Corvina field within the offshore Block Z-1,under an extended well testing program that started on November 1,2007.  The Corvina field consists of approximately 47,000 acres in waterdepths of less than 300 feet.  We are currently concentrating our drillingefforts on West Corvina, which consists of 3,500 acres and have completed atotal of five oil producing wells, the CX11-15D, the CX11-21XD, the CX11-20XD,the CX11-18XD and the CX11-14D.  The oil is delivered by barge to thePetroperu refinery in Talara, located approximately 70 miles south of theplatform.  Produced oil is kept in production inventory until such time itis delivered to the refinery.

 

In November 2008,we commenced drilling on the CX11-15D well and reached total drilling depth in January 2009.However, during the testing it was confirmed that the deeper prospective sandswere found lower than expected and were located below the estimated oil-watercontact, thus testing formation water. Subsequently, we commenced sidetrackingthe CX11-15D well, targeting a location higher in the geological formation andreached total drilling depth of 9,390 feet in March 2009.  We begantesting the sands that previously tested water and found them to beoil-bearing. We added the CX11-15D well to the wells currently producing underour long-term well testing program in June 2009.   The CX11-15Dwell was completed with a single production string in three of the oil sandsthat were successfully tested, leaving two accessible oil sands to be added ata later date and leaving the two uppermost oil sands isolated from theproducing sands.  Additionally, theCX11-15D well has six gas sands.  The gassands will remain behind pipe until they are needed for the gas-to-powerproject. During the testing of the CX11-15D well, gas channeling was discovered. During the time needed to conduct additional testing and identifypossible solutions, we moved the rig to the CX11-20XD well to perform aworkover to correct gas channeling problems there, which are similar to theCX11-15D well.

 

In June 2009,we completed the workover of the CX11-20XD well and successfully upgradedboth production flow lines from the CX-11 platform in Corvina to the floatingproduction, storage and offloading barge (“FPSO”). The new lines enhancedcapacity to handle the combined production of oil, gas and water from the CX-11platform in a safe and efficient manner. The CX11-20XD well is currentlyunder evaluation to determine if the workover and maintenance measures achievedthe desired results or if additional maintenance activities are necessary.

 

In July 2009,we finished the completion of the first workover of the CX11-15D well and beganthe workover of the CX11-21XD well in order to reduce the amount of water beingproduced along with the oil.  For theworkover of the CX11-21XD well, we attempted to close off the area beneath theoil producing sands which we believed was the cause of the water content. In October theworkover of the CX11-21XD well was completed and the well has been placedback on production.  In September 2009,we completed a second minor workover of the CX11-15D to correct certainmechanical difficulties that were not completely addressed during the firstworkover.  The CX11-21XD and CX11-15Dwells are currently under evaluation to determine if the workovers andmaintenance measures achieved the desired results or if additional maintenanceactivities are necessary.

 

In October 2009,we commenced drilling on the CX11-19D well. The CX11-19D well is adjacent tothe CX11-21XD well, our first oil discovery well completed in 2007. TheCX11-19D is being drilled in a higher geological location that should also allowus to continue appraising the Corvina field. We plan to implement a well designon the CX11-19D to help alleviate previous gas channeling issues encountered onthe CX11-15D and CX11-20XD wells. We expect to have the well completed nearyear-end.

 

***Albacora Field***

 

The Albacora field is located in the northern part of our offshoreBlock Z-1.  The current area of interestwithin the Albacora field is a mapped structure closure of the target Zorritosformation of approximately 6,000 acres and is located in water depths of lessthan 200 feet.

 

In September 2009,we commenced drilling on the A-14XD well from our recently renovated Aplatform. The A platform also has three shut in oil wells that were drilled andproduced for a short period of time by Belco Oil & Gas around 1980.The A-14XD well will be drilled to adepth of approximately 15,000 feet and is designed as a twin well to the 8X-2discovery well drilled in 1972 by Tenneco, which tested oil, gas andcondensate. The A-14XD well will fulfill our current license contractexploration commitment in Block Z-1, as we intend to test the Lower Zorritosformation. Although Tenneco’s 8X-2 discovery well also penetrated the LowerZorritos, testing was limited to the Upper Zorritos formation and none of thesubsequent six wells drilled by Tenneco and Belco penetrated the Lower Zorritosformation.

 

We expect to have the newA-14XD well to total depth around year end and will conduct as many drill stemtests as necessary to fully evaluate the well. The duration of testing willdepend on the number of prospective sands identified by a comprehensive loggingprogram. We are also implementing separate production facilities to carry outan extended well testing program in the Albacora field.

 

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** **

**FinancingActivities**

 

***September 2009Private Placement of Common Stock***

 

On September 15, 2009, we closed a private placement ofapproximately 1.6 million shares of common stock, no par value, to IFC pursuantto a Subscription Agreement dated September 15, 2009. This privateplacement was related to our registered direct offering of approximately 18.8million shares of Common Stock at a price of $4.66 per share that closed on June 30,2009. Pursuant to the Subscription Agreement dated December 16, 2006 (the “SubscriptionAgreement”) by and between IFC and us, IFC has the right, within 45 days ofnotice of the offering, to purchase shares of the our Common Stock for the sameprice and terms as the participants in an offering to retain its proportionateownership in us. IFC exercised its pre-emptive right to purchase approximately1.6 million shares of Common Stock at the offering price of $4.66 per share towhich it was entitled under the Subscription Agreement, resulting in grossproceeds to us of approximately $7.6 million. The transaction was submitted toand approved by the shareholders of BPZ at a Special Meeting of Shareholders onAugust 24, 2009. No warrants or dilutive securities were issued to IFC inconnection with the private placement. The shares were placed directly by us.We plan on using the proceeds of this offering to develop our properties underour existing license contracts and other general corporate purposes consistentwith our operating plans.

 

Under the September 15, 2009 SubscriptionAgreement, we committed to file a registration statement with the SEC coveringthe shares no later than 45 days after the closing with respect to such shares,and will use our reasonable best efforts to obtain its effectiveness no laterthan the earlier of (i) 90 days after the closing with respect to suchshares, or in the event of SEC review of the registration statement, 120 daysafter the closing and (ii) the third business day following the date onwhich BPZ is notified (orally or in writing, whichever is earlier) by the SECthat the registration statement will not be reviewed or is no longer subject tofurther review and comment unless, upon the advice of legal counsel, it isadvisable not to accelerate the effectiveness of such registration statement.On October 21, 2009, we filed a registration statement with the SECcovering the shares and will use our reasonable best efforts to obtain its effectivenessin accordance with the terms of the September 15, 2009 SubscriptionAgreement.

 

***June 2009Registered Direct Offering of Common Stock***

 

On June 30, 2009, we closed the sale of approximately 18.8 millionshares of our common stock, no par value, in a registered direct offering underan effective shelf registration statement.  The shares of commonstock were priced at $4.66 per share resulting in net proceeds to us, afterplacement agent fees and other fees, of approximately $82.9 million. In connectionwith the registered direct offering, we entered into a placement agencyagreement with Canaccord Adams Inc. as lead placement agent for the offeringalong with Pritchard Capital Partners, LLC, and Raymond James and Associates, Inc.In addition, Rodman & Renshaw, LLC, and Wunderlich Securities, Inc.assisted as agents in the transaction. We paid approximately $4.4 million as a5% placement agency fee of the gross proceeds received by us in accordance withthe terms of the placement agency agreement. We plan on using the proceeds ofthis offering to develop our properties under our existing license contractsand other general corporate purposes consistent with our operating plans.

 

***February 2009Private Placement of Common Stock***

 

On February 23, 2009, we 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, IFC exercisedits pre-emptive right to elect to participate in the private placement offeringresulting in an additional 1.4 million shares of common stock which brought thetotal to approximately 15.7 million shares of common stock sold in the privateplacement offering. The common stock was priced at $3.05 per share resulting innet proceeds to us, after placement agent and financial advisory fees, ofapproximately $45.2 million. No warrants or dilutive securities were issued inconnection with the private placement. A financial advisory fee of $0.7 millionwas 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. We plan on using the proceeds of this offering to develop ourproperties under our existing license contracts and other general corporatepurposes consistent with our operating plans.

 

Under the Stock PurchaseAgreement, we committed to file a registration statement with the SEC andobtain the registration statement’s effectiveness within the time-framesoutlined in the Stock Purchase Agreement. On April 27, 2009, we obtainedeffectiveness of the registration statement related to the Stock PurchaseAgreement in compliance with such time-frames.

 

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***Reserve-Based Credit Facility***

 

In July 2009, we,through our subsidiary, BPZ E&P, secured formal commitments for a $70.0million reserve based credit facility. The syndication of this facility is led by Natixis, a major French bank.  The other institutions participating in thesyndicate include IFC, Scotiabank and Banco de Crédito del Perú.

 

The credit facility willprovide our subsidiary, BPZ E&P, with a revolving line of credit forcapital expenditures and working capital. Subject to final negotiations anddocumentation, the facility is expected to: (i) be secured by a pledge ofthe ownership units of the borrower; (ii) be a senior secured revolvingcredit facility maturing June 30, 2013; (iii) bear interest at LIBORplus 7.0%; and (iv) be subject to a commitment fee of 3.50% on theunutilized portion of the borrowing base.  The $70.0 million credit facility will include the $15.0 millionpreviously received under the IFC Facility and the initial borrowing baseavailable under the facility is expected to be approximately $35.0 million,subject to compliance with loan covenants, inclusive of the $15.0 millionalready funded under the IFC Facility. The borrowing base will be redetermined effective February 28, 2010and thereafter on a semi-annual basis beginning June 30, 2010 based on thevalue of oil reserves from the Corvina field and may include future reservesbooked from the Albacora field. Both fields are located offshore in northwestPeru in Block Z-1.

 

Closing of the creditfacility is dependent upon the successful negotiation of the related loandocuments, and funding is predicated on the satisfaction of certain customaryconditions precedent as will be specified in the loan documents.  Both the Commercial Banks and IFC facilitieswill be governed by a single Common Terms Agreement ensuring the efficientadministration of the Facility.  Closingof this financing is expected during the fourth quarter of thisyear. However, we cannot provide assurance that the financing will closewhen anticipated, if at all.

 

**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, , after the Peruviangovernment completes their expansion, are expected to be capable of handling upto 320 MW of power. The existing substation and transmission lines are ownedand operated by third parties.

 

On September 26,2008, we, through our subsidiary Empressa Electrica Nueva Esperanza S.R.L.,entered into a $51.5 million contract (the “Agreement”) for the purchase ofthree LM6000 gas-fired turbines from GE Packaged Power, Inc. and GEInternational, Inc. Sucursal de Peru (collectively “GE”).  TheAgreement required an initial down payment of $5.1 million and monthly progresspayments of $1.1 million per unit. In January 2009 BPZ and GE entered intoan amendment of the contract. Under the terms of the amendment, both GE and BPZagreed 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 the right to terminate the contract, provided we make a $3.4million 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, we paid the first progress payment of $3.4 million. As of September 30,2009, we have made payments to GE totaling $12.0 million. Failure to make thesecond progress payment in full would result in immediate termination of theAgreement with no cure period or time to correct the breach and a charge-off ofthe $12.0 million of progress payments. If the second progress payment of $3.5million is made by November 16, 2009, we may be required to resume makingmonthly progress payments in amounts yet to be determined. As of November 9,2009, we are in negotiations with GE to modify the terms of the Agreement.

 

Once we determine to bring the Agreement out of thesuspension period, we will provide evidence that payment security has beenestablished and new delivery dates, pricing and payment terms may be determinedby us and GE. All previous payments made by us on the Agreement will be appliedagainst any such new terms.

 

We currently estimate the gas-to-power project willcost approximately $135.0 million, excluding 19% value-added tax which will berecovered via early recovery and/or future revenue billings.  The $135.0million includes $115.0 million for the estimated cost of the power plant and$20.0 million for the estimated cost of the construction of the natural gaspipeline. Accordingly, we commenced discussions with potential joint venturepartners for the gas-to-power project in an attempt to secure additional equityfor the project.  After receiving proposals for the Corvina gas-to-power project,management selected a potential joint venture partner in June 2009 andnegotiations with that party have begun.  The joint venture will besubject to the satisfactory negotiation of a joint venture agreement andrelated documents. We expect any joint venture to result in us holding aminority position in the project.  We expect to retain the responsibilityfor the construction of the pipeline as well as retain ownership of thepipeline. Decisions regarding project financing will bedetermined after the consummation of a joint venture agreement.

 

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**Results ofOperations**

 

The following table sets forth revenues and operatingfor the three and nine months ended September 30, 2009 and 2008 (inthousands):

* *
| ** **                                       | ** ** | **Three Months Ended** | ** ** | ** **    | ** ** | **Nine Months Ended** | ** ** | ** **    | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------|------------|---------------------------------|------------|---------------|------------|
| ** **                                       | ** ** | **September 30,**           | ** ** | **Increase/** | ** ** | **September 30,**          | ** ** | **Increase/** | ** ** |
| ** **                                       | ** ** | **2009**                         | ** ** | **2008**      | ** ** | **(Decrease)**                  | ** ** | **2009**      | ** ** | **2008** | ** ** | **(Decrease)** | ** ** |
| Net sales volume:                                | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **                      | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil and condensate (MBbls)                       |       | 207                              |       | 322           |       | (115                            | )          | 744           |       | 437 |   | 307 |   |
| ** **                                       | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **                      | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue:                                     |       |                             |       |          |       |                            |       |          |       |   |   |   |   |
| Oil and condensate                               |       | $                                | 13,088     |          | $          | 33,440                          |       | $             | (20,352    | ) | $ | 37,362 |   | $ | 44,843 |   | $ | (7,481 | ) |
| ** **                                       | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **                      | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average sales price (approximately):             | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **                      | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil (per Bbl)                                    |       | $                                | 63.10      |          | $          | 103.80                          |       | $             | (40.70     | ) | $ | 50.21 |   | $ | 102.56 |   | $ | (52.35 | ) |
| ** **                                       | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **                      | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating expenses                               | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **                      | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Lease operating expense                          |       | 9,591                            |       | 3,582         |       | $                               | 6,009      |          | 21,445     |   | 6,942 |   | $ | 14,503 |   |
| General and administrative expense               |       | 8,474                            |       | 10,407        |       | (1,933                          | )          | 24,956        |       | 28,644 |   | (3,688 | ) |
| Geological, geophysical and engineering expense  |       | 297                              |       | 211           |       | 86                              |       | 1,195         |       | 507 |   | 688 |   |
| Depreciation, depletion and amortization expense |       | 5,881                            |       | 5,673         |       | 208                             |       | 19,267        |       | 7,947 |   | 11,320 |   |
| Total operating expenses                         |       | $                                | 24,243     |          | $          | 19,873                          |       | $             | 4,370      |   | $ | 66,863 |   | $ | 44,040 |   | $ | 22,823 |   |
|                                             |       |                             |       |          |       |                            |       |          |       |   |   |   |   |
| Operating income (loss)                          |       | $                                | (11,155    | )             | $          | 13,567                          |       | $             | (24,722    | ) | $ | (29,501 | ) | $ | 803 |   | $ | (30,304 | ) |

 

*Net Revenue*

 

For both the three and nine months ended September 30,2009 and 2008, all oil production from the CX-11 platform located in theCorvina field within Block Z-1 in northwest Peru was produced under an extendedwell testing program.

 

For the three months ended September 30, 2009,our net revenue decreased by ($20.4) million to $13.1 million from $33.4million for the same period in 2008. The decrease in net revenue is primarilydue to the ($40.70), or (39%), decrease in the average per barrel sales pricereceived as well as 115 MBbls of decreased oil sales from the CX-11 platform.Oil prices reached record levels during the third quarter of 2008 beforesharply falling towards the end of the year. During the same period in 2009, oil prices have steadily risen from thelows seen at the beginning of the year but are considerably less that the oilprices received during third quarter of the previous year. At September 30,2009, we had five producing wells, CX11-15D, CX11-20XD, CX11-18XD, CX11-21XDand the CX11-14D, compared to four producing wells, the CX11-21XD, CX11-14D,CX11-20XD and the CX11-18XD, at the same period in 2008. During the threemonths ended September 30, 2009, oil production from the CX11-21XD and theCX11-15D wells were at various times and intervals partially or fully suspendeddue to workovers and maintenance of the wells. The workovers and maintenance programs were done to help resolve certaingas channeling and water production issues encountered in the operation of thewells. The CX11-15D produced for approximately two of the three months in theperiod and the CX11-21XD produced for approximately one of the three months inthe period.  During the same period in2008, oil production operations were in full production for three of the fourwells while the CX11-20XD well began its initial production toward the end of September 2008.

 

For the nine months ended September 30, 2009, ournet revenue decreased by ($7.5) million to $37.4 million from $44.8 million forthe same period in 2008. The decrease in net revenue is primarily due to the($52.35), or (51%), decrease in the average per barrel sales price received inthe current year.  During the nine monthsended September 30, 2009, the average per barrel price of oil was lessthan $60.00, while during the same period in 2008, the average per barrel priceof oil was more than $100.00.  Partiallyoffsetting the decrease in average per barrel sales priced received is 307MBbls of increased oil production from the CX-11. During the nine months ended September 30,2009, each of our wells had stopped production for one to two months forworkover and maintenance.  Additionallythe CX11-15D well was placed on production under an extended well testingprogram in early June 2009.  Duringthe same period in 2008, oil production operations were voluntarily suspendedafter January 30, 2008 and our oil sales did not resume until June 2008,due to an incident involving a small tanker leased by our marine transportationcontractor from the Peruvian 

 

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Navy. Subsequent to June 2008, we had full oil production for three ofthe four wells while the CX11-20XD well began its initial production toward theend of September 2008.

 

The revenues above are reported net of royalties owedto the government of Peru. Royalties are calculated by Perupetro as stipulatedin the Block Z-1 license agreement based on a blend of crude oil prices. However, the royalty calculation is based on the prior five-day average pricebefore the crude oil delivery date, as opposed to the price we receive for oilwhich is based on the prior two-week average price before the crude oildelivery date. For both the three and nine months ended September 30,2009, the revenues received by us are net of royalty costs of approximately 5%of gross revenues or $0.7 million and $2.1 million, respectively. For the sameperiods in 2008, the revenues received by us are net of royalty costs ofapproximately 5% of gross revenues or $1.9 million and $2.5 million, respectively.

 

*Lease Operating*

 

For the three months ended September 30, 2009,lease operating expenses increased by $6.0 million to $9.6 million ($46.24 perBbl) from $3.6 million ($11.12 per Bbl) for the same period in 2008. Theincrease in expense is primarily attributable to the additional workover andmaintenance expenses incurred in 2009 and additional production costsassociated with increased production facilities. During the three months ended September 30,2009, we incurred $5.7 million of workover expenses related to the CX11-20XD,CX11-21XD and CX11-15XD wells. Additionally, while quarterly lease operating expenses have increasedproduction has decreased contributing to the increase in the per Bbl amounts.

 

For the nine months ended September 30, 2009,lease operating expenses increased by $14.5 million to $21.4 million ($28.82per Bbl) from $6.9 million ($15.88 per Bbl) for the same period in 2008. Theincrease in expense is primarily attributable to the additional workover andmaintenance expenses incurred in 2009 and additional production costsassociated with increased production facilities. During the nine months ended September 30,2009, we incurred $8.5 million of workover expenses related to the CX11-20XD,CX11-21XD and CX11-15XD wells and $1.3 million of additional expense incurredfor the replacement of underwater hoses and flow lines, respectively.  Partially offsetting these costs are adecrease in the per Bbl amount of lease operating expenses as a result of  the increased production compared to the sameperiod in 2008.

 

*General and Administrative*

 

For the three months ended September 30, 2009,general and administrative expenses decreased ($1.9) million to $8.5 millionfrom $10.4 million for the same period in 2008. Stock-based compensation expense, a subset of general and administrativeexpenses, decreased by ($2.1) million to $2.9 million for the three monthsended September 30, 2009 from $5.0 million for the same period in 2008.The decrease in stock-based compensation expense is primarily due to thedecrease in fair market value of awards granted in 2009 as a result of thedecline in the stock price of BPZ.  Othergeneral and administrative expenses increased $0.2 million to $5.6 million from$5.4 million for the same period in 2008. The increase is primarily due to $1.0million of increased non-deductable tax expenses, increased legal and bank feesand  rent and  insurance expenses that is partially offsetby ($0.8) million of  reduced salarycompensation expenses,  reduced travelingexpenses, and reduced consulting and contract labor expenses.  The reduction in salary and compensationexpense is primarily due to the timing of executive bonuses and employee salaryincreases. During the early part of the second quarter of 2008, executives receivedbonuses and employees received salary increases that were retroactive to thebeginning of the year. During the third quarter of 2009, executives and otherkey employees, that had a voluntary salary reduction in the first half of 2009,received a salary reinstatement effective July 2009.

 

For the nine months endedSeptember 30, 2009, general and administrative expenses decreased ($3.7)million to $25.0 million from $28.6 million for the same period in 2008. Asubset of general and administrative expense, stock-based compensation expensedecreased by ($3.5) million to $9.9 million for the nine months ended September 30,2009 from $13.4 million for the same period in 2008. The decrease instock-based compensation expense is primarily due to the reasons mentionedabove. Stock-based compensation expense for the nine months ended September 30,2009 includes approximately $0.7 million of stock-based compensation expenserelated to the accelerated vesting for certain restricted stock and stockoption awards granted to a former member of the Board of Directors but excludes$0.4 million of compensation expense that is included in “Other income(expense)” on the Consolidated Statements of Operations. The $0.4 million relatesto 100,000 stock options awarded to a former member of the Board of Directors. The grant datefair value of the award was recognized upon issuance of the award.  Other general and administrative expenses decreased($0.2) million to $15.0 million from $15.2 million for the same period in 2008.The decrease is primarily due ($2.0) million of reduced salary compensation expenses, reduced traveling expenses, and reduced consulting and contract laborexpenses partially offset by  $1.8million of  increased legal and bank feesand increased  rent and  insurance expenses.

 

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*Geological, Geophysical andEngineering*

 

For the three months ended September 30, 2009,geological, geophysical and engineering expenses increased $0.1 million to $0.3million compared to $0.2 million for the same period in 2008. For the ninemonths ended September 30, 2009, geological, geophysical and engineeringexpenses increased $0.7 million to $1.2 million compared to $0.5 million forthe same period in 2008.  The increase ingeophysical and engineering expenses for both periods is primarily due toincreased environmental impact studies performed on Blocks XIX, XXII and XXIIIin the current year in preparation for our seismic commitments under ourlicense contracts  compared to theactivities of the prior year.

 

*Depreciation, Depletion andAmortization*

 

For the three months ended September 30, 2009,depreciation, depletion and amortization expense increased $0.2 million to $5.9million from $5.7 million for the same period in 2008. For the nine monthsended September 30, 2009, depreciation, depletion and amortization expenseincreased $11.3 million to $19.3 million from $7.9 million for the same periodin 2008. The increase for both periods is primarily due to increased productiondiscussed above, increased average costs per well being depleted and areduction in the reserve base from 2008 as a result of decreased oil prices atthe end of 2008.

 

*Other Income/(Expense)*

 

For the three months ended September 30, 2009,income from our investment in Ecuador property, net of investment amortization,remained relatively flat compared to the same period in 2008 at $0.2 million.For the nine months ended September 30, 2009, income from our investmentin Ecuador property, net of investment amortization, decreased by ($0.6)million to income of $0.1 million from income of $0.7 million in 2008. For bothperiods, the primary difference is due to receiving $0.2 million in paymentsduring the three and nine month period ended September 30, 2009 from ourinvestment in the Santa Elena Property while receiving $0.2 million and 0.8million for the same periods in 2008. Income/(expense) from our investment in Ecuadoris net of investment amortization expense. For both the three and nine months ended September 30, 2009 and2008, investment income / (expense) includes amortization expense ofapproximately $47,000 and $141,000, respectively. Subsequent to September 30,2009, we received $0.9 million of cash from our investment in Ecuador.

 

For the three and ninemonths ended September 30, 2009, in accordance with the “successfulefforts” method of accounting, we capitalized approximately $0.4 million and$1.1 million of depreciation expense, respectively, mainly related to thetender assist barges serving as support equipment to our drilling activities,and $1.2 million and $3.3 million of interest expense, respectively, toconstruction in progress. For the same periods in 2008, we capitalizedapproximately $0.2 million and $0.7 million of depreciation expense,respectively, and $0.9 million and $2.9 million of interest expense,respectively, to construction in progress.

 

For both the three months and nine months ended September 30,2009, we recorded interest income of approximately $0.2 million, respectively.Interest income for the three months ended September 30, 2008 wasnegligible. During the nine month ended September 30, 2008, we recordedinterest income of approximately $0.2 million.

 

For the three monthsended September 30, 2009 and 2008, other expense decreased by ($0.1)million to income of $0.1 million in 2009 from an expense of $0.0 million in2008. The primary reason for the decrease in expense is due to receivingforeign exchange gains of approximately $0.1 million during the quarter whileforeign exchanges gains and losses were negligible in the prior year.

 

For the nine months endedSeptember 30, 2009 and 2008, other expense increased by $1.4 million to anexpense of $1.2 million in 2009 from income of $0.2 million in 2008.  The primary reason for the increase inexpense is due to $0.4 million of stock compensation expense related to stock optionsawarded to a formermember of the Board of Directors that was recognized uponissuance of the award and approximately$0.8 million of expense related to the settlement of a disputed contractual obligation with aformer consultant of ours concerning services provided to both BPZ and itspredecessor at the time BPZ became publicly traded. We were notified of thisalleged dispute towards the end of the first quarter of 2009. Thesettlement was paid in April 2009. Additionally, for the ninemonths ended September 30, 2008, we recognized $0.2 million of foreigncurrency gains and for the same period in 2009 foreign currency gain and losseswere negligible.

 

*Income Taxes*

 

For the three and ninemonths ended September 30, 2009, we recognized an income tax benefit ofapproximately $1.8 million and $4.7 million, respectively, on a net loss beforeincome tax of approximately $10.8 million and $30.5 million, respectively,resulting in an effective tax rate of 17 % and 15%, respectively. For the sameperiods in 2008, we recognized an income tax provision of approximately $5.1 millionand $5.3 million, respectively, on pre-tax income of approximately $13.7million and $1.8 million, 

 

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respectively. Thedifference between the effective tax rate recognized and the 22% statutory rateprovided for under the Block Z-1 License Contract is largely due to:

 

·                  We have a 100% allowance on our netoperating losses generated in the United States - We have a valuation allowancefor the full amount of the domestic deferred tax asset resulting from theincome tax benefit generated from net losses in the U.S., as we believe, basedon the weight of available evidence, that it is more likely than not that thedeferred tax asset will not be realized prior to the expiration of netoperating 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 both the three and nine months ended September 30, 2009and 2008, we did not have any accrued interest or penalties associated with anyunrecognized tax benefits, nor was any interest expense recognized during thoseperiods.

 

For the three months ended September 30, 2009,our net loss increased ($17.6) million to a net loss of ($9.0) million or($0.08) per basic and diluted share from net income of $8.6 million or $0.11per basic and diluted share for the same period in 2008. For the nine monthsended September 30, 2009, our net loss increased ($22.3) million to a netloss of ($25.8) million or ($0.26) per basic and diluted share from a net lossof ($3.5) million or ($0.05) per basic and diluted share for the same period in2008.

 

**Liquidity,Capital Resources and Capital Expenditures**

 

At September 30, 2009, we had cash and cashequivalents of $66.7 million. We also had $21.3 million in value-added taxreceivable which we will collect over time as we invoice our oil sales. At December 31,2008, we had cash and cash equivalents of $5.3 million, current accountsreceivable of $5.3 million and a value-added tax receivable of $12.1 million.

 

At September 30, 2009 and December 31, 2008,we had a working capital/(deficit) balance of $54.8 million and ($30.6)million, respectively. The difference in working capital/ (deficit) balances isprimarily due to the equity financing activities during the nine months ended September 30,2009.

 

At September 30, 2009 and December 31, 2008,our outstanding long-term debt and short-term debt consisted of a $15.0 millionIFC Facility bearing interest at LIBOR plus 2.75% due December 31,2012.  Additionally at September 30,2009 we have a $4.1 million short-term loan that is payable within six months.At September 30, 2009 and December 31, 2008, our capital leaseobligations, primarily related to the barges used in our marine operations was$5.4 million and $7.8 million, respectively.

 
| ** **                  | ** ** | **For the Nine Months Ended** | ** ** |
|-----------------------------|------------|-------------------------------|------------|
| ** **                  | ** ** | **September 30,**        | ** ** |
| **Cash Flows**              | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| ** **                  | ** ** | **(in thousands)**            | ** ** |
| Cash provided by (used in): |       |                          |       |   |   |
| Operating activities        |       | $                             | (25,208    | ) | $ | 32,411 |   |
| Investing activities        |       | (50,256                       | )          | (70,264 | ) |
| Financing activities        |       | 136,798                       |       | 38,865 |   |
|                             |            |                               |            |  |  |  |  |

 

*OperatingActivities*

 

Cash provided by (used in) operating activitiesdecreased by ($57.6) million to ($25.2) million for the nine months ended September 30,2009 from $32.4 million for the same period in 2008. Cash flow before changesin operating assets and liabilities provided a use of ($20.6) million and isprimarily due to decreased net income as result of lower revenues and highercosts incurred in 2009 compared to the same period in 2008. Changes inoperating assets and liabilities provided a use of cash of ($37.0) millionprimarily due to increases in our VAT receivables and inventory balances anddecreases in our current liabilities.

 

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* *

*InvestingActivities*

 

Net cash used ininvesting activities decreased by $20.0 million to ($50.3) million for thenine months ended September 30, 2009 from ($70.3) million for the sameperiod in 2008 and is primarily due to $16.6 million less capital expendituresand by the change in restricted cash proceeds of $3.4 million.

 

*2009 Equipment Activity*

 

During the ninemonths ended September 30, 2009, we incurred costs of approximately $50.5million associated with our development initiatives for the exploration andproduction of oil and natural gas reserves in Peru.

 

Of  the incurred costs mentionedabove, we incurred $1.0 million of capital expenditures related to thecompletion of the CX11-20XD well, $23.4 million for the drilling and testing ofthe CX11-15D well, $9.9 million for drilling of the Albacora A-14XD well and$1.7 million for the drilling of the CX11-19D well. In preparation for ourcurrent and future drilling campaigns, we incurred costs of $5.7 million, $0.6million and $0.4 million for the inspection and refurbishment of the Albacora,Piedra Redonda and Corvina platforms, respectively, and $1.0 million related tothe Caleta La Cruz dock refurbishment. Additionally, we incurred $3.4 million in construction in processequipment purchases, $1.0 million for our gas to power project, $0.5 million inCorvina production facility additions, $0.4 million on the Albacora productionfacilities additions and $0.3 million on barge improvements.

 

For the three and ninemonths ended September 30, 2009, in accordance with the “successfulefforts” method of accounting, we capitalized approximately $0.4 million and$1.1 million of depreciation expense, respectively, mainly related to thetender assist barges serving as support equipment to our drilling activities,and $1.2 million and $3.3 million of interest expense, respectively, toconstruction in progress. For the same periods in 2008, we capitalizedapproximately $0.2 million and $0.7 million of depreciation expense,respectively and $0.9 million and $2.9 million of interest expense,respectively, to construction in progress.

 

For the three and ninemonths ended September 30, 2009 we recognized $5.9 million and $19.3million of depreciation, depletion and amortization expense, respectively. Forthe same periods in 2008, we recognized $5.7 million and $7.9 million ofdepreciation, depletion and amortization expense, respectively.

 

*FinancingActivities*

 

Cash provided by financing activities increased by $97.9 millionto $136.8 million for the nine months ended September 30, 2009 from $38.9million for the same period in 2008. The increase in cash provided by financingactivities reflects $94.1 million in additional cash proceeds from equityofferings, $3.6 in additional debt borrowings, and $3.3 million in increasedcash as a result of a less repayments of debt which is partially offset by($3.0) million less cash received for the issuances of stock options andwarrants.

 

*Shelf Registration*

 

To finance our operations we may sell additionalshares of our common stock. Our certificate of formation does not provide forpreemptive rights, although we may grant similar rights by contract from timeto time. We currently have approximately $134.6 million in common stockavailable under an effective shelf registration statement, which we may sellfrom time to time in one or more offerings pursuant to underwritten publicofferings, negotiated transactions, block trades or a combination of thesemethods.

 

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*Long-TermDebt and Capital Lease Obligations*

 

***At September 30, 2009 and December 31, 2008long-term debt and capital lease obligations consist of the following (inthousands):***

 
| ** **                                               | ** ** | **September 30,   2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
|                                                     |       |                          |       |                        |       |
| $15 million IFC Senior Note, Libor plus 2.75%, due  2012 |       | $                             | 15,000     |                        | $          | 15,000 |   |
| Capital Lease Obligations                                |       | 5,350                         |       | 7,838                       |       |
| Other                                                    |       | 4,142                         |       | —                      |       |
|                                                     |       | 24,492                        |       | 22,838                      |       |
| Less: Current Portion of Long-Term Debt                  |       | 5,386                         |       | 7,820                       |       |
|                                                     |       | $                             | 19,106     |                        | $          | 15,018 |   |

*** ***

*$15.0Million IFC Reserve-Based Credit Facility*

 

We have a $15.0 millionreserve-based lending facility (“IFC Revolving Facility”) agreement (the “LoanAgreement”) with International Finance Corporation****(“IFC”)through our subsidiaries BPZ E&P 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%, currentlyequivalent to 3.85% based on the six month LIBOR rate of 1.1% at June 30,2009.  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, we are subject to various financial covenants calculated as of thelast day of each quarter, including a life of field coverage ratio, life ofloan coverage ratio, debt to equity ratio and interest coverage ratio. We werein compliance with all material covenants of the Loan Agreement as of September 30,2009.  We requested and received a waiver and amendmentfrom IFC which (i) extended the date by which we were required to satisfycertain conditions precedent with respect to the pending credit facilitycurrently still under negotiations with Natixis and other institutions from September 30,2009 to December 31, 2009, and (ii) extended the period of time toassign a first priority lien on Empresa Electrica Nueva Esperanza S.R.L.’sinterest in the Agreement with GE to IFC until December 2010.

 

*NotePayable*

 

In January 2009, inexchange for receipt of $1.0 million from an individual (“Note Holder”), wesigned a promissory note (the “Note”). The Note originally provided formaturity in July 2009 and bore an annual interest rate of 12.0%. However,in March 2009 we repaid the principal amount and accrued interest in fullto the Note Holder.

 

*CapitalLeases*

 

In February 2009, we made the final lease paymenton the BPZ-02 deck barge at which point title to the barge was transferred tous.

 

In May 2009, weentered into an amendment of our lease agreement for two barges currently undercharter, the Namoku and the Nu’uanu. Under the terms of the amended leaseagreement, the current charter, originally set to expire in November 2009,is extended for five years commencing on May 1, 2009.  During the first 18 months of the amendedlease term, the daily charter rate for the use of both barges isfixed. Commencing on November 2010, the daily charter rate for theuse of both vessels will be based on a tiered structure with the daily ratedependent upon the amount of the previous month’s average daily per barrelprice of West Texas Intermediate Crude Oil (“WTI”), as indicated on the NewYork Mercantile Exchange. Any amount paid by us after November 2010 overthe initial daily rate as a result of the escalated tiered structure based onthe price of WTI will be considered contingent rental payments.  The amended lease agreement contains a $3.0million purchase option after the third year of the lease, a $2.0 millionpurchase option after the fourth year of the lease and a mandatory $1.0 millionpurchase obligation by us after the fifth year of the lease.

 

We accounted for the amended lease agreement inaccordance with ASC Topic 840, “Leases”, previously accounted for under SFAS No. 13,“Accounting for Leases (As Amended)”. Under the guidance, the lease agreementcontinues to be accounted for as a capital lease and the imputed interest ratenecessary to reduce the net minimum lease payments to present value over thelease term is 34.9%.

 

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The following is a summary of scheduled minimum leasepayments under the amended barge lease agreement at September 30, 2009 (inthousands):

 
| 2009                                                      |   | $     | 460    |   |
|-----------------------------------------------------------|--------|-------|--------|--------|
| 2010                                                      |   | 1,825 |   |
| 2011                                                      |   | 1,825 |   |
| 2012                                                      |   | 1,830 |   |
| 2013                                                      |   | 1,825 |   |
| Therafter                                                 |   | 1,600 |   |
| Total Minimum Lease Payments                              |   | 9,365 |   |
| Less: Amounts Representing Interest                       |   | 4,889 |   |
| Present Value of Minimum Lease Payments                   |   | 4,476 |   |
| Less: Current Portion of Obligations Under Capital  Lease |   | 371   |   |
| Long-Term Portion of Obligations Under Capital  Lease     |   | $     | 4,105  |   |

 

*Other*

 

In July 2009, we, through our subsidiary, BPZE&P, entered into a $5.1 million short-term loan agreement to finance thepurchase of casing and accessories for use in our current and futureoperations. The $5.1 million short-term loan bears an annual interest rate of5.45% and is to be repaid in five monthly installments of approximately $1.0million starting September 2009.  Inconnection with the $5.1 million short-term loan agreement, we were required todeposit $1.0 million with the lending institution as a guaranty for theloan.  The $1.0 million will be appliedto the last installment of the loan repayments.

 

*Performance Bonds*

 

As of September 30,2009, we have restricted cash deposits of $4.8 million, which partiallycollateralizes insurance and performance bonds. In connection with ourproperties 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$0.8 million of restricted cash to collateralize insurance bonds for importduties related to the BPZ-01 barge and crane on board the BPZ-01. We also have$1.0 million and $0.1 million of restricted cash held in trust accounts inorder to secure financing to support our operations.

 

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

 

*Liquidity Outlook*

 

Weestimate for the remainder of 2009 our required principal and interest paymentsfor our outstanding debt to be approximately $3.4 million and our required principaland interest payments for our capital lease obligations to be approximately$0.7 million. For the remainder of the year, we expect capital expenditures andseismic data expenditures to be approximately $63.7 million, which includes$54.0 million primarily related to the drilling, development and production,including marine support vessels and equipment, of the Corvina and Albacorafields located in Block Z-1 in northwest Peru. In addition, we may incur approximately $6.2 million and $3.5 millionfor seismic data expenditures and payment towards the purchase of three LM6000gas-fired turbines, respectively.

 

Our major sources of funding to date have been throughoil sales, equity financing and, to a lesser extent, debt financing activities.With our current cash balance, proceeds from the expected IFC and Natixis debtfacilities, as discussed above, current and prospective Corvina andAlbacora oil development cash flow, other potential third-party financing andpotential financing from future sales of equity, we believe we will havesufficient capital resources to execute our current Corvina and Albacora oildevelopment projects and undertake our current commitments under theother license contracts,service our current debt obligationsand execute our gas-to-power project once a suitablejoint venture agreement is executed and project funding becomes available.However, the timing and execution of our projects are dependent on a variety offactors, including the technical design of facilities, permitting approval,availability of equipment, time and costs required for delivery of materialsand construction operations, performance by contractors and the success ofnegotiations with a joint venture partner and planned financing, many of whichfactors are outside our control and the success of which cannot be assured.

 

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**Off-BalanceSheet Arrangements**

 

As of September 30,2009, we had no transactions, agreements or other contractual arrangements withunconsolidated entities or financial partnerships, often referred to as specialpurpose entities, which generally are established for the purpose offacilitating 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 June 2009, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) SFASNo. 168, now codified as Accounting Standard Codification (“ASC”) Topic105, “Generally Accepted AccountingPrinciples” (“ASC Topic 105”)*.*  ASCTopic 105 provides the FASB ASC as the single source of authoritative GAAPrecognized by the FASB to be applied by nongovernmental entities. The FASB ASCchanges GAAP from a standards based model, with thousands of standards, to atopically based model. Rules and interpretive releases of the Securitiesand Exchange Commission (“SEC”) under authority of federal securities laws arealso sources of authoritative GAAP for SEC registrants. On the effective dateof ASC Topic 105 the ASC supersedes all then-existing non-SEC accounting andreporting standards. All other nongrandfathered non-SEC accounting literaturenot included in the ASC will become nonauthoritative.   The provisions ofFASB ASC Topic 105 are effective for interim and annual periods ending after September 15,2009 and, accordingly, are effective for us for the current fiscal reportingperiod. The adoption of the ASC did not have an impact on our financialposition, results of operations or cash flows.

 

In May 2009, the FASB issued SFAS No. 165, “SubsequentEvents” (“SFAS No. 165”), now codified as ASC Topic 855, “Subsequent Events” (“ASC Topic 855”). Thisstandard establishes the accounting for and disclosure of events that occurafter the balance sheet date but before financial statements are issued or areavailable to be issued. It requires the disclosure of the date through which anentity has evaluated subsequent events and the basis for that date, that is,whether that date represents the date the financial statements were issued orwere available to be issued. We adopted ASC Topic 855 in the second quarter of2009. The adoption of ASC Topic 855 did not have a material impact on ourconsolidated financial position, results of operations or cash flows. See Note1, “Basis of Presentation and Significant Accounting Policies”, to theaccompanying consolidated financial statements for the related disclosure.

 

In addition,******on December 31, 2008, the SEC adopted the final rules regardingamendments to current Oil and Gas reporting requirements. The amendments aredesigned to modernize and update the oil and gas disclosure requirements toalign them with current practices and changes in technology and include thefollowing:

 

·                  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. We are currentlyevaluating the impact of the amendments on our consolidated financial position,results of operations and cash flows.

 

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**Disclosure Regarding Forward-LookingStatements**

 

We caution that thisdocument contains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995, Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934.  All statements, other than statements ofhistorical facts, included in or incorporated by reference into this Form 10-Qwhich address activities, events or developments which we expect, believe oranticipate will or may occur in the future are forward-looking statements.  The words “believes,” “intends,” “expects,” “anticipates,”“projects,” “estimates,” “predicts,” “plans” and similar expressions, or thenegative thereof, are also intended to identify forward-lookingstatements.  In particular, statements,expressed or implied, concerning future operating results, the ability toreplace or increase reserves, or to increase production, or the ability togenerate income or cash flows are by nature, forward-looking statements.  These statements are based on certainassumptions and analyses made by the management of BPZ in light of itsexperience and its perception of historical trends, current conditions andexpected future developments as well as other factors it believes areappropriate in the circumstances. However, forward-looking statements are not guarantees of performanceand no assurance can be given that these expectations will be achieved.

 

Important factors thatcould cause actual results to differ materially from the expectations reflectedin the forward-looking statements include, but are not limited to, any of thefollowing in the jurisdictions in which BPZ or its subsidiaries are doingbusiness:  Market conditions,uncertainties inherent in oil and gas production operations and estimatingreserves, unexpected future capital expenditures, the timing and extent ofchanges in commodity prices for crude oil, natural gas and related products,currency exchange rates, interest rates, inflation, the availability of goodsand services, drilling and other operational risks, successful installation andoperation of the new turbines, availability of capital resources, timing ofsyndication of and disbursements under the anticipated debt financing with IFCand Natixis, success of our operational risk management activities, governmentalrelations, legislative or regulatory changes, political developments, acts ofwar and terrorism.  A more detaileddiscussion on risks relating to the oil and natural gas industry and to us isincluded in our Annual Report on Form 10-K for the year ended December 31,2008.

 

In light of these risks,uncertainties and assumptions, we caution the reader that these forward-lookingstatements are subject to risks and uncertainties, many of which are beyond ourcontrol, which could cause actual events or results to differ materially fromthose expressed or implied by the statements. All subsequent written and oral forward-looking statements attributableto us or persons acting on our behalf are expressly qualified in their entiretyby the cautionary statements.  Weundertake no obligations to update or revise our forward-looking statements,whether as a result of new information, future events or otherwise.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

Theprimary objective of the following information is to provide forward-lookingquantitative and qualitative information about our potential exposure to marketrisks.  The term “market risk” refers tothe risk of loss arising from adverse changes in interest rates, oil andnatural 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.

 

*Interest Rate Risk*

 

As of September 30, 2009, we had long-term debtand capital lease obligations of approximately $19.1 million and currentmaturities of long-term debt and capital lease obligations of approximately$5.4 million, consisting of capital lease obligations for the FPSO andproduction equipment, two loans for office furniture and a short term loan agreement.

 

The $15.0 million reserve-based lending facility isvariable rate debt and bears interest at an approximate rate of LIBOR plus2.75%. The variable rate debt exposes us to the risk of increased interestexpense in the event of increases in short-term interest rates. If the variableinterest rate were to increase by 1% from December 2008 levels, interestexpense would increase by approximately $0.2 million annually. Thecarrying value of the variable interest rate debt approximates fair value as itbears interest at current market rates.

 

Additionally we, through our subsidiary, BPZ E&P,entered into a $5.1 million short-term loan agreement to finance the purchaseof casing and accessories for use in our current and future operations. The$5.1 million short-term loan bears an annual interest rate of 5.45%. Due to theshort term nature of the loan, we do not expect the short-term loan will exposeus to a material amount of interest rate risk.

 

The capital lease obligation for the FPSO andtransportation barges began in August 2007 and is set to expire in May 2014.Lease payments are variable based on the working status of the barges, with apurchase option of $3.0 million in May 2012, $2.0 

 

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million in May 2013, and required to be purchasedby us for $1.0 million in May 2014.  The imputed interest ratenecessary to reduce the net minimum lease payments to present value over thelease term is 34.9%. The capital lease obligation for the production equipmenton board the FPSO barge, the Namoku, is set to expire in June 2010, andcontains a purchase option at the end of twelve months and another at the endof 24 months and stipulates an interest rate of 18.0%.  We have twoadditional loans for office equipment containing a term of 60 months andbearing fixed interest rates of 5.94% and 9.44%, respectively, with principaland interest payments due on a monthly basis. We do not expect a significantchange in the market interest rate to impact the interest on our capital leaseobligations.  However, significant changes in market interest rates maysignificantly affect the level of financing IFC and Natixis will structure withrespect to our project in Peru.

 

*Commodity Price Risk*

 

With respect to our oil and gas business, anyrevenues, cash flow, profitability and future rate of growth we achieve will begreatly dependent upon prevailing prices for oil and gas.  Our ability tomaintain or increase our borrowing capacity and to obtain additional capital onattractive terms is also expected to be dependent on oil and gas prices. Historically, oil and gas prices and markets have been volatile and are likelyto continue to be volatile in the future.  Prices for oil and gas aresubject to potentially wide fluctuations in response to relatively minorchanges in supply of and demand for oil and gas, market uncertainty, and avariety of additional factors that are beyond our control.

 

Lower oil and natural gas prices may not only decreaseour revenues on a per unit basis, but may also reduce the amount of oil andnatural gas we can produce economically, if any.  A substantial orextended decline in oil and natural gas prices may materially affect our futurebusiness, financial condition, results of operations, liquidity and borrowingcapacity, and  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 planned electricity generationbusiness, the price we can obtain for the sale of power may not rise at thesame rate, or may not rise at all, to match a rise in our cost to produce andtransport gas reserves to our initial 135MW power plant in Caleta Cruz. Prices for both electricity and natural gas have been historically veryvolatile.  The profitability of this business depends in large part on thedifference between the price of power and the price of fuel used to generatepower, or “spark spread.”

 

*Foreign Currency Exchange Rate Risk*

 

The U.S. Dollar is the functional currency for ouroperations in both Peru and Ecuador.  Ecuador has adopted the U.S. Dollaras its official currency.  Peru, however, uses its local currency, theNuevo Sol, in addition to the U.S. Dollar, and therefore, our financial resultsare subject to favorable or unfavorable fluctuations in the exchange rate andinflation in that country.  Transaction differences have been nominal todate but are expected to increase as our activities in Peru continue toescalate.  For the three and nine months ended September 30, 2009,exchange rate gains and losses were approximately $0.2 million.  For the three months ended September 30,2008, exchange rate gains and losses were negligible. For the nine months endedSeptember 30, 2008, we recognized exchange rate gains of approximately$0.2 million.

 

**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 isaccumulated and communicated to our management, including our principalexecutive officer and principal financial officer, as appropriate, to allowtimely decisions regarding required disclosure.

 

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

 

During the quarter ended September 30, 2009,there was no change in internal control over financial reporting thatmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II**

 

**Item 1. Legal Proceedings**

 

See Note 15, “Legal Proceedings”, of the Notes to Unaudited Consolidated FinancialStatements included in thisForm 10-Q and Item 3 of Part I of our 2008 Annual Report foradditional discussion of legal proceedings which are incorporated into Part II,Item 1. “Legal Proceedings” by reference.

 

**Item 1A. Risk Factors**

 

Item 1A, “Risk Factors” of our Annual Report on Form 10-Kfor the year ended December 31, 2008, includes a detailed discussion ofour risk factors.  For the three and ninemonths ended September 30, 2009, there are no material changes in our riskfactors as previously described in our Annual Report on Form 10-K.

 

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

 

On September 15, 2009, we closed a private placement ofapproximately 1.6 million shares of common stock, no par value, to IFC pursuantto a Subscription Agreement dated September 15, 2009. This privateplacement was related to our registered direct offering of approximately 18.8million shares of Common Stock at a price of $4.66 per share that closed on June 30,2009. Pursuant to the Subscription Agreement dated December 16, 2006 (the “SubscriptionAgreement”) by and between IFC and us, IFC has the right, within 45 days ofnotice of the offering, to purchase shares of the our Common Stock for the sameprice and terms as the participants in an offering to retain its proportionateownership in us. IFC exercised its pre-emptive right to purchase approximately1.6 million shares of Common Stock at the offering price of $4.66 per share towhich it was entitled under the Subscription Agreement, resulting in grossproceeds to us of approximately $7.6 million. The transaction was submitted toand approved by the shareholders of BPZ at a Special Meeting of Shareholders onAugust 24, 2009. No warrants or dilutive securities were issued to IFC inconnection with the private placement. The shares were placed directly by us.The Company plans on using the proceeds of this offering to develop itsproperties under its existing license contracts and other general corporatepurposes consistent with our operating plans.

 

In connection with the offer and sale of the commonstock in the private placement, the Company relied on an exemption fromregistration under Section 4(2) of the Securities Act of 1933, asamended, and Regulation D, Rule 506 promulgated thereunder. The sale ofcommon stock was made to an accredited investor as defined in Regulation D, Rule 501(a),each of whom had adequate access to information pertaining to the Company.Furthermore, no advertisements or general solicitation activities were made orundertaken by the Company and the securities issued in the private placementare restricted as defined in Rule 144 of the Securities Act of 1933.

 

Under the September 15, 2009 SubscriptionAgreement, we committed to file a registration statement with the SEC coveringthe shares no later than 45 days after the closing with respect to such shares,and will use our reasonable best efforts to obtain its effectiveness no laterthan the earlier of (i) 90 days after the closing with respect to suchshares, or in the event of SEC review of the registration statement, 120 daysafter the closing and (ii) the third business day following the date onwhich BPZ is notified (orally or in writing, whichever is earlier) by the SECthat the registration statement will not be reviewed or is no longer subject tofurther review and comment unless, upon the advice of legal counsel, it isadvisable not to accelerate the effectiveness of such registration statement.On October 21, 2009, we filed a registration statement with the SECcovering the shares and will use our reasonable best efforts to obtain itseffectiveness in accordance with the terms of the September 15, 2009Subscription Agreement.

 

**Item 4. Submission of Matters to aVote of Security Holders**

 

A Special Meeting of Shareholders was held on August 24,2009. At this meeting, the shareholders approved the proposal to issue up to1,889,415 shares of common stock to the International Finance Corporation by thefollowing vote:

 
| ** **                                                                                         | ** ** | ** **         | ** ** | **Votes**   | ** ** | ** **      | ** ** | **Broker**    | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------|------------|-----------------|------------|---------------|------------|
| **Proposal**                                                                                       | ** ** | **Votes For** | ** ** | **Against** | ** ** | **Abstentions** | ** ** | **Non-votes** | ** ** |
| Proposal  to issue up to 1,889,415 shares of commonstock to the International Finance  Corporation |       | 72,941,840         |       | 925,462     |       | 82,036          |       | —        |       |

 

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**Item 5. Market for Registrant’sCommon Equity, and Related Stockholder Matters and Issuer Purchases of EquitySecurities**

 

On October 19, 2009, the Company provided writtennotice to the NYSE Amex that the Company intends to transfer its listing to theNew York Stock Exchange (“NYSE”) and, as such, the Company will voluntarilycease trading on the NYSE Amex, with its last day of trading on the NYSE Amexto be October 23, 2009.  The Company’s common stock, no par value pershare, was approved for listing on the NYSE and commenced trading on October 26,2009 under the Company’s current stock symbol “BPZ”.

 

**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: November 9,  2009 |                                               | /s/  MANUEL  PABLO ZÚÑIGA-PFLÜCKER |
|     |                         | Manuel Pablo  Zúñiga-Pflücker       |
| * * | * *                     | *President,  Chief Executive Officer and Director* |
|          |                              |                                                    |  |

 

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