---





UNITED STATES

SECURITIES
AND EXCHANGE COMMISSION

Washington, D. C. 20549



FORM 10-Q



x QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2005



OR



 ̈ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



Commission file number: 001-31470



PLAINS EXPLORATION & PRODUCTION COMPANY

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0430755                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



700 Milam Street, Suite 3100

Houston, Texas 77002

(Address of
principal executive offices)

(Zip Code)



(713) 579-6000

(Registrants telephone number,
including area code)



Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.    Yes x    No  ̈



Indicate by check mark
whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes x    No  ̈



77.4 million shares of
Common Stock, $0.01 par value, issued and outstanding at April 29, 2005.



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PLAINS EXPLORATION & PRODUCTION COMPANY



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                     |  |   
|---------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                        |  |   
|                                                                                                     | 
|ITEM 1. Unaudited Financial Statements:                                                              |  |   
|                                                                                                     | 
|Consolidated Balance Sheets  March 31, 2005 and December 31, 2004                                    |  | 1 
|Consolidated Statements of Income  For the three months ended March 31, 2005 and 2004                |  | 2 
|Consolidated Statements of Cash Flows  For the three months ended March 31, 2005 and 2004            |  | 3 
|Consolidated Statements of Comprehensive Income  For the three months ended March 31, 2005 and 2004  |  | 4 
|Consolidated Statement of Changes in Stockholders Equity  For the three months ended March 31, 2005 |  | 5 
|Notes to Consolidated Financial Statements                                                           |  | 6 
|                                                                                                     | 
|ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations         |  | 22
|                                                                                                     | 
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                                   |  | 35
|                                                                                                     | 
|ITEM 4. Controls and Procedures                                                                      |  | 38
|                                                                                                     | 
|PART II. OTHER INFORMATION                                                                           |  | 39



(i)



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands of dollars)



|                                                            |  |                |           |   |                   |   |           |  
|----------------------------------------------------------- |  | -------------- | --------- | - | ----------------- | - | --------- | -
|                                                            |  | March 31, 2005 |           |   | December 31, 2004 |  
|ASSETS                                                      |  |                |           |   |                   |   |           |  
|Current Assets                                              |  |                |           |   |                   |   |           |  
|Cash and cash equivalents                                   |  | $              | 1,538     |   |                   | $ | 1,545     |  
|Accounts receivable - Plains All American Pipeline, L.P.    |  |                | 34,893    |   |                   |   | 26,224    |  
|Other accounts receivable                                   |  |                | 86,583    |   |                   |   | 96,064    |  
|Inventories                                                 |  |                | 9,345     |   |                   |   | 8,505     |  
|Deferred income taxes                                       |  |                | 194,187   |   |                   |   | 76,823    |  
|Assets held for sale                                        |  |                | 44,128    |   |                   |   | 44,222    |  
|Other current assets                                        |  |                | 13,948    |   |                   |   | 4,784     |  
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  |                | 384,622   |   |                   |   | 258,167   |  
|                                                            |  |                |           |   |                   |   |           |  
|Property and Equipment, at cost                             |  |                |           |   |                   |   |           |  
|Oil and natural gas properties - full cost method           |  |                |           |   |                   |   |           |  
|Subject to amortization                                     |  |                | 2,494,343 |   |                   |   | 2,402,179 |  
|Not subject to amortization                                 |  |                | 77,725    |   |                   |   | 79,405    |  
|Other property and equipment                                |  |                | 13,221    |   |                   |   | 12,546    |  
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  |                | 2,585,289 |   |                   |   | 2,494,130 |  
|Less allowance for depreciation, depletion and amortization |  |                | (365,964  | ) |                   |   | (323,041  | )
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  |                | 2,219,325 |   |                   |   | 2,171,089 |  
|                                                            |  |                |           |   |                   |   |           |  
|Goodwill                                                    |  |                | 169,828   |   |                   |   | 170,467   |  
|                                                            |  |                |           |   |                   |   |           |  
|Other Assets                                                |  |                | 35,778    |   |                   |   | 33,522    |  
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  | $              | 2,809,553 |   |                   | $ | 2,633,245 |  
|                                                            |  |                |           |   |                   |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |                |           |   |                   |   |           |  
|Current Liabilities                                         |  |                |           |   |                   |   |           |  
|Accounts payable                                            |  | $              | 93,519    |   |                   | $ | 90,469    |  
|Commodity derivative contracts                              |  |                | 453,494   |   |                   |   | 175,473   |  
|Royalties payable                                           |  |                | 33,580    |   |                   |   | 39,174    |  
|Stock appreciation rights                                   |  |                | 54,502    |   |                   |   | 34,589    |  
|Interest payable                                            |  |                | 11,562    |   |                   |   | 13,070    |  
|Deposit on assets held for sale                             |  |                | 40,711    |   |                   |   | 40,711    |  
|Other current liabilities                                   |  |                | 24,372    |   |                   |   | 32,909    |  
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  |                | 711,740   |   |                   |   | 426,395   |  
|                                                            |  |                |           |   |                   |   |           |  
|Long-Term Debt                                              |  |                |           |   |                   |   |           |  
|8.75% Senior Subordinated Notes                             |  |                | 276,681   |   |                   |   | 276,727   |  
|7.125% Senior Notes                                         |  |                | 248,764   |   |                   |   | 248,741   |  
|Revolving credit facility                                   |  |                | 143,400   |   |                   |   | 110,000   |  
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  |                | 668,845   |   |                   |   | 635,468   |  
|                                                            |  |                |           |   |                   |   |           |  
|Other Long-Term Liabilities                                 |  |                |           |   |                   |   |           |  
|Asset retirement obligation                                 |  |                | 128,775   |   |                   |   | 126,850   |  
|Commodity derivative contracts                              |  |                | 363,994   |   |                   |   | 244,140   |  
|Other                                                       |  |                | 10,511    |   |                   |   | 10,534    |  
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  |                | 503,280   |   |                   |   | 381,524   |  
|                                                            |  |                |           |   |                   |   |           |  
|Deferred Income Taxes                                       |  |                | 276,144   |   |                   |   | 319,483   |  
|                                                            |  |                |           |   |                   |   |           |  
|Commitments and Contingencies (Note 6)                      |  |                |           |   |                   |   |           |  
|Stockholders Equity                                        |  |                |           |   |                   |   |           |  
|Common stock                                                |  |                | 774       |   |                   |   | 772       |  
|Additional paid-in capital                                  |  |                | 918,050   |   |                   |   | 913,466   |  
|Retained earnings (deficit)                                 |  |                | (125,270  | ) |                   |   | 80,406    |  
|Accumulated other comprehensive income                      |  |                | (144,010  | ) |                   |   | (123,874  | )
|Treasury stock, at cost                                     |  |                | -         |   |                   |   | (395      | )
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  |                | 649,544   |   |                   |   | 870,375   |  
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  | $              | 2,809,553 |   |                   | $ | 2,633,245 |  
|                                                            |  |                |           |   |                   |   |           |  



See notes to consolidated
financial statements.



1



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)

|                                                                              |  |                              |          |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | ------- | -
|                                                                              |  | Three Months Ended March 31, |         
|                                                                              |  | 2005                         |          |   | 2004 |  
|Revenues                                                                      |  |                              |          |   |      |   |         |  
|Oil sales to Plains All American Pipeline, L.P.                               |  | $                            | 74,608   |   |      | $ | 64,267  |  
|Other oil sales                                                               |  |                              | 105,550  |   |      |   | 4,037   |  
|Oil hedging                                                                   |  |                              | (45,445  | ) |      |   | (19,033 | )
|Gas sales (includes $7.8 million related to buy/sell contracts in 2005)       |  |                              | 53,653   |   |      |   | 42,386  |  
|Gas hedging                                                                   |  |                              | 826      |   |      |   | 1,068   |  
|Other operating revenues                                                      |  |                              | 883      |   |      |   | 236     |  
|                                                                              |  |                              |          |   |      |   |         |  
|                                                                              |  |                              | 190,075  |   |      |   | 92,961  |  
|                                                                              |  |                              |          |   |      |   |         |  
|Costs and Expenses                                                            |  |                              |          |   |      |   |         |  
|Production costs                                                              |  |                              |          |   |      |   |         |  
|Lease operating expenses                                                      |  |                              | 32,328   |   |      |   | 18,961  |  
|Steam gas costs (includes $8.1 million related to buy/sell contracts in 2005) |  |                              | 16,681   |   |      |   | 957     |  
|Electricity                                                                   |  |                              | 6,575    |   |      |   | 5,762   |  
|Production and ad valorem taxes                                               |  |                              | 7,336    |   |      |   | 3,973   |  
|Gathering and transportation expenses                                         |  |                              | 3,545    |   |      |   | 1,196   |  
|General and administrative (Note 1)                                           |  |                              | 37,528   |   |      |   | 20,092  |  
|Depreciation, depletion and amortization                                      |  |                              | 43,593   |   |      |   | 15,840  |  
|Accretion                                                                     |  |                              | 1,745    |   |      |   | 727     |  
|                                                                              |  |                              |          |   |      |   |         |  
|                                                                              |  |                              | 149,331  |   |      |   | 67,508  |  
|                                                                              |  |                              |          |   |      |   |         |  
|Income from Operations                                                        |  |                              | 40,744   |   |      |   | 25,453  |  
|Other Income (Expense)                                                        |  |                              |          |   |      |   |         |  
|Interest expense                                                              |  |                              | (11,403  | ) |      |   | (6,930  | )
|Gain (loss) on mark-to-market derivative contracts                            |  |                              | (374,052 | ) |      |   | (1,565  | )
|Interest and other income (expense)                                           |  |                              | 292      |   |      |   | 262     |  
|                                                                              |  |                              |          |   |      |   |         |  
|Income Before Income Taxes                                                    |  |                              | (344,419 | ) |      |   | 17,220  |  
|Income tax (expense) benefit                                                  |  |                              |          |   |      |   |         |  
|Current                                                                       |  |                              | -        |   |      |   | (188    | )
|Deferred                                                                      |  |                              | 138,801  |   |      |   | (6,634  | )
|                                                                              |  |                              |          |   |      |   |         |  
|Net Income (Loss)                                                             |  | $                            | (205,618 | ) |      | $ | 10,398  |  
|                                                                              |  |                              |          |   |      |   |         |  
|Earnings (loss) per share, basic and diluted                                  |  | $                            | (2.66    | ) |      | $ | 0.26    |  
|                                                                              |  |                              |          |   |      |   |         |  
|Weighted Average Shares Outstanding                                           |  |                              |          |   |      |   |         |  
|Basic                                                                         |  |                              | 77,202   |   |      |   | 40,247  |  
|                                                                              |  |                              |          |   |      |   |         |  
|Diluted                                                                       |  |                              | 77,202   |   |      |   | 40,488  |  
|                                                                              |  |                              |          |   |      |   |         |  





See notes to consolidated financial statements.



2



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands of dollars)



|                                                           |  |                              |          |   |      |   |         |  
|---------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | ------- | -
|                                                           |  | Three Months Ended March 31, |         
|                                                           |  | 2005                         |          |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |                              |          |   |      |   |         |  
|Net income (loss)                                          |  | $                            | (205,618 | ) |      | $ | 10,398  |  
|Items not affecting cash flows from operating activities   |  |                              |          |   |      |   |         |  
|Depreciation, depletion, amortization and accretion        |  |                              | 45,338   |   |      |   | 16,567  |  
|Deferred income taxes                                      |  |                              | (138,801 | ) |      |   | 6,634   |  
|Commodity derivative contracts                             |  |                              |          |   |      |   |         |  
|Loss (gain) on derivatives                                 |  |                              | 354,510  |   |      |   | (2,911  | )
|Reclassify financing derivative settlements                |  |                              | 50,714   |   |      |   | -       |  
|Noncash compensation                                       |  |                              |          |   |      |   |         |  
|Stock appreciation rights                                  |  |                              | 19,886   |   |      |   | 6,303   |  
|Other                                                      |  |                              | 2,829    |   |      |   | 2,488   |  
|Other noncash items                                        |  |                              | (23      | ) |      |   | (44     | )
|Change in assets and liabilities from operating activities |  |                              |          |   |      |   |         |  
|Accounts receivable and other assets                       |  |                              | (3,526   | ) |      |   | (1,300  | )
|Accounts payable and other liabilities                     |  |                              | (27,513  | ) |      |   | (7,753  | )
|                                                           |  |                              |          |   |      |   |         |  
|Net cash provided by operating activities                  |  |                              | 97,796   |   |      |   | 30,382  |  
|                                                           |  |                              |          |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |                              |          |   |      |   |         |  
|Oil and gas properties                                     |  |                              | (80,954  | ) |      |   | (32,105 | )
|Proceeds from sales of properties                          |  |                              | -        |   |      |   | 22,732  |  
|Other property and equipment                               |  |                              | (675     | ) |      |   | (218    | )
|                                                           |  |                              |          |   |      |   |         |  
|Net cash used in investing activities                      |  |                              | (81,629  | ) |      |   | (9,591  | )
|                                                           |  |                              |          |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |                              |          |   |      |   |         |  
|Revolving credit facilities                                |  |                              |          |   |      |   |         |  
|Borrowings                                                 |  |                              | 287,000  |   |      |   | 68,600  |  
|Repayments                                                 |  |                              | (253,600 | ) |      |   | (88,600 | )
|Derivative settlements                                     |  |                              | (50,714  | ) |      |   | -       |  
|Other                                                      |  |                              | 1,140    |   |      |   | (183    | )
|                                                           |  |                              |          |   |      |   |         |  
|Net cash used in financing activities                      |  |                              | (16,174  | ) |      |   | (20,183 | )
|                                                           |  |                              |          |   |      |   |         |  
|Net increase in cash and cash equivalents                  |  |                              | (7       | ) |      |   | 608     |  
|Cash and cash equivalents, beginning of period             |  |                              | 1,545    |   |      |   | 1,377   |  
|                                                           |  |                              |          |   |      |   |         |  
|Cash and cash equivalents, end of period                   |  | $                            | 1,538    |   |      | $ | 1,985   |  
|                                                           |  |                              |          |   |      |   |         |  



See notes to consolidated
financial statements.



3



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands of dollars)



|                                                     |  |                              |          |   |      |   |         |  
|---------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | ------- | -
|                                                     |  | Three Months Ended March 31, |         
|                                                     |  | 2005                         |          |   | 2004 |  
|                                                     |  |                             
|Net Income (Loss)                                    |  | $                            | (205,618 | ) |      | $ | 10,398  |  
|                                                     |  |                              |          |   |      |   |         |  
|Other Comprehensive Income (Loss)                    |  |                              |          |   |      |   |         |  
|Commodity hedging contracts                          |  |                              |          |   |      |   |         |  
|Change in fair value                                 |  |                              | (85,646  | ) |      |   | (66,102 | )
|Reclassification adjustment for settled contracts    |  |                              | 16,199   |   |      |   | 17,848  |  
|Reclassification adjustment for terminated contracts |  |                              | 29,086   |   |      |   | -       |  
|Related tax benefit                                  |  |                              | 20,225   |   |      |   | 19,150  |  
|Other                                                |  |                              |          |   |      |   |         |  
|Interest rate swap and minimum pension liability     |  |                              | -        |   |      |   | 41      |  
|Related tax expense                                  |  |                              | -        |   |      |   | (17     | )
|                                                     |  |                              |          |   |      |   |         |  
|                                                     |  |                              | (20,136  | ) |      |   | (29,080 | )
|                                                     |  |                              |          |   |      |   |         |  
|Comprehensive Income (Loss)                          |  | $                            | (225,754 | ) |      | $ | (18,682 | )
|                                                     |  |                              |          |   |      |   |         |  



See notes to consolidated
financial statements.



4



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (Unaudited)

(share and dollar amounts in thousands)



|                            |        |              |        |                            |     |  |                             |         |   |                                        |        |          |                |  |   |          |   |  |     |   |  |   |      |   |  |   |          |  
|--------------------------- | ------ | ------------ | ------ | -------------------------- | --- |  | --------------------------- | ------- | - | -------------------------------------- | ------ | -------- | -------------- |  | - | -------- | - |  | --- | - |  | - | ---- | - |  | - | -------- | -
|                            |        | Common Stock |        | Additional Paid-in Capital |     |  | Retained Earnings (Deficit) |         |   | Accumulated Other Comprehensive Income |        |          | Treasury Stock |  |   | Total    |  
|                            |        |              |        |                            |    
|                            |        |              |        |                            |    
|                            | Shares |              | Amount |                            |     |  |                             | Shares  |   |                                        | Amount |          |               
|                            |        |              |        |                            |     |  |                             |        
|Balance, December 31, 2004  |        | 77,179       |        | $                          | 772 |  | $                           | 913,466 |   |                                        | $      | 80,406   |                |  | $ | (123,874 | ) |  | (32 | ) |  | $ | (395 | ) |  | $ | 870,375  |  
|Net loss                    |        | -            |        |                            | -   |  |                             | -       |   |                                        |        | (205,618 | )              |  |   | -        |   |  | -   |   |  |   | -    |   |  |   | (205,618 | )
|Other comprehensive income  |        | -            |        |                            | -   |  |                             | -       |   |                                        |        | -        |                |  |   | (20,136  | ) |  | -   |   |  |   | -    |   |  |   | (20,136  | )
|Restricted stock awards     |        |              |        |                            |     |  |                             |         |   |                                        |        |          |                |  |   |          |   |  |     |   |  |   |      |   |  |   |          |  
|Issuance of stock           |        | 106          |        |                            | 1   |  |                             | -       |   |                                        |        | -        |                |  |   | -        |   |  | -   |   |  |   | -    |   |  |   | 1        |  
|Deferred compensation       |        | -            |        |                            | -   |  |                             | 3,761   |   |                                        |        | -        |                |  |   | -        |   |  | -   |   |  |   | -    |   |  |   | 3,761    |  
|Treasury stock transactions |        | -            |        |                            | -   |  |                             | (337    | ) |                                        |        | (58      | )              |  |   | -        |   |  | 32  |   |  |   | 395  |   |  |   | -        |  
|Other                       |        | 83           |        |                            | 1   |  |                             | 1,160   |   |                                        |        | -        |                |  |   | -        |   |  | -   |   |  |   | -    |   |  |   | 1,161    |  
|                            |        |              |        |                            |     |  |                             |         |   |                                        |        |          |                |  |   |          |   |  |     |   |  |   |      |   |  |   |          |  
|Balance, March 31, 2005     |        | 77,368       |        | $                          | 774 |  | $                           | 918,050 |   |                                        | $      | (125,270 | )              |  | $ | (144,010 | ) |  | -   |   |  | $ | -    |   |  | $ | 649,544  |  
|                            |        |              |        |                            |     |  |                             |         |   |                                        |        |          |                |  |   |          |   |  |     |   |  |   |      |   |  |   |          |  





See notes to consolidated financial statements.



5



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PLAINS EXPLORATION & PRODUCTION COMPANY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note
1Organization and Significant Accounting Policies



Organization



The consolidated financial statements of Plains Exploration & Production
Company (PXP, us, our, or we) include the accounts of our wholly owned subsidiaries. We are an independent energy company engaged in the upstream oil and gas business of acquiring,
exploiting, developing, exploring for and producing oil and gas. Our activities are all located in the United States.



These consolidated financial statements and related notes present our consolidated financial position as of March 31, 2005 and December 31, 2004, the results of our operations, our
comprehensive income and our cash flows for the three months ended March 31, 2005 and 2004 and the changes in our stockholders equity for the three months ended March 31, 2005. All adjustments, consisting only of normal recurring adjustments,
that in the opinion of management were necessary for a fair statement of the results for the interim periods, have been reflected. All significant intercompany transactions have been eliminated. Certain reclassifications have been made to prior year
statements to conform to the current year presentation. The results for the three months March 31, 2005, are not necessarily indicative of the final results to be expected for the full year.



These financial statements have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial
statements and should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.



Accounting Policies



Asset Retirement Obligations.    The following table reflects the changes in our asset retirement obligation (ARO) during the three months ended March
31, 2005 (in thousands):



|                                                  |  |   |         |    
|------------------------------------------------- |  | - | ------- | ---
|                                                  | 
|Asset retirement obligation - beginning of period |  | $ | 130,469 |    
|Settlements                                       |  |   | (266    | )  
|Accretion expense                                 |  |   | 1,745   |    
|Asset retirement additions                        |  |   | 470     |    
|                                                  |  |   |         |    
|Asset retirement obligation - end of period       |  | $ | 132,418 | (1)
|                                                  |  |   |         |    

(1) $3.6 million included in current liabilities.



Earnings Per Share.    For the three months ended March 31, 2005 and 2004
the weighted average shares outstanding for computing basic and diluted earnings per share were (in thousands):



|                                                                    |  |                                       |  |       
|------------------------------------------------------------------- |  | ------------------------------------- |  | ------
|                                                                    |  | Three Months Ended          March 31,
|                                                                    |  | 2005                                  |  | 2004  
|                                                                    |  |                                      
|Common shares outstanding - basic                                   |  | 77,202                                |  | 40,247
|Unvested restricted stock, restricted stock units and stock options |  | -                                     |  | 241   
|                                                                    |  |                                       |  |       
|Common shares outstanding - diluted                                 |  | 77,202                                |  | 40,488
|                                                                    |  |                                       |  |       



6



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Due to our net loss in 2005 our unvested restricted stock, restricted stock units and stock options (846,000 equivalent shares)
were not included in computing earnings per share because the effect was antidilutive. In computing earnings per share, no adjustments were made to reported net income.



Inventory.    Oil inventories are carried at the lower of the cost to produce or market value. Materials and supplies
inventory is stated at the lower of cost or market with cost determined on an average cost method. Inventory consists of the following (in thousands):



|                       |  |               |       |                  |   |      
|---------------------- |  | ------------- | ----- | ---------------- | - | -----
|                       |  | March 31,2005 |       | December 31,2004
|Oil                    |  | $             | 1,526 |                  | $ | 1,526
|Materials and supplies |  |               | 7,819 |                  |   | 6,979
|                       |  |               |       |                  |   |      
|                       |  | $             | 9,345 |                  | $ | 8,505
|                       |  |               |       |                  |   |      



General and Administrative
Expense.Our general and administrative (G&A) expense consists of (in thousands):



|                               |  |                              |        |      |   |       
|------------------------------ |  | ---------------------------- | ------ | ---- | - | ------
|                               |  | Three Months Ended March 31,
|                               |  | 2005                         |        | 2004
|G&A excluding items below      |  | $                            | 11,727 |      | $ | 7,043 
|Stock appreciation rights      |  |                              | 22,972 |      |   | 10,561
|Other stock-based compensation |  |                              | 2,829  |      |   | 2,488 
|                               |  |                              |        |      |   |       
|                               |  | $                            | 37,528 |      | $ | 20,092
|                               |  |                              |        |      |   |       



Use of
Estimates.    The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include (1) oil and
natural gas reserves; (2) depreciation, depletion and amortization, including future abandonment costs; (3) assigning fair value and allocating purchase price in connection with business combinations, including goodwill; (4) income taxes; (5)
accrued liabilities; and (6) valuation of derivative instruments. Although management believes these estimates are reasonable, actual results could differ from these estimates.



Buy/Sell Contracts. Steam generators utilized in our thermal recovery operations in California are fueled by natural gas. In certain instances
we have entered into buy/sell contracts that allow us to exchange gas we produce elsewhere for gas delivered to our thermal recovery operations. The buy/sell transactions result in us making or receiving physical delivery of the gas and involve the
attendant risks and rewards of ownership, including title transfer.



We account for
buy/sell contracts in the same manner as any other monetary transaction for which title passes and the risk and reward of ownership are assumed by the counterparties. The SEC has questioned whether the industrys accounting for buy/sell
contracts should instead be shown net on the income statement and accounted for under the provisions of Accounting Principles Board (APB) Opinion No. 29, Accounting for Nonmonetary Transactions(APB 29). The topic is under
deliberation by the Emerging Issues Task Force (EITF) of the FASB as Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty.The EITF first discussed this issue in November 2004 and again in
March 2005. Additional research is being performed by the FASB staff, and the topic will be discussed again at a future EITF meeting. While this issue is under deliberation, the SEC staff directed companies in a February 2005 letter to disclose on
the face of the income statement, if



7



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material, the amounts associated with buy/sell contracts and to discuss in a footnote to the financial statements the basis for the underlying accounting.



We believe our buy/sell contracts are monetary transactions that are outside the scope of APB 29. We
also believe our accounting is supported by the indicators of gross reporting of purchases and sales in paragraph 3 of EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.



For the three months ended March 31, 2005, Gas Sales includes $7.8 million and Steam Gas Costs includes
$8.1 million related to buy/sell contracts. If the EITF were to determine these transactions should be accounted for as non-monetary, such amounts would be netted in our Consolidated Statements of Income. We did not enter into buy/sell contracts in
periods prior to our acquisition of Nuevo Energy Company in May 2004.



Stock Based
Compensation. We account for stock based compensation using the intrinsic value method. No adjustments to our net income or earnings per share would be required under SFAS No. 123, Accounting for Stock-Based Compensation.



Recent Accounting Pronouncements. In December 2004 the FASB issued SFAS No.123R (revised
2004), Share-Based Payment (SFAS 123R). SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of
the equity or liability instruments issued. SFAS No. 123R covers a wide range of share-based compensation arrangements including stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee stock purchase
plans. SFAS 123R replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Public entities (other than those filing as small
business issuers) were originally required to apply SFAS 123R as of the first interim or annual reporting period that begins after June 15, 2005. On April 14, 2005 the SEC announced the adoption of a new rule that amends the compliance dates for
SFAS 123R. The Commissions new rule allows registrants to implement SFAS 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. Accordingly, we will adopt SFAS 123R effective
January 1, 2006. We are in the process of determining how the new method of valuing stock-based compensation as prescribed in SFAS 123R will be applied to valuing stock-based awards and the impact the recognition of compensation expense related to
such awards will have on our financial statements.



In February 2005, the SEC issued
guidance concerning the specific circumstance of a property disposition by a company that follows the full cost accounting method that resulted in a less than 25% alteration of the proved oil and gas reserve quantities within a full cost center. In
connection with that disposition, the SEC considered if goodwill should be allocated to the property disposed, and, if so, whether that allocated goodwill should remain as a component of the capitalized full cost center or be reflected in the
statement of operations.



The SEC concluded that only the fair value allocated to the oil
and gas properties in a business acquisition should be included in the costs accounted for under Rule 4-10(c) of Regulation S-X. Goodwill associated with acquisitions of oil and gas properties that constitute a business is recognized in accordance
with SFAS 141 but accounted for outside of the full cost rules. Therefore, when dispositions of these properties occur, the goodwill previously recognized does not affect the associated adjustments contemplated under Rule 4-10(c)(6)(i). Rather, the
accounting for the goodwill and any potential impairment should follow the provisions of FASB Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142). Companies are required to consider whether a property disposition that
results in a less than 25% alteration of the proved oil and gas reserve quantities within



8



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a given cost center is a trigger that requires goodwill be evaluated for impairment under SFAS 142. The SEC has not yet addressed whether any portion of goodwill
should be allocated to a disposition of greater than 25%, but less than 100%, of the oil and gas reserves in a given cost center.



In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations. This Interpretation clarifies the definition
and treatment of conditional asset retirement obligations as discussed in FASB Statement No. 143, Accounting for Asset Retirement Obligations. A conditional asset retirement obligation is defined as an asset retirement activity in which
the timing and/or method of settlement are dependent on future events that may be outside the control of the company. FIN 47 states that a company must record a liability when incurred for conditional asset retirement obligations if the fair value
of the obligation is reasonably estimable. This Interpretation is intended to provide more information about long-lived assets, more information about future cash outflows for these obligations and more consistent recognition of these liabilities.
FIN 47 is effective for fiscal years ending after December 15, 2005. We do not believe that our financial position, results of operations or cash flows will be impacted by this Interpretation.



Note 2Acquisitions



Nuevo Energy Company



On May 14, 2004 we acquired Nuevo Energy Company (Nuevo) in a stock-for-stock transaction (the Nuevo acquisition). In the Nuevo acquisition, each
outstanding share of Nuevo common stock was converted into 1.765 shares of PXP common stock and Nuevo became our wholly owned subsidiary. The Nuevo acquisition required the issuance of 36.5 million additional PXP common shares, plus the assumption
of $254 million in net debt and $115 million of $2.875 Term Convertible Securities, Series A, or TECONS. We have accounted for the Nuevo acquisition as a purchase effective May 14, 2004.



Pro Forma Information



The following unaudited pro forma information shows the pro forma effect of the Nuevo acquisition, the issuance by PXP on June 30, 2004 of $250 million of 7.125% Senior Notes due
2014, the retirement of Nuevos 93/8% Senior Subordinated Notes and TECONS on June 30, 2004 and the sale of
Nuevos Congo operations. This unaudited pro forma information assumes such transactions occurred on January 1, 2004.



This unaudited pro forma information has been prepared based on our historical consolidated statements of income and the historical consolidated statement of income of Nuevo. We
believe the assumptions used provide a reasonable basis for presenting the significant effects directly attributable to the pro forma transactions. This pro forma financial information does not purport to represent what our results of operations
would have been if such transactions had occurred on January 1, 2004.



|                                      |  |                                   |        
|------------------------------------- |  | --------------------------------- | -------
|(in thousands, except per share data) |  | Three Months Ended March 31, 2004
|Revenues                              |  | $                                 | 185,004
|Income from operations                |  |                                   | 36,450 
|Net income                            |  |                                   | 10,281 
|                                      | 
|Basic and diluted earnings per share  |  | $                                 | 0.13   
|                                      | 
|Weighted average shares outstanding   |  |                                   |        
|Basic                                 |  |                                   | 76,733 
|Diluted                               |  |                                   | 77,059 



Pro forma net income has been reduced by debt
extinguishment costs of $3.0 million ($1.9 million after tax) in the three months ended March 31, 2004.



9



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Note 3Derivative Instruments and Hedging Activities



General



We use various derivative instruments to manage our exposure to commodity price risk on sales of oil and gas production. All derivative instruments are recorded on the balance
sheet at fair value. If a derivative does not qualify as a hedge or is not designated as a hedge, the changes in fair value, both realized and unrealized, are recognized currently in our income statement as gain (loss) on mark-to-market derivative
contracts. If a derivative is designated as a cash flow hedge and qualifies for hedge accounting, any unrealized gain or loss is deferred in accumulated Other Comprehensive Income (OCI), a component of Stockholders Equity, until
the hedged oil and gas production is sold. Realized gains and losses on derivative instruments that are designated as a hedge and qualify for hedge accounting are generally included in oil and gas revenues in the period the hedged volumes are sold.
Gains and losses deferred in OCI related to cash flow hedges for which hedge accounting has been discontinued remain in OCI until the related product has been delivered.



We do not use hedge accounting for certain of our derivative instruments, either because the derivatives do not qualify for hedge accounting or we
have elected not to use hedge accounting. Consequently, these derivative contracts are marked-to-market each quarter with fair value gains and losses, both realized and unrealized, recognized currently as a gain or loss on mark-to-market derivative
contracts on the income statement. Cash flow is only impacted to the extent the actual settlements under the contracts result in making or receiving a payment from the counterparty.



Elimination of 2006 swap & collar positions



In March 2005, we executed a series of contracts that will eliminate all of our 2006 oil price swaps and collars at a pre-tax cost of approximately $292 million ($175 million after
tax). Approximately $146 million of this amount is attributable to 2006 collars for 22,000 barrels of oil per day with a floor price of $25.00 and an average ceiling price of $34.76. Approximately $146 million of the cost is attributable to 2006
swaps for 15,000 barrels of oil per day at an average price of $25.28. The collars were not accounted for as hedges, therefore, the $146 million loss in the fair value of these instruments was currently recognized in our income statement and there
will be no income statement effect subsequent to the amounts reported as of March 31, 2005. We used hedge accounting for the swaps and as a result the $146 million loss in fair value attributable to the swaps has been deferred in OCI and will be
recognized as a noncash reduction to oil revenues in 2006 when the hedged production is sold.



The $146 million cash payment for the collars will be reflected as a financing cash outflow in our statement of cash flows when the cash is paid. Under SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities,
the collars are deemed to contain a significant financing element because they included off-market terms. The $146 million cash payment for the swaps will be reflected as an operating cash outflow when the cash is paid. We expect to pay the cost to
eliminate the 2006 swaps and collars in the second or third quarter of 2005 with proceeds received from the property sale discussed in Note 7. These payments will reduce derivative liabilities on our balance sheet



Acquisition of floors for 2006 oil production



In March 2005 we acquired $45.00 NYMEX put options on 40,000 barrels of oil per day in 2006. These put
options cost an average of $2.96 per barrel which will be paid during 2006. We have elected not to use hedge accounting for the puts, consequently, the puts will be marked-to-market with fair value gains and losses recognized as a gain or loss on
mark-to-market derivative contracts on the income statement.



10



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Derivative Instruments Designated as Cash Flow Hedges



At March 31, 2005, we had the following open commodity derivative positions designated as cash flow hedges:



|                         |  |             |  |                |  |                 |  |               |       |       |      
|------------------------ |  | ----------- |  | -------------- |  | --------------- |  | ------------- | ----- | ----- | -----
|Period                   |  | Commodity   |  | InstrumentType |  | DailyVolumes    |  | Average Price |       | Index
|Sales of Production      |  |             |  |                |  |                 |  |               |       |       |      
|2005                     |  |             |  |                |  |                 |  |               |       |       |      
|2nd Quarter              |  | Crude oil   |  | Swap           |  | 10,000 /Barrels |  | $             | 25.80 |       | WTI  
|2nd Quarter              |  | Natural gas |  | Swap           |  | 9,500 /MMBtu    |  | $             | 4.66  |       | Waha 
|3rd Quarter              |  | Natural gas |  | Swap           |  | 5,000 /MMBtu    |  | $             | 4.40  |       | Waha 
|4th Quarter              |  | Natural gas |  | Swap           |  | 5,000 /MMBtu    |  | $             | 4.40  |       | Waha 
|                         |  |             |  |               
|Purchases of Natural Gas |  |             |  |                |  |                 |  |               |      
|2005                     |  |             |  |                |  |                 |  |               |       |       |      
|April - December         |  | Natural gas |  | Swap           |  | 8,000 /MMBtu    |  | $             | 3.85  |       | Socal



Location and quality differentials attributable
to our properties are not included in the foregoing prices. Because of the quality and location of our oil and gas production, these adjustments will affect our net price.



Derivative Instruments Not Designated as Hedging Instruments



At March 31, 2005, we had the following open commodity derivative positions that were not designated as hedging instruments:



|                    |  |           |  |                        |  |                 |  |                             |  |      
|------------------- |  | --------- |  | ---------------------- |  | --------------- |  | --------------------------- |  | -----
|Period              |  | Commodity |  | Instrument        Type |  | Daily Volumes   |  | Average Price               |  | Index
|Sales of Production |  |           |  |                        |  |                 |  |                             |  |      
|2005                |  |           |  |                        |  |                 |  |                             |  |      
|2nd Quarter         |  | Crude oil |  | Collar                 |  | 6,800 /Barrels  |  | $27.00 Floor-$30.40 Ceiling |  | WTI  
|3rd Quarter         |  | Crude oil |  | Collar                 |  | 14,400 /Barrels |  | $26.00 Floor-$30.03 Ceiling |  | WTI  
|4th Quarter         |  | Crude oil |  | Collar                 |  | 14,000 /Barrels |  | $26.00 Floor-$29.33 Ceiling |  | WTI  
|April - December    |  | Crude oil |  | Collar                 |  | 22,000 /Barrels |  | $25.00 Floor-$34.76 Ceiling |  | WTI  
|                    |  |           |  |                        | 
|2006                |  |           |  |                        |  |                 |  |                             |  |      
|January - December  |  | Crude oil |  | Put options            |  | 40,000 /Barrels |  | $45.00                      |  | WTI  
|                    |  |           |  |                        | 
|2007                |  |           |  |                        |  |                 |  |                             |  |      
|January - December  |  | Crude oil |  | Collar                 |  | 22,000 /Barrels |  | $25.00 Floor-$34.76 Ceiling |  | WTI  
|                    |  |           |  |                        | 
|2008                |  |           |  |                        |  |                 |  |                             |  |      
|January - December  |  | Crude oil |  | Collar                 |  | 22,000 /Barrels |  | $25.00 Floor-$34.76 Ceiling |  | WTI  



During the three months ended March 31, 2005 and
2004 we recognized pre-tax losses of $374 million and $2 million, respectively, from derivatives that do not qualify or have not been designated for hedge accounting. Cash settlements for the three months ended March 31, 2005 and 2004 were $37
million and $1 million, respectively.



Physical Purchase Contracts



Although not a derivative, at March 31, 2005 we also had the following contracts for the purchase of
natural gas utilized in our steam flood operations:



|                         |  |             |  |                   |  |                      |  |               |  |      
|------------------------ |  | ----------- |  | ----------------- |  | -------------------- |  | ------------- |  | -----
|Period                   |  | Commodity   |  | Instrument Type   |  | Daily        Volumes |  | Average Price |  | Index
|Purchases of Natural Gas |  |             |  |                   |  |                      |  |              
|2005                     |  |             |  |                   |  |                      |  |               |  |      
|April - December         |  | Natural gas |  | Physical purchase |  | 10,000 /MMBtu        |  | $4.19         |  | Socal



11



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Other Comprehensive Income



OCI consists of the following gains (losses):



|                              |  |                       |        |   |                   |   |        |                |  |   |                   |   |  |   |       |  
|----------------------------- |  | --------------------- | ------ | - | ----------------- | - | ------ | -------------- |  | - | ----------------- | - |  | - | ----- | -
|                              |  | March 31, 2005        |        |   | December 31, 2004 |   |        | March 31, 2004 |  |   | December 31, 2003 |  
|                              |  | (millions of dollars) |       
|Commodity hedging contracts   |  |                       |        |   |                   |   |        |                |  |   |                   |   |  |   |       |  
|Unrealized losses             |  | $                     | (241.2 | ) |                   | $ | (200.9 | )              |  | $ | (114.9            | ) |  | $ | (66.7 | )
|Related tax benefit (expense) |  |                       | 97.2   |   |                   |   | 77.0   |                |  |   | 45.5              |   |  |   | 26.4  |  
|                              |  |                       |        |   |                   |   |        |                |  |   |                   |   |  |   |       |  
|                              |  |                       | (144.0 | ) |                   |   | (123.9 | )              |  |   | (69.4             | ) |  |   | (40.3 | )
|Other                         |  |                       | -      |   |                   |   | -      |                |  |   | (0.1              | ) |  |   | 0.2   |  
|                              |  |                       |        |   |                   |   |        |                |  |   |                   |   |  |   |       |  
|                              |  | $                     | (144.0 | ) |                   | $ | (123.9 | )              |  | $ | (69.5             | ) |  | $ | (40.1 | )
|                              |  |                       |        |   |                   |   |        |                |  |   |                   |   |  |   |       |  



During the three months ended March 31, 2005 and
2004 deferred losses for cash flow hedges of $45.3 million and $17.8 million, respectively, were reclassified from OCI and charged to income as a reduction of oil and gas revenues and steam gas costs. During each of such periods we recognized $0.1
million for ineffectiveness of derivatives that qualify for hedge accounting. During the twelve months ended March 31, 2006, based on quoted market prices for future delivery as of March 31, 2005, we expect to reclassify $18.4 million of net
deferred losses associated with open derivative contracts and $113.6 million of net deferred losses on terminated and de-designated derivative contracts from OCI to oil and gas revenue. Also during such period, we expect to reclassify approximately
$53.2 million of deferred income tax benefits from OCI to income tax expense. The amounts ultimately reclassified to earnings will vary due the actual realized value upon settlement.



Net deferred losses associated with terminated or de-designated derivative contracts that have been or will be reclassified from OCI and recognized as
a non-cash reduction in our 2005 and 2006 oil revenues are as follows (in thousands):



|            |  |      |        |      |   |       
|----------- |  | ---- | ------ | ---- | - | ------
|            |  | 2005 |        | 2006
|            |  |     
|1st Quarter |  | $    | 29,086 |      | $ | 36,538
|2nd Quarter |  |      | 27,253 |      |   | 36,549
|3rd Quarter |  |      | 25,714 |      |   | 36,545
|4th Quarter |  |      | 24,112 |      |   | 36,123



Note 4Long-Term Debt



At March 31, 2005 and December 31, 2004 long-term debt consisted of (in thousands):



|                                                                                                     |  |                |   |                   |   |         |  |           |   |  |   |        
|---------------------------------------------------------------------------------------------------- |  | -------------- | - | ----------------- | - | ------- |  | --------- | - |  | - | -------
|                                                                                                     |  | March 31, 2005 |   | December 31, 2004
|                                                                                                     |  | Current        |   | Long-Term         |   | Current |  | Long-Term
|Senior revolving credit facility                                                                     |  | $              | - |                   | $ | 143,400 |  | $         | - |  | $ | 110,000
|8.75% senior subordinated notes, including unamortized premium of $1.7 million in 2005and 2004       |  |                | - |                   |   | 276,681 |  |           | - |  |   | 276,727
|7.125% senior notes, including unamortized discount of $1.2 million in 2005 and $1.3 million in 2004 |  |                | - |                   |   | 248,764 |  |           | - |  |   | 248,741
|                                                                                                     |  |                |   |                   |   |         |  |           |   |  |   |        
|                                                                                                     |  | $              | - |                   | $ | 668,845 |  | $         | - |  | $ | 635,468
|                                                                                                     |  |                |   |                   |   |         |  |           |   |  |   |        



12



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Senior Revolving Credit Facility.At March 31, 2005, we had $143 million in borrowings and $7 million in letters of credit
outstanding under the credit facility. At that date we were in compliance with the covenants contained in the credit facility and could have borrowed the full amount available under the credit facility. The effective interest rate on our borrowings
under this revolving credit facility was 4.1% at March 31, 2005.



Note 5Related
Party Transactions



Our Chief Executive Officer is a director of Vulcan Energy
Corporation (Vulcan Energy formerly known as Plains Resources). In connection with the reorganization and our 2002 spin-off from Plains Resources we entered into certain agreements with Plains Resources, including a master separation
agreement; the Plains Exploration & Production transition services agreement that expired June 16, 2004; the Plains Resources transition services agreement that expired June 8, 2004; and a technical services agreement that expired June 30, 2004.
For the three months ended March 31, 2004 we billed Plains Resources $0.3 million for services provided by us under these agreements.



Our Chief Executive Officer is a member of Cypress Aviation LLC (Cypress). During 2004, we chartered private aircraft from Gulf Coast Aviation Inc. (Gulf
Coast), a corporation that from time-to-time leased aircraft owned by Cypress. In the three months ended March 31, 2004, we paid Gulf Coast $0.2 million in connection with such services. The charter services were arranged with market-based
rates.



Plains All American Pipeline, L.P. (PAA), a publicly traded master
limited partnership, is an affiliate of Vulcan Energy. PAA is the marketer/purchaser for a significant portion of our oil production, including the royalty share of production. The marketing agreement provides that PAA will purchase for resale at
market prices certain of our oil production for which PAA charges a marketing fee of either $0.20 or $0.15 per barrel based upon the contract the barrels are resold under. During the three months ended March 31, 2005 and 2004, the following amounts
were recorded with respect to such transactions (in thousands):



|                               |  |                              |        |      |   |       
|------------------------------ |  | ---------------------------- | ------ | ---- | - | ------
|                               |  | Three Months Ended March 31,
|                               |  | 2005                         |        | 2004
|Sales of oil to PAA            |  |                              |        |      |   |       
|PXPs share                    |  | $                            | 74,608 |      | $ | 64,267
|Royalty owners share          |  |                              | 16,989 |      |   | 14,135
|                               |  |                              |        |      |   |       
|                               |  | $                            | 91,597 |      | $ | 78,402
|                               |  |                              |        |      |   |       
|Charges for PAA marketing fees |  | $                            | 309    |      | $ | 395   
|                               |  |                              |        |      |   |       



Note 6Commitments and Contingencies



Environmental matters. As an owner or lessee and operator of oil and gas
properties, we are subject to various federal, state, and local laws and regulations relating to discharge of materials into, and protection of, the environment. Often these regulations are more burdensome on older properties that were operated
before the regulations came into effect such as some of our properties in California that have operated for over 90 years. We have established policies for continuing compliance with environmental laws and regulations. We also maintain insurance
coverage for environmental matters, which we believe is customary in the industry, but we are not fully insured against all environmental risks. There can be no assurance that current or future local, state or federal rules and regulations will not
require us to spend material amounts to comply with such rules and regulations.



In
January 2005 we discovered and self-reported a violation related to flared gas emissions in excess of permitted levels on properties acquired in the Nuevo acquisition. Estimated excess emissions from



13



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the San Joaquin Valley casing vent recovery system located on the Gamble Lease are approximately 881 tons over a 745 day period. We brought the facility into
compliance within 10 days of discovering the violation. We do not believe that the outcome of this matter will have a material adverse effect on our financial condition, results of operations or cash flows.



Plugging, Abandonment and Remediation Obligations.Consistent with normal industry practices,
substantially all of our oil and gas leases require that, upon termination of economic production, the working interest owners plug and abandon non-producing wellbores, remove tanks, production equipment and flow lines and restore the wellsite.
Typically, when producing oil and gas assets are purchased the purchaser assumes the obligation to plug and abandon wells that are part of such assets. However, in some instances, we receive an indemnity with respect to those costs. There can be no
assurance that we will be able to collect on these indemnities.



In connection with the
sale of certain properties offshore California in December 2004 we retained the responsibility for certain abandonment costs, including removing, dismantling and disposing of the existing offshore platforms. Such abandonment costs are included in
our asset retirement obligation as reflected on our consolidated balance sheet. In addition, we agreed to guarantee the performance of the purchaser with respect to the remaining abandonment obligations related to the properties (approximately $44
million).



Operating risks and insurance coverage. Our operations are subject to
all of the risks normally incident to the exploration for and the production of oil and gas, including well blowouts, cratering, explosions, oil spills, gas or well fluids, fires, pollution and releases of toxic gas, each of which could result in
damage to or destruction of oil and gas wells, production facilities or other property, or injury to persons. Our operations in California, including transportation of oil by pipelines within the city and county of Los Angeles, are especially
susceptible to damage from earthquakes and involve increased risks of personal injury, property damage and marketing interruptions because of the population density of southern California. Although we maintain insurance coverage considered to be
customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of high premium costs. We maintain coverage for earthquake damages in California but this coverage may not provide for the
full effect of damages that could occur and we may be subject to additional liabilities. The occurrence of a significant event that is not fully insured against could have a material adverse effect on our financial position. Our insurance does not
cover every potential risk associated with operating our pipelines, including the potential loss of significant revenues. Consistent with insurance coverage generally available to the industry, our insurance policies provide limited coverage for
losses or liabilities relating to pollution, with broader coverage for sudden and accidental occurrences.



Sale of Nuevos Congo operations. Upon our acquisition of Nuevo, we became a party to an existing agreement between Nuevo, CMS NOMECO Oil & Gas Co. (CMS) and a third party. Under the agreement, Nuevo and CMS may
be liable to the third party for the recapture of dual consolidated losses (DCLs) in connection with each companys 1995 acquisition of Congolese properties. Nuevo and CMS agreed to indemnify each other for any act that would cause the third
party to experience a liability from the recapture of DCLs as a result of a triggering event.



CMS sold its interest in the Congolese properties to a subsidiary of Perenco, S.A. (Perenco) in 2002. Both CMS and Perenco filed a request with the Internal Revenue Service (IRS), in accordance with the U.S consolidated return regulations,
for a closing agreement confirming that the transaction will not trigger recapture. The closing agreement is expected to be finalized in the near future. We and Perenco have finalized a closing agreement with the IRS confirming that neither our
merger with Nuevo, nor the sale of our interest in the Congolese properties to Perenco will trigger recapture. The estimated remaining contingent liabilities are $19.2 million relative to Nuevos former interest, and



14



---

$23.5 million relative to CMS former interest, for which we would be jointly liable. We believe the occurrence of a triggering event in the future is remote and
we do not believe the agreements will have a material adverse effect upon us.



Other
commitments and contingencies. As is common within the industry, we have entered into various commitments and operating agreements related to the exploration and development of and production from proved oil and gas properties and the marketing,
transportation and storage of oil. It is managements belief that such commitments will be met without a material adverse effect on our financial position, results of operations or cash flows.



We are a defendant in various lawsuits arising in the ordinary course of our business. While the
outcome of these lawsuits cannot be predicted with certainty and could have a material adverse effect on our financial position, we do not believe that the outcome of these legal proceedings, individually or in the aggregate, will have a material
adverse effect on our financial condition, results of operations or cash flows.



Note
7 - Property Acquisitions and Dispositions



On March 11, 2005 we entered into an
agreement to acquire certain California producing oil and gas properties from a private company for $119 million. The properties are primarily located in the Los Angeles Basin of onshore California with some smaller properties located in adjacent
Ventura County. The transaction, which was financed under our existing credit facility, closed on April 1, 2005.



On March 31, 2005, we entered into a purchase and sale agreement with XTO Energy, Inc. to sell 275 net active wells for $350 million. As of December 31, 2004, our independent
reserve engineers estimated that these producing properties had proven reserves of approximately 27 million equivalent barrels of which 81% was proved developed. The properties produced approximately 5,800 net equivalent barrels per day at March 31,
2005. This transaction, which has an effective date of January 1, 2005, is expected to close in the second quarter of 2005, subject to customary closing adjustments and we expect the net proceeds we receive will be reduced by approximately $15
to $20 million.



Note 8 - Consolidating Financial Statements



We are the issuer of $275 million of 8.75% Notes due 2012 and $250 million of 7.125% Notes due 2014.
The 8.75% Notes and 7.125% Notes are jointly and severally guaranteed on a full and unconditional basis by our wholly-owned subsidiaries (referred to as Guarantor Subsidiaries).



The following financial information presents consolidating financial statements, which
include:



| |  |  | PXP (the Issuer);
| | - |  | -------------------

| |  |  | the guarantor subsidiaries on a combined basis (Guarantor Subsidiaries);
| | - |  | --------------------------------------------------------------------------

| |  |  | elimination entries necessary to consolidate the Issuer and Guarantor Subsidiaries; and
| | - |  | ---------------------------------------------------------------------------------------

| |  |  | PXP on a consolidated basis.
| | - |  | ----------------------------



15



---

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

MARCH 31, 2005

(in thousands)



|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|----------------------------------------------------------- |  | ------ | --------- | - | ---------------------- | - | -------- | ------------------------- |  | - | ------------ | - |  | - | --------- | -
|                                                            |  | Issuer |           |   | Guarantor Subsidiaries |   |          | Intercompany Eliminations |  |   | Consolidated |  
|ASSETS                                                      |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Current Assets                                              |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Cash and cash equivalents                                   |  | $      | 1,529     |   |                        | $ | 9        |                           |  | $ | -            |   |  | $ | 1,538     |  
|Accounts receivable and other current assets                |  |        | 347,928   |   |                        |   | 35,156   |                           |  |   | -            |   |  |   | 383,084   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 349,457   |   |                        |   | 35,165   |                           |  |   | -            |   |  |   | 384,622   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Property and Equipment, at cost                             |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Oil and natural gas properties - full cost method           |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Subject to amortization                                     |  |        | 1,870,540 |   |                        |   | 623,803  |                           |  |   | -            |   |  |   | 2,494,343 |  
|Not subject to amortization                                 |  |        | 40,227    |   |                        |   | 37,498   |                           |  |   | -            |   |  |   | 77,725    |  
|Other property and equipment                                |  |        | 12,570    |   |                        |   | 651      |                           |  |   | -            |   |  |   | 13,221    |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 1,923,337 |   |                        |   | 661,952  |                           |  |   | -            |   |  |   | 2,585,289 |  
|Less allowance for depreciation, depletion and amortization |  |        | (234,253  | ) |                        |   | (131,711 | )                         |  |   | -            |   |  |   | (365,964  | )
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 1,689,084 |   |                        |   | 530,241  |                           |  |   | -            |   |  |   | 2,219,325 |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Investment in and Advances to Subsidiaries                  |  |        | 658,318   |   |                        |   | -        |                           |  |   | (658,318     | ) |  |   | -         |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Other Assets                                                |  |        | 53,454    |   |                        |   | 152,152  |                           |  |   | -            |   |  |   | 205,606   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  | $      | 2,750,313 |   |                        | $ | 717,558  |                           |  | $ | (658,318     | ) |  | $ | 2,809,553 |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Current Liabilities                                         |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Accounts payable and other current liabilities              |  | $      | 220,280   |   |                        | $ | 37,966   |                           |  | $ | -            |   |  | $ | 258,246   |  
|Commodity derivative contracts                              |  |        | 449,336   |   |                        |   | 4,158    |                           |  |   | -            |   |  |   | 453,494   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 669,616   |   |                        |   | 42,124   |                           |  |   | -            |   |  |   | 711,740   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Long-Term Debt                                              |  |        | 668,845   |   |                        |   | -        |                           |  |   | -            |   |  |   | 668,845   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Other Long-Term Liabilities                                 |  |        | 487,566   |   |                        |   | 15,714   |                           |  |   | -            |   |  |   | 503,280   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Payable to Parent                                           |  |        | -         |   |                        |   | 353,504  |                           |  |   | (353,504     | ) |  |   | -         |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Deferred Income Taxes                                       |  |        | 274,742   |   |                        |   | 1,402    |                           |  |   | -            |   |  |   | 276,144   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Stockholders Equity                                        |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Stockholders equity                                        |  |        | 793,554   |   |                        |   | 359,391  |                           |  |   | (359,391     | ) |  |   | 793,554   |  
|Accumulated other comprehensive income                      |  |        | (144,010  | ) |                        |   | (54,577  | )                         |  |   | 54,577       |   |  |   | (144,010  | )
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 649,544   |   |                        |   | 304,814  |                           |  |   | (304,814     | ) |  |   | 649,544   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  | $      | 2,750,313 |   |                        | $ | 717,558  |                           |  | $ | (658,318     | ) |  | $ | 2,809,553 |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  



16



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2004

(in thousands)



|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|----------------------------------------------------------- |  | ------ | --------- | - | ---------------------- | - | -------- | ------------------------- |  | - | ------------ | - |  | - | --------- | -
|                                                            |  | Issuer |           |   | Guarantor Subsidiaries |   |          | Intercompany Eliminations |  |   | Consolidated |  
|ASSETS                                                      |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Current Assets                                              |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Cash and cash equivalents                                   |  | $      | 876       |   |                        | $ | 669      |                           |  | $ | -            |   |  | $ | 1,545     |  
|Accounts receivable and other current assets                |  |        | 215,668   |   |                        |   | 40,954   |                           |  |   | -            |   |  |   | 256,622   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 216,544   |   |                        |   | 41,623   |                           |  |   | -            |   |  |   | 258,167   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Property and Equipment, at cost                             |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Oil and natural gas properties - full cost method           |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Subject to amortization                                     |  |        | 1,817,709 |   |                        |   | 584,470  |                           |  |   | -            |   |  |   | 2,402,179 |  
|Not subject to amortization                                 |  |        | 39,707    |   |                        |   | 39,698   |                           |  |   | -            |   |  |   | 79,405    |  
|Other property and equipment                                |  |        | 11,963    |   |                        |   | 583      |                           |  |   | -            |   |  |   | 12,546    |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 1,869,379 |   |                        |   | 624,751  |                           |  |   | -            |   |  |   | 2,494,130 |  
|Less allowance for depreciation, depletion and amortization |  |        | (209,224  | ) |                        |   | (113,817 | )                         |  |   | -            |   |  |   | (323,041  | )
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 1,660,155 |   |                        |   | 510,934  |                           |  |   | -            |   |  |   | 2,171,089 |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Investment in and Advances to Subsidiaries                  |  |        | 612,538   |   |                        |   | -        |                           |  |   | (612,538     | ) |  |   | -         |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Other Assets                                                |  |        | 54,227    |   |                        |   | 149,762  |                           |  |   | -            |   |  |   | 203,989   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  | $      | 2,543,464 |   |                        | $ | 702,319  |                           |  | $ | (612,538     | ) |  | $ | 2,633,245 |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Current Liabilities                                         |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Accounts payable and other current liabilities              |  | $      | 210,366   |   |                        | $ | 40,556   |                           |  | $ | -            |   |  | $ | 250,922   |  
|Commodity derivative contracts                              |  |        | 172,800   |   |                        |   | 2,673    |                           |  |   | -            |   |  |   | 175,473   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 383,166   |   |                        |   | 43,229   |                           |  |   | -            |   |  |   | 426,395   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Long-Term Debt                                              |  |        | 635,468   |   |                        |   | -        |                           |  |   | -            |   |  |   | 635,468   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Other Long-Term Liabilities                                 |  |        | 340,271   |   |                        |   | 41,253   |                           |  |   | -            |   |  |   | 381,524   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Payable to Parent                                           |  |        | -         |   |                        |   | 307,820  |                           |  |   | (307,820     | ) |  |   | -         |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Deferred Income Taxes                                       |  |        | 314,184   |   |                        |   | 5,299    |                           |  |   | -            |   |  |   | 319,483   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Stockholders Equity                                        |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Stockholders equity                                        |  |        | 994,249   |   |                        |   | 353,629  |                           |  |   | (353,629     | ) |  |   | 994,249   |  
|Accumulated other comprehensive income                      |  |        | (123,874  | ) |                        |   | (48,911  | )                         |  |   | 48,911       |   |  |   | (123,874  | )
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 870,375   |   |                        |   | 304,718  |                           |  |   | (304,718     | ) |  |   | 870,375   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  | $      | 2,543,464 |   |                        | $ | 702,319  |                           |  | $ | (612,538     | ) |  | $ | 2,633,245 |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  



17



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED MARCH 31, 2005

(in thousands)



|                                                                      |  |        |          |   |                        |   |        |                           |  |   |              |   |  |   |          |  
|--------------------------------------------------------------------- |  | ------ | -------- | - | ---------------------- | - | ------ | ------------------------- |  | - | ------------ | - |  | - | -------- | -
|                                                                      |  | Parent |          |   | Guarantor Subsidiaries |   |        | Intercompany Eliminations |  |   | Consolidated |  
|Revenues                                                              |  |        |          |   |                        |   |        |                           |  |   |              |   |  |   |          |  
|Oil and liquids                                                       |  | $      | 122,134  |   |                        | $ | 12,579 |                           |  | $ | -            |   |  | $ | 134,713  |  
|Natural gas                                                           |  |        | 12,146   |   |                        |   | 42,333 |                           |  |   | -            |   |  |   | 54,479   |  
|Other operating revenues                                              |  |        | 639      |   |                        |   | 244    |                           |  |   | -            |   |  |   | 883      |  
|                                                                      |  |        |          |   |                        |   |        |                           |  |   |              |   |  |   |          |  
|                                                                      |  |        | 134,919  |   |                        |   | 55,156 |                           |  |   | -            |   |  |   | 190,075  |  
|                                                                      |  |        |          |   |                        |   |        |                           |  |   |              |   |  |   |          |  
|Costs and Expenses                                                    |  |        |          |   |                        |   |        |                           |  |   |              |   |  |   |          |  
|Production expenses                                                   |  |        | 43,558   |   |                        |   | 22,907 |                           |  |   | -            |   |  |   | 66,465   |  
|General and administrative                                            |  |        | 37,409   |   |                        |   | 119    |                           |  |   | -            |   |  |   | 37,528   |  
|Depreciation, depletion and amortization and accretion                |  |        | 27,175   |   |                        |   | 18,163 |                           |  |   | -            |   |  |   | 45,338   |  
|                                                                      |  |        |          |   |                        |   |        |                           |  |   |              |   |  |   |          |  
|                                                                      |  |        | 108,142  |   |                        |   | 41,189 |                           |  |   | -            |   |  |   | 149,331  |  
|                                                                      |  |        |          |   |                        |   |        |                           |  |   |              |   |  |   |          |  
|Income from Operations                                                |  |        | 26,777   |   |                        |   | 13,967 |                           |  |   | -            |   |  |   | 40,744   |  
|Other Income (Expense)                                                |  |        |          |   |                        |   |        |                           |  |   |              |   |  |   |          |  
|Equity in earnings of subsidiaries                                    |  |        | 5,762    |   |                        |   | -      |                           |  |   | (5,762       | ) |  |   | -        |  
|Interest expense                                                      |  |        | (7,642   | ) |                        |   | (3,761 | )                         |  |   | -            |   |  |   | (11,403  | )
|Gain (loss) on mark-to-market derivative contracts                    |  |        | (374,052 | ) |                        |   | -      |                           |  |   | -            |   |  |   | (374,052 | )
|Interest and other income (expense)                                   |  |        | 292      |   |                        |   | -      |                           |  |   | -            |   |  |   | 292      |  
|                                                                      |  |        |          |   |                        |   |        |                           |  |   |              |   |  |   |          |  
|Income Before Income Taxes and Cumulative Effect of Accounting Change |  |        | (348,863 | ) |                        |   | 10,206 |                           |  |   | (5,762       | ) |  |   | (344,419 | )
|Income tax benefit (expense)                                          |  |        |          |   |                        |   |        |                           |  |   |              |   |  |   |          |  
|Current                                                               |  |        | 2,548    |   |                        |   | (2,548 | )                         |  |   | -            |   |  |   | -        |  
|Deferred                                                              |  |        | 140,697  |   |                        |   | (1,896 | )                         |  |   | -            |   |  |   | 138,801  |  
|                                                                      |  |        |          |   |                        |   |        |                           |  |   |              |   |  |   |          |  
|Net Income                                                            |  | $      | (205,618 | ) |                        | $ | 5,762  |                           |  | $ | (5,762       | ) |  | $ | (205,618 | )
|                                                                      |  |        |          |   |                        |   |        |                           |  |   |              |   |  |   |          |  



18



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED MARCH 31, 2004

(in thousands)



|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|--------------------------------------------------------------------- |  | ------ | ------ | - | ---------------------- | - | ------ | ------------------------- |  | - | ------------ | - |  | - | ------ | -
|                                                                      |  | Parent |        |   | Guarantor Subsidiaries |   |        | Intercompany Eliminations |  |   | Consolidated |  
|Revenues                                                              |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Oil and liquids                                                       |  | $      | 31,414 |   |                        | $ | 17,857 |                           |  | $ | -            |   |  | $ | 49,271 |  
|Natural gas                                                           |  |        | 4,215  |   |                        |   | 39,239 |                           |  |   | -            |   |  |   | 43,454 |  
|Other operating revenues                                              |  |        | -      |   |                        |   | 236    |                           |  |   | -            |   |  |   | 236    |  
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|                                                                      |  |        | 35,629 |   |                        |   | 57,332 |                           |  |   | -            |   |  |   | 92,961 |  
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Costs and Expenses                                                    |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Production expenses                                                   |  |        | 14,404 |   |                        |   | 16,445 |                           |  |   | -            |   |  |   | 30,849 |  
|General and administrative                                            |  |        | 18,988 |   |                        |   | 1,104  |                           |  |   | -            |   |  |   | 20,092 |  
|Depreciation, depletion and amortization and accretion                |  |        | 2,679  |   |                        |   | 13,888 |                           |  |   | -            |   |  |   | 16,567 |  
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|                                                                      |  |        | 36,071 |   |                        |   | 31,437 |                           |  |   | -            |   |  |   | 67,508 |  
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Income from Operations                                                |  |        | (442   | ) |                        |   | 25,895 |                           |  |   | -            |   |  |   | 25,453 |  
|Other Income (Expense)                                                |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Equity in earnings of subsidiaries                                    |  |        | 10,927 |   |                        |   | -      |                           |  |   | (10,927      | ) |  |   | -      |  
|Interest expense                                                      |  |        | (488   | ) |                        |   | (6,442 | )                         |  |   | -            |   |  |   | (6,930 | )
|Gain (loss) on mark-to-market derivative contracts                    |  |        | -      |   |                        |   | (1,565 | )                         |  |   | -            |   |  |   | (1,565 | )
|Interest and other income (expense)                                   |  |        | 262    |   |                        |   | -      |                           |  |   | -            |   |  |   | 262    |  
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Income Before Income Taxes and Cumulative Effect of Accounting Change |  |        | 10,259 |   |                        |   | 17,888 |                           |  |   | (10,927      | ) |  |   | 17,220 |  
|Income tax benefit (expense)                                          |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Current                                                               |  |        | -      |   |                        |   | (188   | )                         |  |   | -            |   |  |   | (188   | )
|Deferred                                                              |  |        | 139    |   |                        |   | (6,773 | )                         |  |   | -            |   |  |   | (6,634 | )
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Net Income                                                            |  | $      | 10,398 |   |                        | $ | 10,927 |                           |  | $ | (10,927      | ) |  | $ | 10,398 |  
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  



19



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2005

(in thousands)



|                                                           |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|---------------------------------------------------------- |  | ------ | -------- | - | ---------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | - | -------- | -
|                                                           |  | Parent |          |   | Guarantor Subsidiaries |   |         | Intercompany Eliminations |  |   | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|Net income (loss)                                          |  | $      | (205,618 | ) |                        | $ | 5,762   |                           |  | $ | (5,762       | ) |  | $ | (205,618 | )
|Items not affecting cash flows from operating activities   |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|Depreciation, depletion, amortization and accretion        |  |        | 27,175   |   |                        |   | 18,163  |                           |  |   | -            |   |  |   | 45,338   |  
|Equity in earnings of subsidiaries                         |  |        | (5,762   | ) |                        |   | -       |                           |  |   | 5,762        |   |  |   | -        |  
|Deferred income taxes                                      |  |        | (140,697 | ) |                        |   | 1,896   |                           |  |   | -            |   |  |   | (138,801 | )
|Commodity derivative contracts                             |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|Loss (gain) on derivatives                                 |  |        | 341,012  |   |                        |   | 13,498  |                           |  |   | -            |   |  |   | 354,510  |  
|Reclassify financing derivative settlements                |  |        | 50,326   |   |                        |   | 388     |                           |  |   | -            |   |  |   | 50,714   |  
|Non-cash compensation                                      |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|Stock appreciation rights                                  |  |        | 19,886   |   |                        |   | -       |                           |  |   | -            |   |  |   | 19,886   |  
|Other                                                      |  |        | 2,829    |   |                        |   | -       |                           |  |   | -            |   |  |   | 2,829    |  
|Other noncash items                                        |  |        | (23      | ) |                        |   | -       |                           |  |   | -            |   |  |   | (23      | )
|Change in assets and liabilities from operating activities |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|Accounts receivable and other assets                       |  |        | (7,586   | ) |                        |   | 4,060   |                           |  |   | -            |   |  |   | (3,526   | )
|Accounts payable and other liabilities                     |  |        | (24,808  | ) |                        |   | (2,705  | )                         |  |   | -            |   |  |   | (27,513  | )
|                                                           |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|Net cash provided by operating activities                  |  |        | 56,734   |   |                        |   | 41,062  |                           |  |   | -            |   |  |   | 97,796   |  
|                                                           |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|Oil and gas properties                                     |  |        | (44,124  | ) |                        |   | (36,830 | )                         |  |   | -            |   |  |   | (80,954  | )
|Other property and equipment                               |  |        | (607     | ) |                        |   | (68     | )                         |  |   | -            |   |  |   | (675     | )
|                                                           |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|Net cash (used in) provided by investing activities        |  |        | (44,731  | ) |                        |   | (36,898 | )                         |  |   | -            |   |  |   | (81,629  | )
|                                                           |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|Change in revolving credit facility                        |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|Borrowings                                                 |  |        | 287,000  |   |                        |   | -       |                           |  |   | -            |   |  |   | 287,000  |  
|Repayments                                                 |  |        | (253,600 | ) |                        |   | -       |                           |  |   | -            |   |  |   | (253,600 | )
|Derivative settlements                                     |  |        | (50,326  | ) |                        |   | (388    | )                         |  |   | -            |   |  |   | (50,714  | )
|Investment in and advances to affiliates                   |  |        | 4,436    |   |                        |   | (4,436  | )                         |  |   | -            |   |  |   | -        |  
|Other                                                      |  |        | 1,140    |   |                        |   | -       |                           |  |   | -            |   |  |   | 1,140    |  
|                                                           |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|Net cash provided by (used in) financing activities        |  |        | (11,350  | ) |                        |   | (4,824  | )                         |  |   | -            |   |  |   | (16,174  | )
|                                                           |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents       |  |        | 653      |   |                        |   | (660    | )                         |  |   | -            |   |  |   | (7       | )
|Cash and cash equivalents, beginning of year               |  |        | 876      |   |                        |   | 669     |                           |  |   | -            |   |  |   | 1,545    |  
|                                                           |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  
|Cash and cash equivalents, end of period                   |  | $      | 1,529    |   |                        | $ | 9       |                           |  | $ | -            |   |  | $ | 1,538    |  
|                                                           |  |        |          |   |                        |   |         |                           |  |   |              |   |  |   |          |  



20



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2004

(in thousands)

|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|---------------------------------------------------------- |  | ------ | ------- | - | ---------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | - | ------- | -
|                                                           |  | Parent |         |   | Guarantor Subsidiaries |   |         | Intercompany Eliminations |  |   | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|                                                           |  |        |         |  
|Net income                                                 |  | $      | 10,398  |   |                        | $ | 10,927  |                           |  | $ | (10,927      | ) |  | $ | 10,398  |  
|Items not affecting cash flows from operating activities   |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Depreciation, depletion, amortization and accretion        |  |        | 2,679   |   |                        |   | 13,888  |                           |  |   | -            |   |  |   | 16,567  |  
|Equity in earnings of subsidiaries                         |  |        | (10,927 | ) |                        |   | -       |                           |  |   | 10,927       |   |  |   | -       |  
|Deferred income taxes                                      |  |        | (139    | ) |                        |   | 6,773   |                           |  |   | -            |   |  |   | 6,634   |  
|Commodity derivative contracts                             |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Loss (gain) on derivatives                                 |  |        | 49      |   |                        |   | (2,960  | )                         |  |   | -            |   |  |   | (2,911  | )
|Non-cash compensation                                      |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Stock appreciation rights                                  |  |        | 6,303   |   |                        |   | -       |                           |  |   | -            |   |  |   | 6,303   |  
|Other                                                      |  |        | 2,488   |   |                        |   | -       |                           |  |   | -            |   |  |   | 2,488   |  
|Other noncash items                                        |  |        | (44     | ) |                        |   | -       |                           |  |   | -            |   |  |   | (44     | )
|Change in assets and liabilities from operating activities |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Accounts receivable and other assets                       |  |        | 6,341   |   |                        |   | (7,641  | )                         |  |   | -            |   |  |   | (1,300  | )
|Accounts payable and other liabilities                     |  |        | (5,500  | ) |                        |   | (2,253  | )                         |  |   | -            |   |  |   | (7,753  | )
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Net cash provided by operating activities                  |  |        | 11,648  |   |                        |   | 18,734  |                           |  |   | -            |   |  |   | 30,382  |  
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|                                                           |  |        |         |  
|Oil and gas properties                                     |  |        | (15,096 | ) |                        |   | (17,009 | )                         |  |   | -            |   |  |   | (32,105 | )
|Proceeds from sales of properties                          |  |        | 12,226  |   |                        |   | 10,506  |                           |  |   | -            |   |  |   | 22,732  |  
|Other property and equipment                               |  |        | (166    | ) |                        |   | (52     | )                         |  |   | -            |   |  |   | (218    | )
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Net cash (used in) provided by investing activities        |  |        | (3,036  | ) |                        |   | (6,555  | )                         |  |   | -            |   |  |   | (9,591  | )
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|                                                           |  |        |         |  
|Change in revolving credit facility                        |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Borrowings                                                 |  |        | 68,600  |   |                        |   | -       |                           |  |   | -            |   |  |   | 68,600  |  
|Repayments                                                 |  |        | (88,600 | ) |                        |   | -       |                           |  |   | -            |   |  |   | (88,600 | )
|Investment in and advances to affiliates                   |  |        | 13,152  |   |                        |   | (13,152 | )                         |  |   | -            |   |  |   | -       |  
|Other                                                      |  |        | (183    | ) |                        |   | -       |                           |  |   | -            |   |  |   | (183    | )
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Net cash provided by (used in) financing activities        |  |        | (7,031  | ) |                        |   | (13,152 | )                         |  |   | -            |   |  |   | (20,183 | )
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents       |  |        | 1,581   |   |                        |   | (973    | )                         |  |   | -            |   |  |   | 608     |  
|Cash and cash equivalents, beginning of year               |  |        | 403     |   |                        |   | 974     |                           |  |   | -            |   |  |   | 1,377   |  
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Cash and cash equivalents, end of year                     |  | $      | 1,984   |   |                        | $ | 1       |                           |  | $ | -            |   |  | $ | 1,985   |  
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  



21



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ITEM 2  Managements Discussion and Analysis of Financial Condition and Results of Operations



The following information should be read in connection with the information contained in the consolidated financial statements and notes thereto included elsewhere in this report
and our report on Form 10-K for the year ended December 31, 2004.



Company Overview



We are an independent oil and gas company primarily engaged in the activities of
acquiring, developing, exploiting, exploring and producing oil and gas properties in the United States. We own oil and gas properties in five states with principal operations in:



| |  |  | the Los Angeles and San Joaquin Basins onshore California;
| | - |  | ----------------------------------------------------------



| |  |  | the Santa Maria Basin offshore California;
| | - |  | ------------------------------------------



| |  |  | the Gulf Coast Basin onshore and offshore Louisiana, including the Gulf of Mexico; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the Val Verde portion of the greater Permian Basin in Texas.
| | - |  | ------------------------------------------------------------



Assets in our principal focus areas include mature properties with long-lived reserves and significant development and exploitation opportunities as well as newer properties with
development, exploitation and exploration potential.



Our primary sources of liquidity
are cash generated from our operations and our revolving credit facility. At April 1, 2005 we had approximately $245 million of availability under our revolving credit facility, after financing our acquisition of certain producing properties in
California. We have a capital budget for 2005, excluding acquisitions, of approximately $375 million. We believe that we have sufficient liquidity through our cash from operations and borrowing capacity under our revolving credit facility to meet
our short-term and long-term normal recurring operating needs, debt service obligations, contingencies and anticipated capital expenditures. In addition, the majority of our capital expenditures are discretionary and could be curtailed if our cash
flows declined from expected levels.



Our cash flows depend on many factors, including
the price of oil and gas, the success of our acquisition and drilling activities and the operational performance of our producing properties. We hedge to manage our commodity price risk. Hedging may prevent us from receiving the full advantage of
increases in oil or gas prices above the maximum fixed amount specified in the hedge agreement. The level of hedging activity depends on our view of market conditions, available hedge prices and our operating strategy. As discussed in 
Hedge Restructuring, in March 2005 we executed a series of contracts that will eliminate all of our 2006 oil price swaps and collars. Although we eliminated our 2006 swap and collar positions, we still have collars with a floor of $25.00 and a
ceiling of $34.76 for the remainder of 2005 and the years 2007 and 2008 that are subject to mark-to-market accounting. Consequently, as in the past, we expect that there will continue to be significant volatility in our reported earnings due to
gains and losses on mark-to-market derivative contracts as changes occur in the NYMEX price index.



In a typical collar transaction, we have the right to receive from the hedge counterparty the excess of the floor price specified in the hedge agreement over a floating price based on a market index, multiplied by the quantity
hedged. If the floating price exceeds the floor price and is less than the ceiling price, no payment is required by either party. If the floating price exceeds the ceiling price, we must pay the counterparty this difference multiplied by the
quantity hedged. Our hedging agreements expose us to risk of financial loss if the counterparty to a hedging contract defaults on its contract obligations.



22



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Acquisitions and Dispositions



On March 11, 2005 we entered into an agreement to acquire certain California producing oil and gas properties from a private company for $119 million. The properties are primarily
located in the Los Angeles Basin of onshore California with some smaller properties located in adjacent Ventura County. The transaction, which was financed under our existing credit facility, closed on April 1, 2005.



We periodically evaluate and from time to time have elected to sell certain of our mature producing
properties that we consider to be nonstrategic. Such sales enable us to focus on our core properties, maintain financial flexibility and redeploy the proceeds therefrom to activities that we believe potentially have a higher financial return. On
March 31, 2005, we entered into a purchase and sale agreement with XTO Energy, Inc. to sell 275 net active wells for $350 million. As of December 31, 2004, our independent reserve engineers estimated that these producing properties had proven
reserves of approximately 27 million equivalent barrels of which 81% was proved developed. The properties produced approximately 5,800 net equivalent barrels per day at March 31, 2005. This transaction, which has an effective date of January 1,
2005, is expected to close in the second quarter of 2005, subject to customary closing adjustments, and we expect our net proceeds will be reduced by approximately $15 to $20 million.



After taking into account the acquisition of the California oil and gas properties and the sale to XTO Energy as though such events occurred before
year-end, we estimate our December 31, 2004 reserves would have been approximately 410 MMBOE, of which approximately 68% was proved developed.



Hedge Restructuring



In March 2005, we executed a series of contracts that will eliminate all of our 2006 oil price swaps and collars at a pre-tax cost of approximately $292 million ($175 million after tax). Approximately $146 million of this amount is
attributable to 2006 collars for 22,000 barrels of oil per day with a floor price of $25.00 and an average ceiling price of $34.76. Approximately $146 million of the cost is attributable to 2006 swaps for 15,000 barrels of oil per day at an average
price of $25.28.



The collars were not accounted for as hedges, therefore, the $146
million loss in the fair value of these instruments was currently recognized in our income statement and there will be no income statement effect subsequent to the amounts reported as of March 31, 2005. We used hedge accounting for the swaps and as
a result the $146 million loss in fair value attributable to the swaps has been deferred in OCI and will be recognized as a noncash reduction to oil revenues in 2006 when the hedged production is sold.



The cost of eliminating the 2006 swaps and collars is a deductible expense for tax purposes. As a
result of the tax deduction, as well as our existing net operating loss (NOL) and enhanced oil recovery credit (EOR) carryforwards we do not expect to pay any significant federal or state income taxes in 2005. Depending on
prevailing commodity prices in 2006, our NOL and EOR positions may result in our not paying significant federal and state income taxes in 2006.



We expect to pay the $292 million cost to eliminate the 2006 swaps and collars in the second or third quarter of 2005 with proceeds to be received from the previously discussed
property sale. This payment will reduce derivative liabilities on our balance sheet. The $146 million cash payment for the collars will be reflected as a financing cash outflow in our statement of cash flows when the cash is paid. Under FAS 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities, the collars are deemed to contain a significant financing element because they included off-market terms. The $146 million cash payment for the swaps will be reflected as
an operating cash outflow when the cash is paid.



23



---

In addition to eliminating all of our 2006 oil price swaps and collars, in March 2005 we acquired $45.00 NYMEX put options on
40,000 barrels of oil per day in 2006 at an average cost of $2.96 per barrel. In April 2005 we acquired $45.00 NYMEX put options on an additional 10,000 barrels of oil per day in 2006 at an average cost of $2.93 per barrel and 20,000 barrels of oil
per day in 2007 at an average cost of $4.43 per barrel. The costs associated with these put options will be paid in 2006 and 2007. We have elected not to use hedge accounting for the puts and consequently, the puts will be marked-to-market each
quarter with fair value gains and losses recognized currently as a gain or loss on mark-to-market derivative contracts on the income statement.



Price Differentials



As is customary in the oil and gas industry, our realized wellhead oil and gas prices are lower than the NYMEX index level as a result of location and quality differentials. During 2005 we estimate that our oil price realization will be
approximately 80% - 83% of the NYMEX index price. A significant portion of our crude oil production in California is sold under a contract that provides for pricing based on a fixed percentage of the NYMEX crude oil price for each type of crude oil
sold under the contract. Consequently, the actual price received under the contract will vary with the production mix. This percentage may be renegotiated every two years, with the current percentage rates eligible for renegotiation effective at the
end of 2005. The average differential for 2005 under the contract results in a net realized price of 80% of NYMEX for approximately 25,000 barrels per day of production. In addition, we have locked in an average fixed price differential to NYMEX of
approximately $4.80 per barrel on approximately 15,000 barrels per day of production for 2005 under the terms of certain crude oil sales contracts. While the sales contracts do not reduce our exposure to price volatility, they do effectively
eliminate the basis differential risk between the NYMEX price and the field price of our production, thereby facilitating the ability to effectively hedge our realized price. The remainder of our oil is sold at posted field prices.



During 2004, the basis differentials for California crude oil widened significantly from past levels
and the prices received by the Company under NYMEX based crude oil contracts were favorable relative to the current market prices. There can be no assurance that the Company will continue to receive the favorable differentials when the price
differentials are renegotiated or that the market differentials will not decrease below our contracted prices.



Approximately 84% of our gas production is sold monthly off of industry recognized, published index pricing. The remaining 16% is priced daily on the spot market. Fluctuations between the two pricing mechanisms can
significantly impact the overall differential to the Henry Hub.



Results Overview



Primarily as a result of a $374 million derivative mark-to-market loss (of which
$337 million was a non-cash unrealized loss), we reported a net loss of $205.6 million, or $2.66 per share for the first quarter of 2005 compared to net income of $10.4 million, or $0.26 per diluted share for the first quarter of 2004. Our results
for 2005 include the effect of the properties acquired in our 2004 acquisition of Nuevo, which are included in our 2004 results with effect from May 14, 2004.



Income from operations increased to $40.7 million in 2005 from $25.5 million in 2004. The improvement is primarily attributable to higher oil and gas sales as a result of
increased sales volumes due to the Nuevo properties and increased oil and gas prices. The increase in income from operations was offset by the derivative mark-to-market loss, expenses related to stock appreciation rights and higher interest costs
related to the Nuevo acquisition.



24



---

General



We follow the full cost method of accounting whereby all costs associated with property acquisition, exploration, exploitation and development activities are capitalized. Our
revenues are derived from the sale of oil, gas and natural gas liquids. We recognize revenues when our production is sold and title is transferred. Our revenues are highly dependent upon the prices of, and demand for, oil and gas. Historically, the
markets for oil and gas have been volatile and are likely to continue to be volatile in the future. The prices we receive for our oil and gas and our levels of production are subject to wide fluctuations and depend on numerous factors beyond our
control, including supply and demand, economic conditions, foreign imports, the actions of OPEC, political conditions in other oil-producing countries, and governmental regulation, legislation and policies. Under the SECs full cost accounting
rules, we review the carrying value of our proved oil and gas properties each quarter. These rules generally require that we price our future oil and gas production at the oil and gas prices in effect at the end of each fiscal quarter to determine a
ceiling value of our properties. The rules require a write-down if our capitalized costs exceed the allowed ceiling. We have had no write-downs due to these ceiling test limitations since 1998. Given the volatility of oil and gas prices,
it is likely that our estimate of discounted future net revenues from proved oil and gas reserves will fluctuate in the near term. If oil and gas prices decline significantly in the future, write-downs of our oil and gas properties could occur.
Write-downs required by these rules do not directly impact our cash flows from operating activities. Decreases in oil and gas prices have had, and will likely have in the future, an adverse effect on the carrying value of our estimated proved
reserves and our revenues, profitability and cash flow.



Our oil and gas production
expenses include salaries and benefits of personnel involved in production activities, steam gas costs, electric costs, maintenance costs, production, ad valorem and severance taxes, and other costs necessary to operate our producing properties.
Depletion of capitalized costs of producing oil and gas properties is provided using the units of production method based upon estimated proved reserves. For the purposes of computing depletion, estimated proved reserves are redetermined as of the
end of each year and on an interim basis when deemed necessary.



General and
administrative expenses (G&A) consist primarily of salaries and related benefits of administrative personnel, office rent, systems costs and other administrative costs.



25



---

Results of Operations



The following table reflects the components of our oil and gas production and sales prices and sets forth our operating revenues and costs and expenses on a BOE basis:



|                                      |  |                              |         |   |      |   |         |  
|------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                      |  | Three Months Ended March 31, |        
|                                      |  | 2005                         |         |   | 2004 |  
|Sales Volumes                         |  |                              |         |   |      |   |         |  
|Oil and liquids (MBbls)               |  |                              | 4,417   |   |      |   | 2,195   |  
|Gas (MMcf)                            |  |                              | 9,277   |   |      |   | 7,404   |  
|MBOE                                  |  |                              | 5,963   |   |      |   | 3,429   |  
|                                      |  |                             
|Daily Average Sales Volumes           |  |                              |         |   |      |   |         |  
|Oil and liquids (Bbls)                |  |                              | 49,082  |   |      |   | 24,119  |  
|Gas (Mcf)                             |  |                              | 103,075 |   |      |   | 81,357  |  
|BOE                                   |  |                              | 66,261  |   |      |   | 37,679  |  
|                                      |  |                             
|Revenues (thousands of dollars)       |  |                              |         |   |      |   |         |  
|Oil sales                             |  | $                            | 180,158 |   |      | $ | 68,304  |  
|Oil hedging                           |  |                              | (45,445 | ) |      |   | (19,033 | )
|                                      |  |                              |         |   |      |   |         |  
|                                      |  |                              | 134,713 |   |      |   | 49,271  |  
|                                      |  |                              |         |   |      |   |         |  
|Gas sales                             |  |                              | 53,653  |   |      |   | 42,386  |  
|Gas hedging                           |  |                              | 826     |   |      |   | 1,068   |  
|                                      |  |                              |         |   |      |   |         |  
|                                      |  |                              | 54,479  |   |      |   | 43,454  |  
|                                      |  |                              |         |   |      |   |         |  
|Other                                 |  |                              | 883     |   |      |   | 236     |  
|                                      |  |                              |         |   |      |   |         |  
|                                      |  | $                            | 190,075 |   |      | $ | 92,961  |  
|                                      |  |                              |         |   |      |   |         |  
|Unit Economics (in dollars)           |  |                              |         |   |      |   |         |  
|Average Oil Sales Price ($/Bbl)       |  |                              |         |   |      |   |         |  
|Net realized price before hedging     |  | $                            | 40.79   |   |      | $ | 31.14   |  
|Hedging revenue (expense)             |  |                              | (10.29  | ) |      |   | (8.68   | )
|                                      |  |                              |         |   |      |   |         |  
|Net realized price                    |  | $                            | 30.50   |   |      | $ | 22.46   |  
|                                      |  |                              |         |   |      |   |         |  
|Average Gas Sales Price ($/Mcf)       |  |                              |         |   |      |   |         |  
|Net realized price before hedging     |  | $                            | 5.78    |   |      | $ | 5.73    |  
|Hedging revenue (expense)             |  |                              | 0.09    |   |      |   | 0.14    |  
|                                      |  |                              |         |   |      |   |         |  
|Net realized price                    |  | $                            | 5.87    |   |      | $ | 5.87    |  
|                                      |  |                              |         |   |      |   |         |  
|Average Realized Price per BOE        |  | $                            | 31.73   |   |      | $ | 27.05   |  
|Costs and Expenses per BOE            |  |                              |         |   |      |   |         |  
|Production costs                      |  |                              |         |   |      |   |         |  
|Lease operating expenses              |  | $                            | 5.42    |   |      | $ | 5.53    |  
|Steam gas costs                       |  |                              | 2.80    |   |      |   | 0.28    |  
|Electricity                           |  |                              | 1.10    |   |      |   | 1.68    |  
|Production and ad valorem taxes       |  |                              | 1.23    |   |      |   | 1.16    |  
|Gathering and transportation          |  |                              | 0.59    |   |      |   | 0.35    |  
|G&A                                   |  |                              |         |   |      |   |         |  
|G&A excluding items below             |  |                              | 1.97    |   |      |   | 2.05    |  
|Stock appreciation rights             |  |                              | 3.85    |   |      |   | 3.08    |  
|Other stock based compensation        |  |                              | 0.47    |   |      |   | 0.73    |  
|DD&A per BOE (oil and gas properties) |  |                              | 7.10    |   |      |   | 4.39    |  



If derivative instruments that are designated as
hedges and qualify for hedge accounting are terminated prior to the sale of the hedged production, any unrealized gains or losses existing at the termination date are deferred in Other Comprehensive Income (OCI) until the production that
was originally hedged is sold. In 2004 we terminated certain 2005 oil production hedges and oil revenues



26



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for the first quarter of 2005 have been reduced by $29.1 million ($6.58 per barrel) of non-cash hedging expenses related to the terminated hedges. Oil revenues for the
remainder of 2005 will be reduced by an additional $77.1 million of non-cash losses related to the terminated hedges.



Unrealized gains and losses on derivative instruments that are designated as hedges and qualify for hedge accounting are deferred in OCI until the hedged production is sold and the
realized gains or losses are included in oil and gas revenues. In the case of the derivatives acquired in connection with our acquisitions of Nuevo and 3TEC, only cash settlements for changes in fair value subsequent to the acquisition date are
reflected in our oil and gas revenues. Cash settlements for the liability existing at the merger date are reflected as the payment of a liability. Oil hedging expense for the first quarter of 2005 and 2004 does not include $2.71 per barrel and $0.02
per barrel, respectively, of cash settlement payments for the merger date liability for hedges assumed in connection with the Nuevo and 3TEC acquisitions. Gas hedging expense for the first quarter of 2005 and 2004 does not include $0.20 per Mcf and
$0.47 per Mcf, respectively, of cash settlement payments for the merger date liability for hedges assumed in connection with the Nuevo and 3TEC acquisitions.



We do not use hedge accounting for certain of our derivative instruments, because the derivatives do not qualify or have not been qualified for hedge accounting. Consequently,
these derivative contracts are marked-to-market each quarter with fair value gains and losses, both realized and unrealized, recognized currently as a gain or loss on mark-to-market derivative contracts on the income statement. Oil hedging revenues
for the three months ended March 31, 2005 does not include $8.38 per barrel of cash settlements attributable to derivative instruments that are not accounted for as hedges. Gas hedging revenues for the three months ended March 31, 2004 do not
include $0.14 per Mcf of cash settlements attributable to derivative instruments that are not accounted for as hedges. These cash settlements are included in the gain (loss) on mark-to-market derivative contracts on the income statement.



Comparison of Three Months Ended March 31, 2005 to Three Months Ended March 31, 2004



Oil and gas revenues.    Oil and gas revenues increased
$96.5 million, to $189.2 million for 2005 from $92.7 million for 2004. The increase is primarily due to increased production volumes attributable to the properties acquired in the Nuevo acquisition and higher realized prices. Our average realized
price per BOE increased to $31.73 and our production increased to 6.0 MMBOE. Production attributable to the properties acquired from Nuevo was 2.9 MMBOE in 2005.



Oil revenues increased $85.4 million, to $134.7 million for 2005 from $49.3 million for 2004, reflecting higher realized prices ($17.7 million) and
higher production ($67.7 million). Our average realized price for oil increased $8.04 to $30.50 per Bbl for 2005 from $22.46 per Bbl for 2004. The increase is primarily attributable to an improvement in the NYMEX oil price, which averaged $49.90 per
Bbl in 2005 versus $35.16 per Bbl in 2004. Hedging had the effect of decreasing our average price per Bbl by $10.29 in 2005 compared to $8.68 per Bbl in 2004. Oil production increased to 4.4 MMBbls in 2005 from 2.2 MMBbls in 2004. Production
attributable to the properties acquired from Nuevo was 2.5 MMBbls in 2005.



Gas revenues
increased $11.0 million, to $54.5 million in 2005 from $43.5 million in 2004 due to increased production volumes. Our average realized price for gas of $5.87 per Mcf for 2005 was equal to the realized price for 2004. Hedging revenues increased our
2005 average price by $0.09 per Mcf and our 2004 average price by $0.14 per Mcf.



Lease operating expenses.    Lease operating expenses (including steam gas costs and electricity) increased $29.9 million, to $55.6 million for 2005 from $25.7 million for 2004, due to the properties acquired from
Nuevo which accounted for $29.3 million of our 2005 operating expenses. On a per unit basis, lease operating expenses increased to $9.32 per BOE in 2005 versus $7.49 per BOE in 2004.



27



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The per unit increase is primarily attributable to the steam gas costs attributable to the properties acquired from Nuevo. Steam gas costs averaged $2.80 per BOE in
2005 versus $0.28 per BOE in 2004.



Production and ad valorem
taxes.    Production and ad valorem taxes increased $3.3 million, to $7.3 million for 2005 from $4.0 million for 2004 primarily due to the properties acquired from Nuevo and increased oil prices.



Gathering and transportation expenses.    Gathering and transportation
expenses increased $2.3 million, to $3.5 million for 2005 from $1.2 million for 2004 primarily due to the properties acquired from Nuevo.



General and administrative expense.    Our G&A expense consists of (in millions of dollars):



|                               |  |                              |      |      |   |     
|------------------------------ |  | ---------------------------- | ---- | ---- | - | ----
|                               |  | Three Months Ended March 31,
|                               |  | 2005                         |      | 2004
|G&A excluding items below      |  | $                            | 11.7 |      | $ | 7.0 
|Stock appreciation rights      |  |                              | 23.0 |      |   | 10.6
|Other stock-based compensation |  |                              | 2.8  |      |   | 2.5 
|                               |  |                              |      |      |   |     
|                               |  | $                            | 37.5 |      | $ | 20.1
|                               |  |                              |      |      |   |     



G&A expense, excluding amounts attributable
to stock appreciation rights (SARs) and other stock based compensation, increased $4.7 million, to $11.7 million for 2005 from $7.0 million for 2004, primarily reflecting increased costs resulting from the Nuevo acquisition and to a
lesser extent Sarbanes-Oxley compliance costs.



G&A expense related to outstanding
SARs was $23.0 million in 2005 compared to $10.6 million in 2004. Accounting for SARs requires that we record an expense or credit for vested or deemed vested SARs depending on whether, during the period, our stock price either rose or fell,
respectively. Such expense in 2005 and 2004 reflects additional vesting of outstanding SARs as well as an increase in our stock price. Our stock price was $34.90 per share on March 31, 2005 versus $26.00 per share on December 31, 2004 and $18.64 per
share on March 31, 2004 versus $15.39 per share on December 31, 2003. In 2005 and 2004 we made cash payments of $3.1 million and $4.3 million, respectively, for SARs that were exercised during the period.



G&A expense for 2005 and 2004 includes other stock based compensation costs of $2.8 million and
$2.5 million, respectively, related to restricted stock and restricted stock unit grants.



G&A expense does not include amounts capitalized as part of our acquisition, exploration and development activities. We capitalized $5.2 million and $3.4 million of G&A expense in 2005 and 2004, respectively.



Depreciation, depletion and amortization, or DD&A.    DD&A expense
increased $27.8 million, to $43.6 million in 2005 from $15.8 million in 2004. Approximately $27.3 million of the increase was attributable to our oil and gas DD&A due to a higher per unit rate and higher production. Our oil and gas unit of
production rate increased to $7.10 per BOE in 2005 compared to $4.39 per BOE in 2004. The increase primarily reflects the effect of the Nuevo acquisition.



Accretion expense. Accretion expense increased $1.0 million to $1.7 million in 2005 from $0.7 million in 2004. The increase is primarily attributable to the increase in
asset retirement obligations related to the Nuevo acquisition.



Interest
expense.    Interest expense increased $4.5 million, to $11.4 million for 2005 from $6.9 million for 2004 primarily due to higher outstanding debt as a result of the Nuevo acquisition. Interest expense



28



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does not include interest capitalized on oil and gas properties not subject to amortization. We capitalized $0.6 million and $0.9 million of interest in 2005 and 2004,
respectively.



Gain (loss) on mark-to-market derivative contracts. We do not use
hedge accounting for certain of our derivative instruments, because the derivatives do not qualify or have not been qualified for hedge accounting. Consequently, these derivative contracts are marked-to-market each quarter with fair value gains and
losses, both realized and unrealized, recognized currently as a gain or loss on mark-to-market derivative contracts on the income statement. Cash flow is only impacted to the extent the actual settlements under the contracts result in making or
receiving a payment from the counterparty.



We recognized a pre-tax mark-to-market loss
from derivatives that are not accounted for as hedges of $374.0 million and $1.6 million in 2005 and 2004, respectively. Such losses included cash settlements of $37.0 million and $1.0 million in 2005 and 2004, respectively.



Income tax expense.    Income taxes for 2005, based on our pre-tax loss of
$344.4 million, were a benefit of $138.8 million. In 2004 income taxes, based on our pre-tax income of $17.2 million were an expense of $6.8 million. Our overall effective tax rate was approximately 40% in 2005 and 2004.



The payment to eliminate our 2006 oil price swaps and collars is tax deductible. As a result of this
tax deduction, as well as our existing net operating loss (NOL) and enhanced oil recovery credit (EOR) carryforwards we do not expect to pay any significant federal or state income taxes in 2005.



Liquidity and Capital Resources



Our primary sources of liquidity are cash generated from our operations and our revolving credit facility. At April 1, 2005 we had approximately $245
million of availability under our revolving credit facility, after financing our acquisition of certain producing properties in California. We believe that we have sufficient liquidity through our cash from operations and borrowing capacity under
our revolving credit facility to meet our short-term and long-term normal recurring operating needs, debt service obligations, contingencies and anticipated capital expenditures.



Our cash flows depend on many factors, including the price of oil and gas, the success of our acquisition and drilling activities and the operational
performance of our producing properties. We hedge to limit our commodity price exposure. Hedging also prevents us from receiving the full advantage of increases in oil or gas prices above the maximum fixed amount specified in the hedge agreement.
The level of hedging activity depends on our view of market conditions, available hedge prices and our operating strategy. In addition, the majority of our capital expenditures are discretionary and could be curtailed if our cash flows declined from
expected levels.



As discussed in Company Overview  Hedge
Restructuring, in March 2005, we executed a series of contracts that will eliminate all of our 2006 oil price swaps and collars at a pre-tax cost of approximately $292 million ($175 million after tax). Approximately $146 million of this amount
is attributable to 2006 collars for 22,000 barrels of oil per day with a floor price of $25.00 and an average ceiling price of $34.76. Approximately $146 million of the cost is attributable to 2006 swaps for 15,000 barrels of oil per day at an
average price of $25.28. We expect to make the $292 million payment in the second or third quarter of 2005 with proceeds to be received from a recently announced property sale. This payment will reduce derivative liabilities on our balance sheet. In
addition, we acquired $45.00 NYMEX put options on 50,000 barrels of oil per day in 2006 and 20,000 barrels per day in 2007. We still have collars with a floor of $25.00 and a ceiling of $34.76 on 22,000 barrels per day of oil production for the last
three quarters of 2005 and the years 2007 and 2008.



The payment to eliminate our 2006
oil price swaps and collars is tax deductible. As a result of this tax deduction, as well as our existing net operating loss (NOL) and enhanced oil recovery credit (EOR)



29



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carryforwards we do not expect to pay any significant federal or state income taxes in 2005. Depending upon prevailing commodity prices in 2006, our NOL and EOR
positions may result in our not paying significant federal and state income taxes in 2006.



At March 31, 2005 we had a working capital deficit of approximately $327 million. Approximately $288 million of the working capital deficit is attributable to the fair value of our commodity derivative instruments (net of related
deferred income taxes). In accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, the fair value of all derivative instruments is recorded on the balance sheet. Our hedge agreements provide for monthly
settlement based on the difference between the fixed price in the contract and the actual NYMEX oil price. Cash received for the sale of physical production will be based on actual market prices and, if necessary, will be available to meet
derivative settlement obligations. None of our derivative contracts have margin requirements or collateral provisions that could require funding prior to the scheduled cash settlement date. The contract counterparties for our derivative commodity
contracts are all major financial institutions. Five of the financial institutions are participating lenders in our credit facility, with two such counterparties holding contracts that represent approximately 69% of the fair value of all of our open
positions at March 31, 2005. If we were in default under our credit facility, the derivative counterparties that are participating lenders in our credit facility could require that we fund our obligation prior to the scheduled cash settlement date.
In addition, approximately $33 million (net of related deferred income taxes) of the working capital deficit is attributable to the in-the-money value of stock appreciation rights that were deemed vested at March 31, 2005.



As discussed in Company Overview  Acquisition and Dispositions in March 2005 we
entered into a purchase and sale agreement to sell certain oil and gas properties for $350 million. This transaction, which has an effective date of January 1, 2005, is expected to close in the second quarter of 2005, subject to customary closing
adjustments, and we expect our net proceeds will be reduced by approximately $15 to $20 million. We expect to use the proceeds from the sale to pay for the contracts that were used to eliminate our 2006 oil price collars and swaps.



Financing Activities



Senior Revolving Credit Facility.This is a $500 million committed revolving credit facility with a current borrowing base of $600 million. The
borrowing base will be redetermined on a semi-annual basis, with PXP and the lenders each having the right to one annual interim unscheduled redetermination, and adjusted depending on PXPs oil and gas properties, reserves, other indebtedness
and other relevant factors. Additionally, the credit facility contains a $50.0 million sub-limit on letters of credit. The credit facility matures on April 4, 2007. Collateral consists of 100% of the shares of stock of our domestic subsidiaries and
mortgages representing at least 80% of the total present value of our domestic oil and gas properties.



At March 31, 2005, we had $143 million in borrowings and $7 million in letters of credit outstanding under the credit facility. At that date we were in compliance with the covenants contained in the credit facility and could
have borrowed the full amount available under the credit facility. The effective interest rate on our borrowings under this revolving credit facility was 4.1% at March 31, 2005.



In the second quarter we expect to complete an amendment to our credit facility that we expect will increase the size of the commitment and the amount
of the borrowing base to $750 million and extend the maturity to five years.



7.125%
Senior Notes.On March 31, 2005 we had $250.0 million principal amount of ten year senior unsecured notes (the 7.125% Notes) outstanding. The 7.125% Notes were issued at 99.478% and bear interest at 7.125% with a yield to maturity of
7.2%. During the period from June 15, 2009 to June 14, 2012, we may redeem all or part of the 7.125% Notes at our option, at rates varying from 103.563% to 101.188% of the principal amount and at 100% of the principal amount thereafter. In addition,
before



30



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June 15, 2009, we may redeem all or part of the 7.125% Notes at the make-whole price set forth under the indenture. At any time prior to June 15, 2007, we may redeem
up to 35% of the 7.125% Notes with the net cash proceeds of certain equity offerings at the redemption price set forth under the indenture.



8.75% Senior Subordinated Notes. At March 31, 2005, we had $275.0 million principal amount of 8.75% Senior Subordinated Notes due 2012 (the 8.75% Notes)
outstanding. The 8.75% Notes are our unsecured general obligations, are subordinated in right of payment to all of our existing and future senior indebtedness and are jointly and severally guaranteed on a full, unconditional basis by all of our
existing and future domestic restricted subsidiaries. The 8.75% Notes are not redeemable until July 1, 2007. During the period from July 1, 2007 to June 30, 2010 they are redeemable, at our option, at rates varying from 104.375% to 101.458% of the
principal amount and at 100% of the principal amount thereafter. In the event of a change of control, as defined in the indenture, we will be required to make an offer to repurchase the notes at 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of the repurchase.



Short-term Credit Facility. In
August 2004 we entered into an uncommitted short-term credit facility with a bank under which we may make borrowings from time to time until August 14, 2005, not to exceed at any time the maximum principal amount of $15.0 million. No advance under
the short-term facility may have a term exceeding fourteen days and all amounts outstanding are due and payable no later than August 15, 2005. Each advance under the short-term facility shall bear interest at a rate per annum mutually agreed on by
the bank and the Company. At all times an advance is outstanding, the Company must have $100 million in availability under its senior revolving credit facility. No amounts were outstanding under the short-term credit facility at March 31, 2005.



Shelf Registration. We have filed with the Securities and Exchange Commission a
universal shelf registration statement, which became effective May 2, 2005, that allows us to issue up to an aggregate of $500 million of debt and/or equity securities. The prices and terms of the debt and/or equity securities will be determined at
the time of sale.



Cash Flows



|                            |  |                              |       |   |      |   |       |  
|--------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                            |  | Three Months Ended March 31, |      
|                            |  | 2005                         |       |   | 2004 |  
|                            |  | (in millions)                |      
|Cash provided by (used in): |  |                              |       |   |      |   |       |  
|Operating activities        |  | $                            | 97.8  |   |      | $ | 30.4  |  
|Investing activities        |  |                              | (81.6 | ) |      |   | (9.6  | )
|Financing activities        |  |                              | (16.2 | ) |      |   | (20.2 | )



Net cash provided by operating activities was
$97.8 million in 2005 compared to $30.4 million in 2004. The increase from 2004 to 2005 is primarily due to increased sales volumes as a result of the Nuevo acquisition and increased oil prices. Under SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, certain of our derivatives are deemed to contain a significant financing element and cash settlements with respect to such derivatives are required to be reflected as financing activities. Accordingly,
in the first quarter of 2005 $50.7 million of derivative cash settlements have been reclassified to financing activities.



Net cash used in investing activities was $81.6 million in 2005 compared to $9.6 million in 2004. The 2005 and 2004 outflows include costs incurred in connection with our oil and
gas acquisition, development and exploration activities of $80.9 million and $32.1 million, respectively. The 2004 amount is reduced by property sales proceeds of $22.7 million.



Net cash used in financing activities in 2005 was $16.2 million, primarily reflecting $33.4 million in net borrowings under our credit facility and
the payment of $50.7 million in financing derivative settlements. Net cash used in financing activities in 2004 was $20.2 million, primarily reflecting a $20.0 million net repayment under our credit facility.



31



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Capital Requirements



We have made and will continue to make substantial capital expenditures for the acquisition, exploitation, development, exploration and production of oil and gas. We have a capital
budget for 2005, excluding acquisitions, of approximately $375 million. We believe that we have sufficient liquidity through our cash from operations and borrowing capacity under our revolving credit facility to meet our short-term and long-term
normal recurring operating needs, debt service obligations, contingencies and anticipated capital expenditures. In addition, the majority of our capital expenditures are discretionary and could be curtailed if our cash flows declined from expected
levels.



Stock Appreciation Rights and Restricted Stock Units



Accounting for SARs requires that we record an expense or credit for vested or deemed vested SARs
depending on whether, during the period, our stock price either rose or fell, respectively. Our stock price was $34.90 per share on March 31, 2005 versus $26.00 per share on December 31, 2004 and we recognized $23.0 million of expense in the first
quarter of 2005. We incur cash expenditures upon the exercise of SARs, but our common shares outstanding do not increase. At March 31, 2005 we had approximately 2.9 million SARs outstanding of which 2.0 million were vested. If all of the vested SARs
were exercised, based on $34.90, the price of our common stock as of March 31, 2005, we would pay $48.2 million to holders of the SARs. In the first quarter of 2005 we made cash payments of $3.1 million for SARs that were exercised during that
period.



Our stock compensation plans also allow grants of restricted stock and
restricted stock units. Restricted stock is issued on the grant date but restricted as to transferability. Restricted stock unit awards represent the right to receive common stock when vesting occurs. Compensation expense with respect to grants of
restricted stock and restricted stock units is recognized ratable over the vesting period. We recognized $2.8 million of expense in the first quarter of 2005. Approximately 1.3 million of our restricted stock units have a provision for accelerated
vesting if the closing price of our common stock is equal to or greater than $37.92 per share for any ten of twenty consecutive trading days. If the accelerated vesting event occurs in 2005, compensation expense for the year will be approximately
$16 million higher than if the event had not occurred.



Industry Concentration



Financial instruments which potentially subject us to concentrations of credit risk
consist principally of accounts receivable with respect to our oil and gas operations and derivative instruments related to our hedging activities. During the first quarter of 2005 and 2004 sales to Plains All American Pipeline, L.P. accounted for
approximately 39% and 69%, respectively, of our total revenues and during the first quarter of 2005 sales to ConocoPhillips accounted for approximately 43% of our total revenues. During such periods no other purchaser accounted for more than 10% of
our total revenues. The loss of any single significant customer or contract could have a material adverse short-term effect, however, we do not believe that the loss of any single significant customer or contract would materially affect our business
in the long-term. We believe such purchasers could be replaced by other purchasers under contracts with similar terms and conditions. However, their role as the purchaser of a significant portion of our oil production does have the potential to
impact our overall exposure to credit risk, either positively or negatively, in that they may be affected by changes in economic, industry or other conditions.



The contract counterparties for our derivative commodity contracts are all major financial institutions with Standard & Poors ratings of A or better. Five of the
financial institutions are participating lenders in our credit facility, with two such counterparties holding contracts that represent approximately 69% of the fair value of all of our open positions at March 31, 2005.



32



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Critical Accounting Policies and Factors that May Affect Future Results



Based on the accounting policies that we have in place, certain factors may impact our future financial
results. Significant accounting policies related to commodity pricing and risk management activities, write-downs under full cost ceiling test rules, oil and gas reserves, stock appreciation rights and goodwill are discussed in our Annual Report on
Form 10-K for the year ended December 31, 2004.



Recent Accounting Pronouncements



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



In February 2005, the SEC issued guidance concerning
the specific circumstance of a property disposition by a company that follows the full cost accounting method that resulted in a less than 25% alteration of the proved oil and gas reserve quantities within a full cost center. In connection with that
disposition, the SEC considered if goodwill should be allocated to the property disposed, and, if so, whether that allocated goodwill should remain as a component of the capitalized full cost center or be reflected in the statement of operations.



The SEC concluded that only the fair value allocated to the oil and gas properties in a
business acquisition should be included in the costs accounted for under Rule 4-10(c) of Regulation S-X. Goodwill associated with acquisitions of oil and gas properties that constitute a business is recognized in accordance with SFAS 141 but
accounted for outside of the full cost rules. Therefore, when dispositions of these properties occur, the goodwill previously recognized does not affect the associated adjustments contemplated under Rule 4-10(c)(6)(i). Rather, the accounting for the
goodwill and any potential impairment should follow the provisions of FASB Statement No. 142, Goodwill and Other Intangible Assets(SFAS 142). Companies are required to consider whether a property disposition that results in a less than 25%
alteration of the proved oil and gas reserve quantities within a given cost center is a trigger that requires goodwill be evaluated for impairment under SFAS 142. The SEC has not yet addressed whether any portion of goodwill should be allocated to a
disposition of greater than 25%, but less than 100%, of the oil and gas reserves in a given cost center.



In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations. This Interpretation clarifies the definition and treatment of conditional asset retirement
obligations as discussed in FASB Statement No. 143, Accounting for Asset Retirement Obligations. A conditional asset retirement obligation is defined as an asset retirement activity in which the timing and/or method of settlement are
dependent on future events that may be outside the control of the company. FIN 47 states that a company must record a liability when incurred for conditional



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asset retirement obligations if the fair value of the obligation is reasonably estimable. This Interpretation is intended to provide more information about long-lived
assets, more information about future cash outflows for these obligations and more consistent recognition of these liabilities. FIN 47 is effective for fiscal years ending after December 15, 2005. We do not believe that our financial position,
results of operations or cash flows will be impacted by this Interpretation.



Statement Regarding Forward-Looking Statements



This Quarterly Report on
Form 10-Q includes forward-looking information regarding PXP that is intended to be covered by the safe harbor forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Statements that are predictive in
nature, that depend upon or refer to future events or conditions, or that include words such as will, would, should, plans, likely, expects, anticipates,
intends, believes, estimates, thinks, may, and similar expressions, are forward-looking statements. These statements are based on our current expectations and projections about future
events and involve known and unknown risks, uncertainties, and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking
statements. These factors include, among other things:



| |  |  | uncertainties regarding the closing of our recently announced property sale;
| | - |  | ----------------------------------------------------------------------------



| |  |  | uncertainties inherent in the development and production of oil and gas and in estimating reserves;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | unexpected difficulties in integrating our operations as a result of any significant acquisitions;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | unexpected future capital expenditures (including the amount and nature thereof);
| | - |  | ---------------------------------------------------------------------------------



| |  |  | impact of oil and gas price fluctuations; including the impact on our earnings as a result of our derivative positions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | the effects of our indebtedness, which could adversely restrict our ability to operate, could make us vulnerable to general adverse economic and industry conditions, could place us at a
competitive disadvantage compared to our competitors that have less debt, and could have other adverse consequences;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effects of competition;
| | - |  | ---------------------------



| |  |  | the success of our risk management activities;
| | - |  | ----------------------------------------------



| |  |  | the availability (or lack thereof) of acquisition or combination opportunities;
| | - |  | -------------------------------------------------------------------------------



| |  |  | the impact of current and future laws and governmental regulations;
| | - |  | -------------------------------------------------------------------



| |  |  | environmental liabilities that are not covered by an effective indemnity or insurance, and
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | general economic, market, industry or business conditions.
| | - |  | ----------------------------------------------------------



All forward-looking statements in this report are made as of the date hereof, and you should not place undue reliance on these statements without also considering the risks and
uncertainties associated with these statements and our business that are discussed in this report. Moreover, although we believe the expectations reflected in the forward-looking statements are based upon reasonable



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assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material. Except for any obligation to disclose
material information under the Federal securities laws, we do not intend to update these forward-looking statements and information. See Items 1 & 2.  Business and Properties  Risk Factors in our Annual Report on Form
10-K for the year ended December 31, 2004 and Managements Discussion and Analysis of Financial Condition and Results of Operations  Critical Accounting Policies and Factors That May Affect Future Results in this report for
additional discussions of risks and uncertainties.



ITEM 3  Qualitative and Quantitative Disclosures About Market Risks



General



We use various derivative instruments to manage our
exposure to commodity price risk on sales of oil and gas production. All derivative instruments are recorded on the balance sheet at fair value. If a derivative does not qualify as a hedge or is not designated as a hedge, the changes in fair value,
both realized and unrealized, are recognized currently in our income statement as gain (loss) on mark-to-market derivative contracts. If a derivative is designated as a cash flow hedge and qualifies for hedge accounting, any unrealized gain or loss
is deferred in accumulated Other Comprehensive Income (OCI), a component of Stockholders Equity, until the hedged oil and gas production is sold. Realized gains and losses on derivative instruments that are designated as a hedge
and qualify for hedge accounting are generally included in oil and gas revenues in the period the hedged volumes are sold. Gains and losses deferred in OCI related to cash flow hedges for which hedge accounting has been discontinued remain in OCI
until the related product has been delivered.



We do not use hedge accounting for certain
of our derivative instruments, either because the derivatives do not qualify for hedge accounting or we have elected not to use hedge accounting. Consequently, these derivative contracts are marked-to-market each quarter with fair value gains and
losses, both realized and unrealized, recognized currently as a gain or loss on mark-to-market derivative contracts on the income statement. Cash flow is only impacted to the extent the actual settlements under the contracts result in making or
receiving a payment from the counterparty.



The contract counterparties for our
derivative commodity contracts are all major financial institutions with Standard & Poors ratings of A or better. Five of the financial institutions are participating lenders in our revolving credit facility, with two counterparties
holding contracts that represent approximately 69% of the fair value of all open positions as of March 31, 2005.



Our management intends to continue to maintain hedging arrangements for a portion of our production. These contracts may expose us to the risk of financial loss in certain
circumstances. Our hedging arrangements provide us protection on the hedged volumes if prices decline below the prices at which these hedges are set, but ceiling prices in our hedges may cause us to receive less revenues on the hedged volumes than
we would receive in the absence of hedges.



Elimination of 2006 Swap & Collar
Positions



In March 2005, we executed a series of contracts that will eliminate all
of our 2006 oil price swaps and collars at a pre-tax cost of approximately $292 million ($175 million after tax). Approximately $146 million of this amount is attributable to 2006 collars for 22,000 barrels of oil per day with a floor price of
$25.00 and an average ceiling price of $34.76. Approximately $146 million of the cost is attributable to 2006 swaps for 15,000 barrels of oil per day at an average price of $25.28. The collars were not accounted for as hedges, therefore, the $146
million loss in the fair value of these instruments was currently recognized in our income statement and there will be no income statement effect subsequent to the amounts reported as of March 31, 2005. We used hedge accounting for the swaps and as
a



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result the $146 million loss in fair value attributable to the swaps has been deferred in OCI and will be recognized as a noncash reduction to oil revenues in 2006
when the hedged production is sold.



Acquisition of Floors for 2006 and 2007 Oil
Production



In March 2005 we acquired $45.00 NYMEX put options on 40,000 barrels of
oil per day in 2006 at an average cost of $2.96 per barrel. In April 2005 we acquired $45.00 NYMEX put options on an additional 10,000 barrels of oil per day in 2006 at an average cost of $2.93 per barrel and 20,000 barrels of oil per day in 2007 at
an average cost of $4.43 per barrel. The costs associated with these put options will be paid in 2006 and 2007. We have elected not to use hedge accounting for the puts, consequently, the puts will be marked-to-market with fair value gains and
losses recognized as a gain or loss on mark-to-market derivative contracts on the income statement.



Derivative Instruments Designated as Cash Flow Hedges.



At
May 1, 2005, we had the following open commodity derivative positions designated as cash flow hedges:



|                         |  |             |  |                |  |                 |  |               |  |      
|------------------------ |  | ----------- |  | -------------- |  | --------------- |  | ------------- |  | -----
|Period                   |  | Commodity   |  | InstrumentType |  | DailyVolumes    |  | Average Price |  | Index
|Sales of Production      |  |             |  |                |  |                 |  |               |  |      
|2005                     |  |             |  |                |  |                 |  |               |  |      
|                         |  |             |  |                | 
|2nd Quarter              |  | Crude oil   |  | Swap           |  | 10,000 /Barrels |  | $25.80        |  | WTI  
|2nd Quarter              |  | Natural gas |  | Swap           |  | 9,500 /MMBtu    |  | $4.66         |  | Waha 
|3rd Quarter              |  | Natural gas |  | Swap           |  | 5,000 /MMBtu    |  | $4.40         |  | Waha 
|4th Quarter              |  | Natural gas |  | Swap           |  | 5,000 /MMBtu    |  | $4.40         |  | Waha 
|                         |  |             |  |                | 
|Purchases of Natural Gas |  |             |  |                |  |                 |  |               |  |      
|2005                     |  |             |  |                |  |                 |  |               |  |      
|April - December         |  | Natural gas |  | Swap           |  | 8,000 /MMBtu    |  | $3.85         |  | Socal



Location and quality differentials attributable
to our properties are not included in the foregoing prices. Because of the quality and location of our oil and gas production, these adjustments will affect our net price.



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Derivative Instruments Not Designated as Hedging Instruments.



At May 1, 2005, we had the following open commodity derivative positions that were not designated as hedging instruments:



|                    |  |           |  |                |  |                 |  |                             |  |      
|------------------- |  | --------- |  | -------------- |  | --------------- |  | --------------------------- |  | -----
|Period              |  | Commodity |  | InstrumentType |  | DailyVolumes    |  | Average Price               |  | Index
|Sales of Production |  |           |  |                |  |                 |  |                             |  |      
|2005                |  |           |  |                |  |                 |  |                             |  |      
|2nd Quarter         |  | Crude oil |  | Collar         |  | 6,800 /Barrels  |  | $27.00 Floor-$30.40 Ceiling |  | WTI  
|3rd Quarter         |  | Crude oil |  | Collar         |  | 14,400 /Barrels |  | $26.00 Floor-$30.03 Ceiling |  | WTI  
|4th Quarter         |  | Crude oil |  | Collar         |  | 14,000 /Barrels |  | $26.00 Floor-$29.33 Ceiling |  | WTI  
|April - December    |  | Crude oil |  | Collar         |  | 22,000 /Barrels |  | $25.00 Floor-$34.76 Ceiling |  | WTI  
|                    |  |           |  |                | 
|2006                |  |           |  |                |  |                 |  |                             |  |      
|January - December  |  | Crude oil |  | Put options    |  | 50,000 /Barrels |  | $45.00                      |  | WTI  
|                    |  |           |  |                | 
|2007                |  |           |  |                |  |                 |  |                             |  |      
|January - December  |  | Crude oil |  | Collar         |  | 22,000 /Barrels |  | $25.00 Floor-$34.76 Ceiling |  | WTI  
|January - December  |  | Crude oil |  | Put options    |  | 20,000 /Barrels |  | $45.00                      |  | WTI  
|                    |  |           |  |                | 
|2008                |  |           |  |                |  |                 |  |                             |  |      
|January - December  |  | Crude oil |  | Collar         |  | 22,000 /Barrels |  | $25.00 Floor-$34.76 Ceiling |  | WTI  



During the three months ended March 31, 2005 and
2004 we recognized pre-tax losses of $374 million and $2 million, respectively, from derivatives that do not qualify or have not been designated for hedge accounting. Such losses included cash settlements of $37 million and $1 million in 2005 and
2004, respectively.



Physical Purchase Contracts.



Although not a derivative, at May 1, 2005 we also had the following contracts for the purchase of
natural gas utilized in our steam flood operations:



|                         |  |             |  |                   |  |               |  |               |      |       |      
|------------------------ |  | ----------- |  | ----------------- |  | ------------- |  | ------------- | ---- | ----- | -----
|Period                   |  | Commodity   |  | Instrument Type   |  | DailyVolumes  |  | Average Price |      | Index
|Purchases of Natural Gas |  |             |  |                   |  |               |  |               |      |       |      
|2005                     |  |             |  |                   |  |               |  |               |      |       |      
|                         |  |             |  |                   | 
|April - December         |  | Natural gas |  | Physical purchase |  | 10,000 /MMBtu |  | $             | 4.19 |       | Socal



Changes in Fair Value



The fair value of outstanding crude oil and natural gas commodity derivative instruments and the change
in fair value that would be expected from a 10% price increase are shown in the table below (in millions):



|                                                  |  |                |        |   |                              |   |        |  
|------------------------------------------------- |  | -------------- | ------ | - | ---------------------------- | - | ------ | -
|                                                  |  | March 31, 2005 |       
|                                                  |  | FairValue      |        |   | Effect of 10% Price Increase |  
|Derivatives designated as cash flow hedges        |  | $              | (23.9  | ) |                              | $ | (4.7   | )
|Derivatives not designated as hedging instruments |  |                | (765.8 | ) |                              |   | (131.5 | )



The fair value of the swaps and option contracts
are estimated based on quoted prices from independent reporting services compared to the contract price of the agreement, and approximate the



37



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gain or loss that would have been realized if the contracts had been closed out at period end. All hedge positions offset physical positions exposed to the cash
market. None of these offsetting physical positions are included in the above table. Price risk sensitivities were calculated by assuming an across-the-board 10% increase in price regardless of term or historical relationships between the
contractual price of the instruments and the underlying commodity price. In the event of an actual 10% change in prompt month prices, the fair value of our derivative portfolio would typically change less than that shown in the table due to lower
volatility in out-month prices.



Price differentials.



As is customary in the oil and gas industry, our realized wellhead oil and gas prices are lower than
the NYMEX index level as a result of location and quality differentials. See Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations  Company Overview  Price Differentials.



ITEM 4  Controls and Procedures



Under the supervision
and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), we evaluated the effectiveness of our disclosure controls and
procedures (as defined under Rules 13a-15(e) and 15d-15(e) to the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer believe that the
disclosure controls and procedures as of March 31, 2005 were effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms and (ii) accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.



Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, our internal control over financial reporting can provide only reasonable assurance with respect to our financial reporting and financial statement preparation.



There were no changes in our internal control over financial reporting during the quarter ended March
31, 2005 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



ITEM 6  Exhibits



|     |   |  |                                                                                                                                                                                                       
|---- | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 | * |  | Purchase and Sale Agreement made and entered into on March 31, 2005, by and among PXP Texas Limited Partnership, PXP Gulf Coast Inc., and PXP Louisiana LLC (Sellers) and XTO Energy Inc.
(Buyer).
|     |  
|10.2 | * |  | Purchase and Sale Agreement dated as of March 11, 2005, by and between Bentley-Simonson, Inc. (Seller) and Plains Exploration & Production Company(Buyer).                                        
|     |  
|21.1 | * |  | List of Subsidiaries.                                                                                                                                                                                 
|     |  
|31.1 | * |  | Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                       
|     |  
|31.2 | * |  | Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                       
|     |  
|32.1 | * |  | Chief Executive Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                        
|     |  
|32.2 | * |  | Chief Financial Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                        



* Filed herewith



Items 1, 2, 3, 4 & 5 are not applicable and have been omitted.



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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.



|                  |  |                                          |  |                                                     
|----------------- |  | ---------------------------------------- |  | ----------------------------------------------------
|                  |  | PLAINS EXPLORATION & PRODUCTION COMPANY.
|                  |  |                                         
|Date: May 6, 2004 |  | By:                                      |  | /s/ Stephen A. Thorington                           
|                  |  |                                          |  | Stephen A. Thorington                               
|                  |  |                                          |  | Executive Vice President and Chief Financial Officer
|                  |  |                                          |  | (Principal Financial Officer)                       



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