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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 September 30, 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 ofincorporation 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 Rule 12b-2 of the Exchange Act). Yes x    No  ̈



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



78.4 million shares of Common Stock,
$0.01 par value, issued and outstanding at October 31, 2005.



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY



INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                                |  |   
|------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                                                   |  |   
|                                                                                                                                | 
|ITEM 1. Unaudited Condensed Financial Statements:                                                                               |  |   
|                                                                                                                                | 
|Condensed Consolidated Balance SheetsSeptember 30, 2005 and December 31, 2004                                                   |  | 1 
|Condensed Consolidated Statements of IncomeFor the three months and nine months ended September 30, 2005 and 2004               |  | 2 
|Condensed Consolidated Statements of Cash FlowsFor the nine months ended September 30, 2005 and 2004                            |  | 3 
|Condensed Consolidated Statements of Comprehensive IncomeFor the three months and nine months ended September 30, 2005 and 2004 |  | 4 
|Condensed Consolidated Statement of Changes in Stockholders EquityFor the nine months ended September 30, 2005                 |  | 5 
|Notes to Condensed Consolidated Financial Statements                                                                            |  | 6 
|                                                                                                                                | 
|ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                   |  | 26
|                                                                                                                                | 
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                                                              |  | 41
|                                                                                                                                | 
|ITEM 4. Controls and Procedures                                                                                                 |  | 44
|                                                                                                                                | 
|PART II. OTHER INFORMATION                                                                                                      |  | 45



(i)



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands of dollars)



|                                                            |  |                   |           |   |                  |   |           |  
|----------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                            |  | September 30,2005 |           |   | December 31,2004 |  
|ASSETS                                                      |  |                   |           |   |                  |   |           |  
|Current Assets                                              |  |                   |           |   |                  |   |           |  
|Cash and cash equivalents                                   |  | $                 | 1,306     |   |                  | $ | 1,545     |  
|Accounts receivable - Plains All American Pipeline, L.P.    |  |                   | 40,046    |   |                  |   | 26,224    |  
|Other accounts receivable                                   |  |                   | 95,287    |   |                  |   | 96,064    |  
|Inventories                                                 |  |                   | 9,565     |   |                  |   | 8,505     |  
|Deferred income taxes                                       |  |                   | 142,597   |   |                  |   | 76,823    |  
|Assets held for sale                                        |  |                   | -         |   |                  |   | 44,222    |  
|Other current assets                                        |  |                   | 5,315     |   |                  |   | 4,784     |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 294,116   |   |                  |   | 258,167   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Property and Equipment, at cost                             |  |                   |           |   |                  |   |           |  
|Oil and natural gas properties - full cost method           |  |                   |           |   |                  |   |           |  
|Subject to amortization                                     |  |                   | 2,513,945 |   |                  |   | 2,402,179 |  
|Not subject to amortization                                 |  |                   | 89,101    |   |                  |   | 79,405    |  
|Other property and equipment                                |  |                   | 16,069    |   |                  |   | 12,546    |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 2,619,115 |   |                  |   | 2,494,130 |  
|Less allowance for depreciation, depletion and amortization |  |                   | (450,562  | ) |                  |   | (323,041  | )
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 2,168,553 |   |                  |   | 2,171,089 |  
|                                                            |  |                   |           |   |                  |   |           |  
|Goodwill                                                    |  |                   | 172,558   |   |                  |   | 170,467   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Other Assets                                                |  |                   | 36,152    |   |                  |   | 33,522    |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  | $                 | 2,671,379 |   |                  | $ | 2,633,245 |  
|                                                            |  |                   |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |                   |           |   |                  |   |           |  
|Current Liabilities                                         |  |                   |           |   |                  |   |           |  
|Accounts payable                                            |  | $                 | 124,333   |   |                  | $ | 90,469    |  
|Commodity derivative contracts                              |  |                   | 173,330   |   |                  |   | 175,473   |  
|Royalties payable                                           |  |                   | 49,223    |   |                  |   | 39,174    |  
|Stock appreciation rights                                   |  |                   | 68,291    |   |                  |   | 34,589    |  
|Interest payable                                            |  |                   | 11,481    |   |                  |   | 13,070    |  
|Deposit on assets held for sale                             |  |                   | -         |   |                  |   | 40,711    |  
|Other current liabilities                                   |  |                   | 35,148    |   |                  |   | 32,909    |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 461,806   |   |                  |   | 426,395   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Long-Term Debt                                              |  |                   |           |   |                  |   |           |  
|8.75% Senior Subordinated Notes                             |  |                   | 276,586   |   |                  |   | 276,727   |  
|7.125% Senior Notes                                         |  |                   | 248,813   |   |                  |   | 248,741   |  
|Revolving credit facility                                   |  |                   | 238,500   |   |                  |   | 110,000   |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 763,899   |   |                  |   | 635,468   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Other Long-Term Liabilities                                 |  |                   |           |   |                  |   |           |  
|Asset retirement obligation                                 |  |                   | 144,286   |   |                  |   | 126,850   |  
|Commodity derivative contracts                              |  |                   | 440,774   |   |                  |   | 244,140   |  
|Other                                                       |  |                   | 7,434     |   |                  |   | 10,534    |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 592,494   |   |                  |   | 381,524   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Deferred Income Taxes                                       |  |                   | 228,405   |   |                  |   | 319,483   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Commitments and Contingencies (Note 6)                      |  |                   |           |   |                  |   |           |  
|Stockholders Equity                                        |  |                   |           |   |                  |   |           |  
|Common stock                                                |  |                   | 784       |   |                  |   | 772       |  
|Additional paid-in capital                                  |  |                   | 931,893   |   |                  |   | 913,466   |  
|Retained earnings (deficit)                                 |  |                   | (204,449  | ) |                  |   | 80,406    |  
|Accumulated other comprehensive income                      |  |                   | (103,248  | ) |                  |   | (123,874  | )
|Treasury stock, at cost                                     |  |                   | (205      | ) |                  |   | (395      | )
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 624,775   |   |                  |   | 870,375   |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  | $                 | 2,671,379 |   |                  | $ | 2,633,245 |  
|                                                            |  |                   |           |   |                  |   |           |  



See notes to consolidated
financial statements.



1



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)



|                                                   |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|-------------------------------------------------- |  | ------------------------------- | -------- | - | ------------------------------ | - | -------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                   |  | Three Months EndedSeptember 30, |          |   | Nine Months EndedSeptember 30, |  
|                                                   |  | 2005                            |          |   | 2004                           |   |          | 2005 |  |   | 2004     |  
|Revenues                                           |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Oil sales to Plains All American Pipeline, L.P.    |  | $                               | 102,523  |   |                                | $ | 69,173   |      |  | $ | 264,930  |   |  | $ | 196,459  |  
|Other oil sales                                    |  |                                 | 140,938  |   |                                |   | 122,540  |      |  |   | 365,179  |   |  |   | 185,722  |  
|Oil hedging                                        |  |                                 | (25,714  | ) |                                |   | (43,046  | )    |  |   | (114,977 | ) |  |   | (84,679  | )
|Gas sales                                          |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Sales related to buy/sell contracts (Note 1)       |  |                                 | 8,609    |   |                                |   | 8,928    |      |  |   | 24,693   |   |  |   | 12,813   |  
|Other                                              |  |                                 | 36,616   |   |                                |   | 53,084   |      |  |   | 128,890  |   |  |   | 146,422  |  
|Gas hedging                                        |  |                                 | (994     | ) |                                |   | (1,185   | )    |  |   | (975     | ) |  |   | (2,246   | )
|Other operating revenues                           |  |                                 | 641      |   |                                |   | 867      |      |  |   | 2,262    |   |  |   | 1,601    |  
|                                                   |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|                                                   |  |                                 | 262,619  |   |                                |   | 210,361  |      |  |   | 670,002  |   |  |   | 456,092  |  
|                                                   |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Costs and Expenses                                 |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Production costs                                   |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Lease operating expenses                           |  |                                 | 36,284   |   |                                |   | 44,501   |      |  |   | 105,489  |   |  |   | 92,066   |  
|Steam gas costs                                    |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Costs related to buy/sell contracts (Note 1)       |  |                                 | 9,039    |   |                                |   | 8,978    |      |  |   | 25,876   |   |  |   | 12,887   |  
|Other                                              |  |                                 | 8,893    |   |                                |   | 5,331    |      |  |   | 25,141   |   |  |   | 9,733    |  
|Electricity                                        |  |                                 | 8,917    |   |                                |   | 9,207    |      |  |   | 23,678   |   |  |   | 21,720   |  
|Production and ad valorem taxes                    |  |                                 | 5,111    |   |                                |   | 6,565    |      |  |   | 18,414   |   |  |   | 15,118   |  
|Gathering and transportation expenses              |  |                                 | 2,467    |   |                                |   | 2,581    |      |  |   | 8,416    |   |  |   | 5,567    |  
|General and administrative (Note 1)                |  |                                 | 52,764   |   |                                |   | 29,526   |      |  |   | 108,634  |   |  |   | 62,840   |  
|Depreciation, depletion and amortization           |  |                                 | 40,626   |   |                                |   | 42,820   |      |  |   | 129,964  |   |  |   | 88,651   |  
|Accretion                                          |  |                                 | 1,926    |   |                                |   | 2,987    |      |  |   | 5,605    |   |  |   | 5,591    |  
|                                                   |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|                                                   |  |                                 | 166,027  |   |                                |   | 152,496  |      |  |   | 451,217  |   |  |   | 314,173  |  
|                                                   |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Income from Operations                             |  |                                 | 96,592   |   |                                |   | 57,865   |      |  |   | 218,785  |   |  |   | 141,919  |  
|Other Income (Expense)                             |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Interest expense                                   |  |                                 | (14,478  | ) |                                |   | (10,969  | )    |  |   | (40,039  | ) |  |   | (26,506  | )
|Gain (loss) on mark-to-market derivative contracts |  |                                 | (141,646 | ) |                                |   | (124,651 | )    |  |   | (629,569 | ) |  |   | (125,842 | )
|Debt extinguishment costs                          |  |                                 | -        |   |                                |   | -        |      |  |   | -        |   |  |   | (19,691  | )
|Interest and other income (expense)                |  |                                 | (392     | ) |                                |   | 364      |      |  |   | (220     | ) |  |   | 669      |  
|                                                   |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Income (Loss) Before Income Taxes                  |  |                                 | (59,924  | ) |                                |   | (77,391  | )    |  |   | (451,043 | ) |  |   | (29,451  | )
|Income taxes                                       |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Current                                            |  |                                 | 757      |   |                                |   | (463     | )    |  |   | (573     | ) |  |   | (607     | )
|Deferred                                           |  |                                 | 27,318   |   |                                |   | 29,876   |      |  |   | 166,819  |   |  |   | 11,371   |  
|                                                   |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Net Income (Loss)                                  |  | $                               | (31,849  | ) |                                | $ | (47,978  | )    |  | $ | (284,797 | ) |  | $ | (18,687  | )
|                                                   |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Earnings (Loss) Per Share                          |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Basic                                              |  | $                               | (0.41    | ) |                                | $ | (0.62    | )    |  | $ | (3.67    | ) |  | $ | (0.32    | )
|Diluted                                            |  | $                               | (0.41    | ) |                                | $ | (0.62    | )    |  | $ | (3.67    | ) |  | $ | (0.32    | )
|                                                   |  |                                 |          |  
|Weighted Average Shares Outstanding                |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Basic                                              |  |                                 | 78,053   |   |                                |   | 76,977   |      |  |   | 77,531   |   |  |   | 59,008   |  
|Diluted                                            |  |                                 | 78,053   |   |                                |   | 76,977   |      |  |   | 77,531   |   |  |   | 59,008   |  



See notes to consolidated
financial statements.



2



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands of dollars)



|                                                                                          |  |                                |           |   |      |   |          |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | --------- | - | ---- | - | -------- | -
|                                                                                          |  | Nine Months EndedSeptember 30, |          
|                                                                                          |  | 2005                           |           |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                      |  |                                |           |   |      |   |          |  
|Net income (loss)                                                                         |  | $                              | (284,797  | ) |      | $ | (18,687  | )
|Items not affecting cash flows from operating activities                                  |  |                                |           |   |      |   |          |  
|Depreciation, depletion, amortization and accretion                                       |  |                                | 135,569   |   |      |   | 94,242   |  
|Deferred income taxes                                                                     |  |                                | (166,819  | ) |      |   | (11,371  | )
|Debt extinguishment costs                                                                 |  |                                | -         |   |      |   | (4,453   | )
|Commodity derivative contracts                                                            |  |                                |           |   |      |   |          |  
|Loss on derivatives                                                                       |  |                                | 358,838   |   |      |   | 66,206   |  
|Reclassify financing derivative settlements                                               |  |                                | 364,932   |   |      |   | 61,274   |  
|Noncash compensation                                                                      |  |                                |           |   |      |   |          |  
|Stock appreciation rights                                                                 |  |                                | 30,729    |   |      |   | 17,884   |  
|Other                                                                                     |  |                                | 29,078    |   |      |   | 6,736    |  
|Other noncash items                                                                       |  |                                | (69       | ) |      |   | (92      | )
|Change in assets and liabilities from operating activities, net of effect of acquisitions |  |                                |           |   |      |   |          |  
|Accounts receivable and other assets                                                      |  |                                | (10,606   | ) |      |   | (8,201   | )
|Accounts payable and other liabilities                                                    |  |                                | (33,332   | ) |      |   | 23,836   |  
|Commodity derivative contracts                                                            |  |                                | (135,348  | ) |      |   | 22,795   |  
|                                                                                          |  |                                |           |   |      |   |          |  
|Net cash provided by operating activities                                                 |  |                                | 288,175   |   |      |   | 250,169  |  
|                                                                                          |  |                                |           |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                      |  |                                |           |   |      |   |          |  
|Exploration and development costs                                                         |  |                                | (261,576  | ) |      |   | (142,099 | )
|Acquisition of oil and gas properties                                                     |  |                                | (131,802  | ) |      |   | -        |  
|Acquisition of Nuevo Energy Company, net of cash acquired                                 |  |                                | -         |   |      |   | (14,156  | )
|Proceeds from sales of properties                                                         |  |                                | 343,096   |   |      |   | 85,892   |  
|Other property and equipment                                                              |  |                                | (3,523    | ) |      |   | (5,739   | )
|                                                                                          |  |                                |           |   |      |   |          |  
|Net cash used in investing activities                                                     |  |                                | (53,805   | ) |      |   | (76,102  | )
|                                                                                          |  |                                |           |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                      |  |                                |           |   |      |   |          |  
|Revolving credit facilities                                                               |  |                                |           |   |      |   |          |  
|Borrowings                                                                                |  |                                | 1,092,700 |   |      |   | 762,950  |  
|Repayments                                                                                |  |                                | (964,200  | ) |      |   | (710,950 | )
|Proceeds from issuance of 7.125% Senior Notes                                             |  |                                | -         |   |      |   | 248,695  |  
|Retirement of debt assumed in acquisition of Nuevo Energy Company                         |  |                                | -         |   |      |   | (405,000 | )
|Costs incurred in connection with financing arrangements                                  |  |                                | (1,521    | ) |      |   | (8,988   | )
|Derivative settlements                                                                    |  |                                | (364,932  | ) |      |   | (61,274  | )
|Other                                                                                     |  |                                | 3,344     |   |      |   | 913      |  
|                                                                                          |  |                                |           |   |      |   |          |  
|Net cash used in financing activities                                                     |  |                                | (234,609  | ) |      |   | (173,654 | )
|                                                                                          |  |                                |           |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                                | (239      | ) |      |   | 413      |  
|Cash and cash equivalents, beginning of period                                            |  |                                | 1,545     |   |      |   | 1,377    |  
|                                                                                          |  |                                |           |   |      |   |          |  
|Cash and cash equivalents, end of period                                                  |  | $                              | 1,306     |   |      | $ | 1,790    |  
|                                                                                          |  |                                |           |   |      |   |          |  



See notes to consolidated
financial statements.



3



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands of dollars)



|                                                     |  |                                 |         |   |                                |   |          |      |  |   |          |   |  |   |          |  
|---------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | -------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                     |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                     |  | 2005                            |         |   | 2004                           |   |          | 2005 |  |   | 2004     |  
|Net Income (Loss)                                    |  | $                               | (31,849 | ) |                                | $ | (47,978  | )    |  | $ | (284,797 | ) |  | $ | (18,687  | )
|                                                     |  |                                 |         |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Other Comprehensive Income (Loss)                    |  |                                 |         |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Commodity hedging contracts                          |  |                                 |         |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Change in fair value                                 |  |                                 | 1,795   |   |                                |   | (166,961 | )    |  |   | (81,519  | ) |  |   | (292,498 | )
|Reclassification adjustment for settled contracts    |  |                                 | 5       |   |                                |   | 45,311   |      |  |   | 33,099   |   |  |   | 87,692   |  
|Reclassification adjustment for terminated contracts |  |                                 | 25,715  |   |                                |   | -        |      |  |   | 82,053   |   |  |   | -        |  
|Related income taxes                                 |  |                                 | (11,755 | ) |                                |   | 40,089   |      |  |   | (13,007  | ) |  |   | 73,064   |  
|Other                                                |  |                                 |         |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Interest rate swap and minimum pension liability     |  |                                 | -       |   |                                |   | 47       |      |  |   | -        |   |  |   | 150      |  
|Related income taxes                                 |  |                                 | -       |   |                                |   | (17      | )    |  |   | -        |   |  |   | (60      | )
|                                                     |  |                                 |         |   |                                |   |          |      |  |   |          |   |  |   |          |  
|                                                     |  |                                 | 15,760  |   |                                |   | (81,531  | )    |  |   | 20,626   |   |  |   | (131,652 | )
|                                                     |  |                                 |         |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Comprehensive Income (Loss)                          |  | $                               | (16,089 | ) |                                | $ | (129,509 | )    |  | $ | (264,171 | ) |  | $ | (150,339 | )
|                                                     |  |                                 |         |   |                                |   |          |      |  |   |          |   |  |   |          |  



See notes to consolidated
financial statements.



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)

(share and dollar amounts in thousands)



|                                    |  |              |  |                          |     |  |                           |         |        |                                     |   |          |                |  |   |          |   |  |     |   |  |   |      |   |  |   |          |  
|----------------------------------- |  | ------------ |  | ------------------------ | --- |  | ------------------------- | ------- | ------ | ----------------------------------- | - | -------- | -------------- |  | - | -------- | - |  | --- | - |  | - | ---- | - |  | - | -------- | -
|                                    |  | Common Stock |  | AdditionalPaid-inCapital |     |  | RetainedEarnings(Deficit) |         |        | AccumulatedOtherComprehensiveIncome |   |          | 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                            |  | -            |  |                          | -   |  |                           | -       |        |                                     |   | (284,797 | )              |  |   | -        |   |  | -   |   |  |   | -    |   |  |   | (284,797 | )
|Other comprehensive income          |  | -            |  |                          | -   |  |                           | -       |        |                                     |   | -        |                |  |   | 20,626   |   |  | -   |   |  |   | -    |   |  |   | 20,626   |  
|Restricted stock awards             |  |              |  |                          |     |  |                           |         |        |                                     |   |          |                |  |   |          |   |  |     |   |  |   |      |   |  |   |          |  
|Issuance of stock                   |  | 1,008        |  |                          | 10  |  |                           | -       |        |                                     |   | -        |                |  |   | -        |   |  | -   |   |  |   | -    |   |  |   | 10       |  
|Deferred compensation, net          |  | -            |  |                          | -   |  |                           | 15,161  |        |                                     |   | -        |                |  |   | -        |   |  | -   |   |  |   | -    |   |  |   | 15,161   |  
|Treasury stock transactions         |  | -            |  |                          | -   |  |                           | (337    | )      |                                     |   | (58      | )              |  |   | -        |   |  | 27  |   |  |   | 190  |   |  |   | (205     | )
|Exercise of stock options and other |  | 180          |  |                          | 2   |  |                           | 3,603   |        |                                     |   | -        |                |  |   | -        |   |  |     |   |  |   |      |   |  |   | 3,605    |  
|                                    |  |              |  |                          |     |  |                           |         |        |                                     |   |          |                |  |   |          |   |  |     |   |  |   |      |   |  |   |          |  
|Balance, September 30, 2005         |  | 78,367       |  | $                        | 784 |  | $                         | 931,893 |        |                                     | $ | (204,449 | )              |  | $ | (103,248 | ) |  | (5  | ) |  | $ | (205 | ) |  | $ | 624,775  |  
|                                    |  |              |  |                          |     |  |                           |         |        |                                     |   |          |                |  |   |          |   |  |     |   |  |   |      |   |  |   |          |  



See notes to consolidated
financial statements.



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

NOTES TO CONDENSED 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 September 30, 2005 and December 31, 2004, the results of our operations and our comprehensive income for the three months and nine months ended September 30,
2005 and 2004, our cash flows for the nine months ended September 30, 2005 and 2004 and the changes in our stockholders equity for the nine months ended September 30, 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 of our operations for the nine months ended September 30, 2005 are not necessarily indicative of the results of our operations 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 illustrates the changes in our asset retirement obligation (ARO)
during the nine months ended September 30, 2005 (in thousands):



|                                                  |  |   |         |    
|------------------------------------------------- |  | - | ------- | ---
|Asset retirement obligation - beginning of period |  | $ | 130,469 |    
|Settlements                                       |  |   | (861    | )  
|Property dispositions                             |  |   | (2,989  | )  
|Accretion expense                                 |  |   | 5,605   |    
|Asset retirement additions                        |  |   | 14,998  |    
|                                                  |  |   |         |    
|Asset retirement obligation - end of period       |  | $ | 147,222 | (1)
|                                                  |  |   |         |    
|(1) $2.9 million included in current liabilities. |  |   |         |    



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##### Table of Contents

Earnings Per Share.    For the three months and nine months ended September 30, 2005 and 2004 the
weighted average shares outstanding for computing basic and diluted earnings per share (EPS) (in thousands):



|                                                                                                                             |  |                                     |  |                                    |  |        |  |       
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- |  | ---------------------------------- |  | ------ |  | ------
|                                                                                                                             |  | Three Months    Ended September 30, |  | Nine Months    Ended September 30,
|                                                                                                                             |  | 2005                                |  | 2004                               |  | 2005   |  | 2004  
|Common shares outstanding - basic and diluted                                                                                |  | 78,053                              |  | 76,977                             |  | 77,531 |  | 59,008
|                                                                                                                             |  |                                     |  |                                    |  |        |  |       
|Unvested restricted stock, restricted stock units and stock options not included in computing EPS due to antidilutive effect |  | 614                                 |  | 534                                |  | 800    |  | 366   
|                                                                                                                             |  |                                     |  |                                    |  |        |  |       



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):



|                       |  |                    |       |                   |   |      
|---------------------- |  | ------------------ | ----- | ----------------- | - | -----
|                       |  | September 30, 2005 |       | December 31, 2004
|                       |  |                   
|Oil                    |  | $                  | 1,526 |                   | $ | 1,526
|Materials and supplies |  |                    | 8,039 |                   |   | 6,979
|                       |  |                    |       |                   |   |      
|                       |  | $                  | 9,565 |                   | $ | 8,505
|                       |  |                    |       |                   |   |      



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



|                               |  |                                 |        |                                |   |        |  |      |         |  |   |       
|------------------------------ |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------- |  | - | ------
|                               |  | Three MonthsEnded September 30, |        | Nine MonthsEnded September 30,
|                               |  | 2005                            |        | 2004                           |   | 2005   |  | 2004
|G&A excluding items below      |  | $                               | 12,638 |                                | $ | 12,236 |  | $    | 35,876  |  | $ | 27,746
|Stock appreciation rights      |  |                                 | 18,224 |                                |   | 15,023 |  |      | 44,101  |  |   | 28,449
|Other stock-based compensation |  |                                 | 21,902 |                                |   | 2,267  |  |      | 28,657  |  |   | 6,645 
|                               |  |                                 |        |                                |   |        |  |      |         |  |   |       
|                               |  | $                               | 52,764 |                                | $ | 29,526 |  | $    | 108,634 |  | $ | 62,840
|                               |  |                                 |        |                                |   |        |  |      |         |  |   |       



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 did not enter into buy/sell contracts in periods prior to our acquisition of Nuevo Energy Company in
May 2004.



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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 sale of natural gas under such contracts is included in gas revenue and the cost to purchase natural gas under such contracts is included in production costs.



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). In February 2005 the SEC staff directed companies
to disclose on the face of the income statement, if material, the amounts associated with buy/sell contracts and to discuss in a footnote to the financial statements the basis for the underlying accounting.



Our position in response to the SECs question is that our buy/sell contracts are monetary
transactions that are outside the scope of APB 29 and that our accounting is also supported by the indicators of gross reporting of purchases and sales in paragraph 3 of Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting
Revenue Gross as a Principal versus Net as an Agent.



In September 2005 in Issue
No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. the EITF reached a consensus that two or more inventory transactions with the same counterparty should be viewed as a single nonmonetary
transaction for the purposes of applying APB 29 if the transactions were entered into in contemplation of one another (as determined in accordance with Issue No. 04-13). At its September 28, 2005 meeting, the Financial Accounting Standards
Board (FASB) ratified the consensus reached by the EITF.



Issue No. 04-13 will be
applied to transactions completed in reporting periods beginning after March 15, 2006, whether pursuant to arrangements that were in place at the date of initial application of the consensus or arrangements executed subsequent to that date.
Early application is permitted in periods for which financial statements have not been issued.



We are in the process of reviewing our buy/sell contracts to determine if transactions under such contracts should be presented net in accordance with Issue No. 04-13. Our financial position, results of operations or cash flows will
not be impacted by the implementation of Issue No. 04-13. If we determine that certain transactions should be presented net in accordance with Issue No. 04-13, certain costs currently included as operating costs will be reclassified as a
reduction of revenues.



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 Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation.



Federal and State Income Taxes.    During
interim periods income tax expense is generally based on the estimated effective income tax rate that is expected for the entire year. Changes in the annual effective income tax rate are reflected on a cumulative basis for the year-to-date in the
period in which the change in estimate occurs. At September 30, 2005 the Company estimated its 2005 annual effective tax rate would be a 38.3% benefit compared to the 36.8% benefit we estimated at June 30, 2005. The increase in the
estimated annual effective tax rate primarily reflects the change in the relationship between the estimated 2005 financial statement pre-tax loss (which was higher at September 30 than at June 30 primarily due to higher estimated fair
value losses on mark-to-market derivatives) and certain permanent differences between book income and taxable income (primarily enhanced oil recovery (EOR) credits and certain expenses that are not deductible because of IRS limitations). At
September 30, 2004 we estimated our 2004 effective annual tax rate to be approximately 36.5%. To reflect the increase in the estimated 2005 annual effective tax rate, the Companys tax rate for the third quarter of 2005 was approximately
47%.



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Variances in our reported tax rate from the 35% federal statutory rate are caused by state income taxes, EOR credits and various
other items. EOR credits are a credit against federal and state income taxes for certain costs related to extracting high-cost oil, utilizing certain prescribed enhanced (tertiary) recovery methods. During periods when PXP reports net
income, the benefit from the EOR credits will generally reduce our effective tax rate below the statutory rates. During periods when PXP reports a net loss, the benefit from the EOR credits will generally increase our effective tax rate above the
statutory rates. In the current period, PXP reported a net loss due to the mark-to-market derivative losses, and the EOR credits had the effect of increasing our tax benefit rate. The increase in the tax benefit rate attributable to the EOR credits
was offset by the items discussed above, resulting in the estimated annual benefit rate of 38.3% for 2005.



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 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 FASB Statement No. 141,
Business Combinations 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. We determined that an
evaluation of goodwill for impairment under SFAS 142 was not required as a result of the property dispositions in the second quarter of 2005. 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 No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies the definition and treatment of conditional asset



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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. FIN 47 is intended to provide more information about long-lived assets and 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 FIN 47.



In June 2005 the FASB issued SFAS No. 154, Accounting Changes and Error Corrections
(SFAS 154), which changes the requirements for the accounting for and reporting of a change in accounting principle by requiring voluntary changes in accounting principles to be reported using retrospective application, unless impracticable to do
so. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. Application is effective for accounting changes and correction of errors made in
fiscal years beginning after December 15, 2005. Early adoption is permitted. We do not believe that our financial position, results of operations or cash flows will be impacted by SFAS 154.



Note 2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. Cash flow is only impacted to the extent the actual settlements under the contracts result in making or receiving a payment from the counterparty. 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.



Elimination of 2006
Swap & Collar Positions



In March 2005 we executed a series of contracts
that eliminated all of our 2006 oil price swaps and collars at a pre-tax cost of $292.7 million. Approximately $145.4 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. The collars were not accounted for as hedges, therefore, the $145.4 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 March 31, 2005. Approximately $147.3 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 used hedge accounting for the swaps through March 2005 and as a result the
$145.8 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.



In May 2005 we completed the transactions to eliminate all of our 2006 oil price swaps and collars and
paid the $292.7 million due under the contracts with proceeds received from the property sale



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discussed in Note 5. Under SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, the collars were deemed to contain a
significant financing element because they included off-market terms. Accordingly, the $145.4 million cash payment for the collars is reflected as a financing cash outflow in our statement of cash flows. The $147.3 million cash payment for the swaps
is reflected as an operating cash outflow in our statement of cash flows. These payments reduced derivative liabilities on our balance sheet.



Floors for 2006 and 2007 Oil Production



In the first half of 2005 we acquired NYMEX put options with a strike price of $45.00 per barrel on 50,000 barrels per day in 2006 and 20,000 barrels per day in 2007. In the third
quarter of 2005 we entered into a series of transactions that resulted in us now holding NYMEX put options with a strike price of $55.00 per barrel on 50,000 barrels of oil per day in 2006 and 2007. These put options cost an average of $4.91 per
barrel for 2006 and $5.57 per barrel for 2007, which will be paid when the options are settled. We have elected not to use hedge accounting for the puts, consequently, the puts are 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.



Ceilings
for 2006 Natural Gas Purchases



We purchase natural gas that is utilized in our steam
flood operations. In October 2005 we acquired NYMEX call options with a strike price of $12.00 per MMBtu on 30,000 MMBtu of natural gas per day in 2006. These call options cost an average of $1.04 per MMBtu, which will be paid when the options are
settled. We have elected not to use hedge accounting for the calls, consequently, the calls 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



We have the following open commodity derivative positions designated as cash flow hedges:



|                         |  |             |  |                 |  |              |  |               |  |      
|------------------------ |  | ----------- |  | --------------- |  | ------------ |  | ------------- |  | -----
|Period                   |  | Commodity   |  | Instrument Type |  | DailyVolumes |  | Average Price |  | Index
|Sales of Production      |  |             |  |                 |  |              |  |               |  |      
|2005                     |  |             |  |                 |  |              |  |               |  |      
|                         |  |             |  |                 | 
|4th Quarter              |  | Natural gas |  | Swap            |  | 5,000 /MMBtu |  | $4.40         |  | Waha 
|                         |  |             |  |                
|Purchases of Natural Gas |  |             |  |                 |  |              |  |              
|                         |  |             |  |                 | 
|2005                     |  |             |  |                 |  |              |  |               |  |      
|                         |  |             |  |                 | 
|4th Quarter              |  | 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



We have 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                     |  |             |  |                 |  |                 |  |                              |  |      
|4th Quarter              |  | Crude oil   |  | Collar          |  | 14,000 /Barrels |  | $26.00 Floor- $29.33 Ceiling |  | WTI  
|4th Quarter              |  | Crude oil   |  | Collar          |  | 22,000 /Barrels |  | $25.00 Floor- $34.76 Ceiling |  | WTI  
|                         |  |             |  |                 | 
|2006                     |  |             |  |                 |  |                 |  |                              |  |      
|January - December       |  | Crude oil   |  | Put options     |  | 50,000 /Barrels |  | $55.00 Strike price          |  | WTI  
|                         |  |             |  |                 | 
|2007                     |  |             |  |                 |  |                 |  |                              |  |      
|January - December       |  | Crude oil   |  | Collar          |  | 22,000 /Barrels |  | $25.00 Floor- $34.76 Ceiling |  | WTI  
|January - December       |  | Crude oil   |  | Put options     |  | 50,000 /Barrels |  | $55.00 Strike price          |  | WTI  
|                         |  |             |  |                 | 
|2008                     |  |             |  |                 |  |                 |  |                              |  |      
|January - December       |  | Crude oil   |  | Collar          |  | 22,000 /Barrels |  | $25.00 Floor- $34.76 Ceiling |  | WTI  
|                         |  |             |  |                 | 
|Purchases of Natural Gas |  |             |  |                 |  |                 |  |                              |  |      
|2006                     |  |             |  |                 |  |                 |  |                              |  |      
|January - December       |  | Natural gas |  | Call options    |  | 30,000 /MMBtu   |  | $12.00 Strike price          |  | Socal



The average strike price for the put options and
call options do not reflect the cost to purchase such options. The call options were acquired in October 2005.



During the three and nine months ended September 30, 2005 we recognized pre-tax losses of $141.6 million and $629.6 million, respectively, from derivatives that do not qualify for hedge accounting. During the three and
nine months ended September 30, 2005 we made cash payments of $101.4 million and $189.3 million, respectively, on derivatives that do not qualify for hedge accounting that settled during the periods. In addition, in the second quarter of
2005 we made a $145.4 million cash payment to eliminate our 2006 oil price collars.



Physical Purchase Contracts



Although not a derivative, at
September 30, 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                     |  |             |  |                   |  |               |  |              
|4th Quarter              |  | Natural gas |  | Physical purchase |  | 10,000 /MMBtu |  | $4.19         |  | Socal



Other Comprehensive Income



During the three months and nine months ended September 30, 2005, net deferred losses of $25.7
million and $115.2 million, respectively, were reclassified from OCI and charged to oil and gas revenues and steam gas costs and in the nine months ended September 30, 2005 we recognized $0.1 million for ineffectiveness of derivatives that
qualify for hedge accounting. During the three months and nine months ended September 30, 2004, net deferred losses of $44.2 million and $86.4 million, respectively, were reclassified from OCI and charged to oil and gas revenues and steam
gas costs and in the three months and nine months ended September 30, 2004 we recognized $1.1 million and $1.3 million, respectively, for ineffectiveness of derivatives that qualify for hedge accounting.



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At September 30, 2005 OCI consisted of $167.2 million ($103.2 million after tax) of deferred losses on our hedging
instruments, including $24.1 million ($14.9 million, net of tax) of deferred losses attributable to the cancelled 2005 swaps and $145.8 million ($90.0 million, net of tax) of deferred losses attributable to the cancelled 2006 swaps. At
December 31, 2004, OCI consisted of $200.9 million ($123.9 million after tax) of unrealized losses on our open hedging instruments, including $106.2 million ($65.5 million, net of tax) of deferred losses attributable to the cancelled 2005
swaps.



During the twelve months ended September 30, 2006, based on quoted market
prices for future delivery as of September 30, 2005, we expect to reclassify $2.6 million of net deferred gains associated with open derivative contracts and $133.8 million of net deferred losses on terminated derivative contracts from OCI
to oil and gas revenue. Also during such period, we expect to reclassify approximately $50.2 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 pre-tax 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 millions):



|            |  |      |      |      |   |     
|----------- |  | ---- | ---- | ---- | - | ----
|            |  | 2005 |      | 2006
|1st Quarter |  | $    | 29.1 |      | $ | 36.5
|2nd Quarter |  |      | 27.3 |      |   | 36.6
|3rd Quarter |  |      | 25.7 |      |   | 36.6
|4th Quarter |  |      | 24.1 |      |   | 36.1



Note 3Long-Term Debt



At September 30, 2005 and December 31, 2004 debt, all of which is classified as long-term,
consisted of (in millions):



|                                                                                                                |  |                   |       |                  |   |      
|--------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                                                                                                                |  | September 30,2005 |       | December 31,2004
|Senior revolving credit facility                                                                                |  | $                 | 238.5 |                  | $ | 110.0
|8.75% senior subordinated notes, including unamortized premium of $1.6 million in 2005 and $1.7 million in 2004 |  |                   | 276.6 |                  |   | 276.7
|7.125% senior notes, including unamortized discount of $1.2 million in 2005 and $1.3 million in 2004            |  |                   | 248.8 |                  |   | 248.7
|                                                                                                                |  |                   |       |                  |   |      
|                                                                                                                |  | $                 | 763.9 |                  | $ | 635.4
|                                                                                                                |  |                   |       |                  |   |      



Senior Revolving Credit
Facility.On May 16, 2005 we entered into an Amended and Restated Credit Agreement (the Amended Credit Agreement) which amended and restated our $500 million senior revolving credit facility. The Amended
Credit Agreement increased the facility size to $750 million and established an initial borrowing base of $750 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 may be adjusted based on PXPs oil and gas properties, reserves, other indebtedness and other relevant factors. Additionally, the Amended Credit Agreement contains a $75 million sub-limit for letters of
credit. The Amended Credit Agreement matures on May 16, 2010. Collateral consists of 100% of the shares of stock of our domestic subsidiaries and mortgages covering at least 80% of the total present value of our domestic oil and gas properties.



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The Amended Credit Agreement also modifies certain covenants to provide additional flexibility regarding the issuance of debt, the
disposition of non oil and gas properties and mergers of subsidiaries. The Amended Credit Agreement also reset, as of June 30, 2005, the financial covenant test with respect to tangible net worth. The effective interest rate on our borrowings
under the Amended Credit Agreement was 4.7% at September 30, 2005. At that date we were in compliance with the covenants contained in the Amended Credit Agreement and could have borrowed the full amount available under the Amended Credit
Agreement.



Short-term Credit Facility.    In May 2005 we
amended our uncommitted short-term credit facility to extend its term and increase the facility size. We may make borrowings from time to time until May 27, 2006, not to exceed at any time the maximum principal amount of $25.0 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 May 27, 2006. Each advance under the short-term facility shall bear interest at a rate per annum
mutually agreed on by the bank and the Company. No amounts were outstanding under the short-term credit facility at September 30, 2005.



Note 4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 nine months ended September 30, 2004 we billed Plains Resources $0.4 million for services
provided by us under these agreements. In addition, for the nine months ended September 30, 2004 we billed Plains Resources $0.2 million for administrative costs associated with certain special projects performed on their behalf.



Our Chief Executive Officer is a member of Cypress Aviation LLC (Cypress). In June 2004,
based on third party valuations we acquired two aircraft from Cypress for $4.5 million. Prior to the acquisition 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 and nine months ended September 30, 2004, we paid Gulf Coast $0.1 million and $0.5 million, respectively, 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. The following table reflects such transactions for the three months and nine
months ended September 30, 2005 and 2004 (in thousands):



|                               |  |                                  |         |                                 |   |        |  |      |         |  |   |        
|------------------------------ |  | -------------------------------- | ------- | ------------------------------- | - | ------ |  | ---- | ------- |  | - | -------
|                               |  | Three Months Ended September 30, |         | Nine Months Ended September 30,
|                               |  | 2005                             |         | 2004                            |   | 2005   |  | 2004
|Sales of oil to PAA            |  |                                  |         |                                 |   |        |  |      |         |  |   |        
|PXPs share                    |  | $                                | 102,523 |                                 | $ | 69,173 |  | $    | 264,930 |  | $ | 196,459
|Royalty owners share          |  |                                  | 16,535  |                                 |   | 13,912 |  |      | 46,251  |  |   | 39,388 
|                               |  |                                  |         |                                 |   |        |  |      |         |  |   |        
|                               |  | $                                | 119,058 |                                 | $ | 83,085 |  | $    | 311,181 |  | $ | 235,847
|                               |  |                                  |         |                                 |   |        |  |      |         |  |   |        
|Charges for PAA marketing fees |  | $                                | 308     |                                 | $ | 347    |  | $    | 927     |  | $ | 1,097  
|                               |  |                                  |         |                                 |   |        |  |      |         |  |   |        



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Note 5Acquisitions and Dispositions



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 accounted for the Nuevo acquisition as a purchase effective May 14, 2004. We have completed our evaluation of the assets
acquired and liabilities assumed at the time of the acquisition and during the first half of 2005 goodwill related to the acquisition was increased by $2.1 million.



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 9 3/8% 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 statement 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)       |  | Nine Months EndedSeptember 30, 2004 |        
|Revenues                                    |  | $                                   | 591,023 |  
|Income from operations                      |  |                                     | 161,472 |  
|Net income (loss)                           |  |                                     | (18,749 | )
|Basic and diluted earnings (loss) per share |  | $                                   | (0.24   | )
|Weighted average shares outstanding         |  |                                     |         |  
|Basic and diluted                           |  |                                     | 76,854  |  



Pro forma net income (loss) for the nine months
ended September 30, 2004 includes debt extinguishment costs of $22.7 million ($14.0 million after tax).



Other



On April 1, 2005 we acquired certain California producing oil and gas properties from a private company for $118 million. The properties are primarily located in the Los Angeles Basin of onshore California with some smaller properties
located in adjacent Ventura County.



On May 31, 2005 we closed the sale to XTO
Energy, Inc. of interests in producing properties located in East Texas and Oklahoma for net proceeds of approximately $335 million. The proceeds were primarily used to fund the transactions to eliminate all of our 2006 oil price swaps and collars
as discussed in Note 2. 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.



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On September 8, 2005 we acquired a 16.7% interest in the Point Arguello Unit, Rocky Point development project and related
facilities, offshore California, from subsidiaries of Chevron U.S.A. Inc. This acquisition, which was effective July 1, 2005, increased our working interest to 69.3%.



Prior to our acquisition of Nuevo, Nuevo sold its Tonner Hills real estate property and received $40.7 million of the purchase price with the
remainder due upon completion of certain habitat restoration activities. We completed the required restoration and in the second quarter of 2005 we received the $6.5 million due under the terms of the agreement. The fair value of our investment in
the property at December 31, 2004 is reflected on the balance sheet in current assets under the caption assets held for sale and the $40.7 million that had been received as of that date is reflected on the balance sheet in current liabilities,
as such amounts were accounted for as deposits until the completion of the habitat restoration activities.



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. 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 the San Joaquin Valley casing vent recovery system located on the Gamble Lease were approximately 881 tons over a 745 day period. We brought
the facility into compliance within 10 days of discovering the violation. We settled this matter for $750,000.



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). The fair value of our obligation, $0.4 million, is included in Other
Long-Term Liabilities in the Consolidated balance Sheet.



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, releases of 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



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population density of southern California. Although we maintain insurance coverage considered to be customary in the industry for a company our size, 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, have received from the Internal Revenue Service (IRS), in accordance with the U.S. consolidated return regulations, a closing agreement
confirming that the transaction will not trigger recapture. 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 $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 affect 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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.
| | - |  | ----------------------------



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

SEPTEMBER 30, 2005

(in thousands)



|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|----------------------------------------------------------- |  | ------ | --------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | - | --------- | -
|                                                            |  | Issuer |           |   | GuarantorSubsidiaries |   |          | IntercompanyEliminations |  |   | Consolidated |  
|ASSETS                                                      |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Current Assets                                              |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Cash and cash equivalents                                   |  | $      | 1,299     |   |                       | $ | 7        |                          |  | $ | -            |   |  | $ | 1,306     |  
|Accounts receivable and other current assets                |  |        | 259,297   |   |                       |   | 33,513   |                          |  |   | -            |   |  |   | 292,810   |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|                                                            |  |        | 260,596   |   |                       |   | 33,520   |                          |  |   | -            |   |  |   | 294,116   |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Property and Equipment, at cost                             |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Oil and natural gas properties - full cost method           |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Subject to amortization                                     |  |        | 2,047,528 |   |                       |   | 466,417  |                          |  |   | -            |   |  |   | 2,513,945 |  
|Not subject to amortization                                 |  |        | 54,167    |   |                       |   | 34,934   |                          |  |   | -            |   |  |   | 89,101    |  
|Other property and equipment                                |  |        | 15,354    |   |                       |   | 715      |                          |  |   | -            |   |  |   | 16,069    |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|                                                            |  |        | 2,117,049 |   |                       |   | 502,066  |                          |  |   | -            |   |  |   | 2,619,115 |  
|Less allowance for depreciation, depletion and amortization |  |        | (289,075  | ) |                       |   | (161,487 | )                        |  |   | -            |   |  |   | (450,562  | )
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|                                                            |  |        | 1,827,974 |   |                       |   | 340,579  |                          |  |   | -            |   |  |   | 2,168,553 |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Investment in and Advances to Subsidiaries                  |  |        | 414,674   |   |                       |   | -        |                          |  |   | (414,674     | ) |  |   | -         |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Goodwill                                                    |  |        | 27,512    |   |                       |   | 145,046  |                          |  |   | -            |   |  |   | 172,558   |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Other Assets                                                |  |        | 24,103    |   |                       |   | 12,049   |                          |  |   | -            |   |  |   | 36,152    |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|                                                            |  | $      | 2,554,859 |   |                       | $ | 531,194  |                          |  | $ | (414,674     | ) |  | $ | 2,671,379 |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Current Liabilities                                         |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Accounts payable and other current liabilities              |  | $      | 209,074   |   |                       | $ | 79,402   |                          |  | $ | -            |   |  | $ | 288,476   |  
|Commodity derivative contracts                              |  |        | 170,523   |   |                       |   | 2,807    |                          |  |   | -            |   |  |   | 173,330   |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|                                                            |  |        | 379,597   |   |                       |   | 82,209   |                          |  |   | -            |   |  |   | 461,806   |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Long-Term Debt                                              |  |        | 763,899   |   |                       |   | -        |                          |  |   | -            |   |  |   | 763,899   |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Other Long-Term Liabilities                                 |  |        | 565,566   |   |                       |   | 26,928   |                          |  |   | -            |   |  |   | 592,494   |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Payable to Parent                                           |  |        | -         |   |                       |   | 73,692   |                          |  |   | (73,692      | ) |  |   | -         |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Deferred Income Taxes                                       |  |        | 221,022   |   |                       |   | 7,383    |                          |  |   | -            |   |  |   | 228,405   |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Stockholders Equity                                        |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Stockholders equity                                        |  |        | 728,023   |   |                       |   | 379,326  |                          |  |   | (379,326     | ) |  |   | 728,023   |  
|Accumulated other comprehensive income                      |  |        | (103,248  | ) |                       |   | (38,344  | )                        |  |   | 38,344       |   |  |   | (103,248  | )
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|                                                            |  |        | 624,775   |   |                       |   | 340,982  |                          |  |   | (340,982     | ) |  |   | 624,775   |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|                                                            |  | $      | 2,554,859 |   |                       | $ | 531,194  |                          |  | $ | (414,674     | ) |  | $ | 2,671,379 |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

DECEMBER 31, 2004

(in thousands)



|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|----------------------------------------------------------- |  | ------ | --------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | - | --------- | -
|                                                            |  | Issuer |           |   | GuarantorSubsidiaries |   |          | IntercompanyEliminations |  |   | 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     | ) |  |   | -         |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Goodwill                                                    |  |        | 25,421    |   |                       |   | 145,046  |                          |  |   | -            |   |  |   | 170,467   |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Other Assets                                                |  |        | 28,806    |   |                       |   | 4,716    |                          |  |   | -            |   |  |   | 33,522    |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|                                                            |  | $      | 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 |  
|                                                            |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED SEPTEMBER 30, 2005

(in thousands)



|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|--------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | ------ | ------------------------ |  | - | ------------ | - |  | - | -------- | -
|                                                    |  | Parent |          |   | GuarantorSubsidiaries |   |        | IntercompanyEliminations |  |   | Consolidated |  
|Revenues                                            |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Oil sales                                           |  | $      | 195,209  |   |                       | $ | 22,538 |                          |  | $ | -            |   |  | $ | 217,747  |  
|Gas sales                                           |  |        | 13,486   |   |                       |   | 30,745 |                          |  |   | -            |   |  |   | 44,231   |  
|Other operating revenues                            |  |        | 597      |   |                       |   | 44     |                          |  |   | -            |   |  |   | 641      |  
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|                                                    |  |        | 209,292  |   |                       |   | 53,327 |                          |  |   | -            |   |  |   | 262,619  |  
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Costs and Expenses                                  |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Production costs                                    |  |        | 50,714   |   |                       |   | 19,997 |                          |  |   | -            |   |  |   | 70,711   |  
|General and administrative                          |  |        | 51,729   |   |                       |   | 1,035  |                          |  |   | -            |   |  |   | 52,764   |  
|Depreciation, depletion, amortization and accretion |  |        | 31,053   |   |                       |   | 11,499 |                          |  |   | -            |   |  |   | 42,552   |  
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|                                                    |  |        | 133,496  |   |                       |   | 32,531 |                          |  |   | -            |   |  |   | 166,027  |  
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Income from Operations                              |  |        | 75,796   |   |                       |   | 20,796 |                          |  |   | -            |   |  |   | 96,592   |  
|Other Income (Expense)                              |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Equity in earnings of subsidiaries                  |  |        | 8,445    |   |                       |   | -      |                          |  |   | (8,445       | ) |  |   | -        |  
|Interest expense                                    |  |        | (9,500   | ) |                       |   | (4,978 | )                        |  |   | -            |   |  |   | (14,478  | )
|Gain (loss) on mark-to-market derivative contracts  |  |        | (141,646 | ) |                       |   | -      |                          |  |   | -            |   |  |   | (141,646 | )
|Interest and other income (expense)                 |  |        | (392     | ) |                       |   | -      |                          |  |   | -            |   |  |   | (392     | )
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Income (Loss) Before Income Taxes                   |  |        | (67,297  | ) |                       |   | 15,818 |                          |  |   | (8,445       | ) |  |   | (59,924  | )
|Income taxes                                        |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Current                                             |  |        | 3,351    |   |                       |   | (2,594 | )                        |  |   | -            |   |  |   | 757      |  
|Deferred                                            |  |        | 32,097   |   |                       |   | (4,779 | )                        |  |   | -            |   |  |   | 27,318   |  
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Net Income (Loss)                                   |  | $      | (31,849  | ) |                       | $ | 8,445  |                          |  |   | $  (8,445    | ) |  | $ | (31,849  | )
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED SEPTEMBER 30, 2004

(in thousands)



|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|--------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | ------ | ------------------------ |  | - | ------------ | - |  | - | -------- | -
|                                                    |  | Parent |          |   | GuarantorSubsidiaries |   |        | IntercompanyEliminations |  |   | Consolidated |  
|Revenues                                            |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Oil sales                                           |  | $      | 135,840  |   |                       | $ | 12,827 |                          |  | $ | -            |   |  | $ | 148,667  |  
|Gas sales                                           |  |        | 13,865   |   |                       |   | 46,962 |                          |  |   | -            |   |  |   | 60,827   |  
|Other operating revenues                            |  |        | 663      |   |                       |   | 204    |                          |  |   | -            |   |  |   | 867      |  
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|                                                    |  |        | 150,368  |   |                       |   | 59,993 |                          |  |   | -            |   |  |   | 210,361  |  
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Costs and Expenses                                  |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Production costs                                    |  |        | 59,924   |   |                       |   | 17,239 |                          |  |   | -            |   |  |   | 77,163   |  
|General and administrative                          |  |        | 28,322   |   |                       |   | 1,204  |                          |  |   | -            |   |  |   | 29,526   |  
|Depreciation, depletion, amortization and accretion |  |        | 25,099   |   |                       |   | 20,708 |                          |  |   | -            |   |  |   | 45,807   |  
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|                                                    |  |        | 113,345  |   |                       |   | 39,151 |                          |  |   | -            |   |  |   | 152,496  |  
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Income from Operations                              |  |        | 37,023   |   |                       |   | 20,842 |                          |  |   | -            |   |  |   | 57,865   |  
|Other Income (Expense)                              |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Equity in earnings of subsidiaries                  |  |        | 6,837    |   |                       |   | -      |                          |  |   | (6,837       | ) |  |   | -        |  
|Debt extinguishment costs                           |  |        | -        |   |                       |   | -      |                          |  |   | -            |   |  |   | -        |  
|Gain (loss) on mark-to-market derivative contracts  |  |        | (125,153 | ) |                       |   | 502    |                          |  |   | -            |   |  |   | (124,651 | )
|Interest expense                                    |  |        | (5,109   | ) |                       |   | (5,860 | )                        |  |   | -            |   |  |   | (10,969  | )
|Interest and other income (expense)                 |  |        | 364      |   |                       |   | -      |                          |  |   | -            |   |  |   | 364      |  
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Income (Loss) Before Income Taxes                   |  |        | (86,038  | ) |                       |   | 15,484 |                          |  |   | (6,837       | ) |  |   | (77,391  | )
|Income taxes                                        |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Current                                             |  |        | 3,348    |   |                       |   | (3,811 | )                        |  |   | -            |   |  |   | (463     | )
|Deferred                                            |  |        | 34,712   |   |                       |   | (4,836 | )                        |  |   | -            |   |  |   | 29,876   |  
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  
|Net Income (Loss)                                   |  | $      | (47,978  | ) |                       | $ | 6,837  |                          |  | $ | (6,837       | ) |  | $ | (47,978  | )
|                                                    |  |        |          |   |                       |   |        |                          |  |   |              |   |  |   |          |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2005

(in thousands)



|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|--------------------------------------------------- |  | ------ | -------- | - | ------------------------- | - | ------- | ---------------------------- |  | - | ------------ | - |  | - | -------- | -
|                                                    |  | Parent |          |   | Guarantor    Subsidiaries |   |         | Intercompany    Eliminations |  |   | Consolidated |  
|Revenues                                            |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Oil sales                                           |  | $      | 460,228  |   |                           | $ | 54,904  |                              |  | $ | -            |   |  | $ | 515,132  |  
|Gas sales                                           |  |        | 37,915   |   |                           |   | 114,693 |                              |  |   | -            |   |  |   | 152,608  |  
|Other operating revenues                            |  |        | 1,846    |   |                           |   | 416     |                              |  |   | -            |   |  |   | 2,262    |  
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|                                                    |  |        | 499,989  |   |                           |   | 170,013 |                              |  |   | -            |   |  |   | 670,002  |  
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Costs and Expenses                                  |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Production costs                                    |  |        | 149,793  |   |                           |   | 57,221  |                              |  |   | -            |   |  |   | 207,014  |  
|General and administrative                          |  |        | 103,467  |   |                           |   | 5,167   |                              |  |   | -            |   |  |   | 108,634  |  
|Depreciation, depletion, amortization and accretion |  |        | 86,866   |   |                           |   | 48,703  |                              |  |   | -            |   |  |   | 135,569  |  
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|                                                    |  |        | 340,126  |   |                           |   | 111,091 |                              |  |   | -            |   |  |   | 451,217  |  
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Income from Operations                              |  |        | 159,863  |   |                           |   | 58,922  |                              |  |   | -            |   |  |   | 218,785  |  
|Other Income (Expense)                              |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Equity in earnings of subsidiaries                  |  |        | 25,697   |   |                           |   | -       |                              |  |   | (25,697      | ) |  |   | -        |  
|Interest expense                                    |  |        | (28,372  | ) |                           |   | (11,667 | )                            |  |   | -            |   |  |   | (40,039  | )
|Gain (loss) on mark-to-market derivative contracts  |  |        | (629,569 | ) |                           |   | -       |                              |  |   | -            |   |  |   | (629,569 | )
|Interest and other income (expense)                 |  |        | (220     | ) |                           |   | -       |                              |  |   | -            |   |  |   | (220     | )
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Income (Loss) Before Income Taxes                   |  |        | (472,601 | ) |                           |   | 47,255  |                              |  |   | (25,697      | ) |  |   | (451,043 | )
|Income taxes                                        |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Current                                             |  |        | 23,314   |   |                           |   | (23,887 | )                            |  |   | -            |   |  |   | (573     | )
|Deferred                                            |  |        | 164,490  |   |                           |   | 2,329   |                              |  |   | -            |   |  |   | 166,819  |  
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Net Income (Loss)                                   |  | $      | (284,797 | ) |                           | $ | 25,697  |                              |  | $ | (25,697      | ) |  | $ | (284,797 | )
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2004

(in thousands)



|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|--------------------------------------------------- |  | ------ | -------- | - | ------------------------- | - | ------- | ---------------------------- |  | - | ------------ | - |  | - | -------- | -
|                                                    |  | Parent |          |   | Guarantor    Subsidiaries |   |         | Intercompany    Eliminations |  |   | Consolidated |  
|Revenues                                            |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Oil sales                                           |  | $      | 252,334  |   |                           | $ | 45,168  |                              |  | $ | -            |   |  | $ | 297,502  |  
|Gas sales                                           |  |        | 27,352   |   |                           |   | 129,637 |                              |  |   | -            |   |  |   | 156,989  |  
|Other operating revenues                            |  |        | 921      |   |                           |   | 680     |                              |  |   | -            |   |  |   | 1,601    |  
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|                                                    |  |        | 280,607  |   |                           |   | 175,485 |                              |  |   | -            |   |  |   | 456,092  |  
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Costs and Expenses                                  |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Production costs                                    |  |        | 109,563  |   |                           |   | 47,528  |                              |  |   | -            |   |  |   | 157,091  |  
|General and administrative                          |  |        | 58,799   |   |                           |   | 4,041   |                              |  |   | -            |   |  |   | 62,840   |  
|Depreciation, depletion, amortization and accretion |  |        | 43,242   |   |                           |   | 51,000  |                              |  |   | -            |   |  |   | 94,242   |  
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|                                                    |  |        | 211,604  |   |                           |   | 102,569 |                              |  |   | -            |   |  |   | 314,173  |  
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Income from Operations                              |  |        | 69,003   |   |                           |   | 72,916  |                              |  |   | -            |   |  |   | 141,919  |  
|Other Income (Expense)                              |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Equity in earnings of subsidiaries                  |  |        | 34,297   |   |                           |   | -       |                              |  |   | (34,297      | ) |  |   | -        |  
|Debt extinguishment costs                           |  |        | (19,691  | ) |                           |   | -       |                              |  |   | -            |   |  |   | (19,691  | )
|Gain (loss) on mark-to-market derivative contracts  |  |        | (123,966 | ) |                           |   | (1,876  | )                            |  |   | -            |   |  |   | (125,842 | )
|Interest expense                                    |  |        | (14,203  | ) |                           |   | (12,303 | )                            |  |   | -            |   |  |   | (26,506  | )
|Interest and other income (expense)                 |  |        | 664      |   |                           |   | 5       |                              |  |   | -            |   |  |   | 669      |  
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Income (Loss) Before Income Taxes                   |  |        | (53,896  | ) |                           |   | 58,742  |                              |  |   | (34,297      | ) |  |   | (29,451  | )
|Income taxes                                        |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Current                                             |  |        | 3,083    |   |                           |   | (3,690  | )                            |  |   | -            |   |  |   | (607     | )
|Deferred                                            |  |        | 32,126   |   |                           |   | (20,755 | )                            |  |   | -            |   |  |   | 11,371   |  
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  
|Net Income (Loss)                                   |  | $      | (18,687  | ) |                           | $ | 34,297  |                              |  | $ | (34,297      | ) |  | $ | (18,687  | )
|                                                    |  |        |          |   |                           |   |         |                              |  |   |              |   |  |   |          |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2005

(in thousands of dollars)



|                                                           |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|---------------------------------------------------------- |  | ------ | --------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | - | --------- | -
|                                                           |  | Parent |           |   | GuarantorSubsidiaries |   |          | IntercompanyEliminations |  |   | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Net income (loss)                                          |  | $      | (284,797  | ) |                       | $ | 25,697   |                          |  | $ | (25,697      | ) |  | $ | (284,797  | )
|Items not affecting cash flows from operating activities   |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Depreciation, depletion, amortization and accretion        |  |        | 86,866    |   |                       |   | 48,703   |                          |  |   | -            |   |  |   | 135,569   |  
|Equity in earnings of subsidiaries                         |  |        | (25,697   | ) |                       |   | -        |                          |  |   | 25,697       |   |  |   | -         |  
|Deferred income taxes                                      |  |        | (164,490  | ) |                       |   | (2,329   | )                        |  |   | -            |   |  |   | (166,819  | )
|Commodity derivative contracts                             |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Loss (gain) on derivatives                                 |  |        | 319,668   |   |                       |   | 39,170   |                          |  |   | -            |   |  |   | 358,838   |  
|Reclassify financing derivative settlements                |  |        | 361,451   |   |                       |   | 3,481    |                          |  |   |              |   |  |   | 364,932   |  
|Noncash compensation                                       |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Stock appreciation rights                                  |  |        | 30,729    |   |                       |   | -        |                          |  |   | -            |   |  |   | 30,729    |  
|Other                                                      |  |        | 29,078    |   |                       |   | -        |                          |  |   | -            |   |  |   | 29,078    |  
|Other noncash items                                        |  |        | (69       | ) |                       |   | -        |                          |  |   | -            |   |  |   | (69       | )
|Change in assets and liabilities from operating activities |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Accounts receivable and other assets                       |  |        | (10,782   | ) |                       |   | 176      |                          |  |   | -            |   |  |   | (10,606   | )
|Accounts payable and other liabilities                     |  |        | (25,653   | ) |                       |   | (7,679   | )                        |  |   | -            |   |  |   | (33,332   | )
|Commodity derivative contracts                             |  |        | (135,348  | ) |                       |   |          |                          |  |   | -            |   |  |   | (135,348  | )
|                                                           |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Net cash provided by operating activities                  |  |        | 180,956   |   |                       |   | 107,219  |                          |  |   | -            |   |  |   | 288,175   |  
|                                                           |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Exploration and development costs                          |  |        | (194,814  | ) |                       |   | (66,762  | )                        |  |   |              |   |  |   | (261,576  | )
|Acquisition of oil and gas properties                      |  |        | (1,870    | ) |                       |   | (129,932 | )                        |  |   |              |   |  |   | (131,802  | )
|Proceeds from sales of properties                          |  |        | 6,500     |   |                       |   | 336,596  |                          |  |   |              |   |  |   | 343,096   |  
|Other property and equipment                               |  |        | (3,390    | ) |                       |   | (133     | )                        |  |   |              |   |  |   | (3,523    | )
|                                                           |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Net cash provided by (used in) investing activities        |  |        | (193,574  | ) |                       |   | 139,769  |                          |  |   | -            |   |  |   | (53,805   | )
|                                                           |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Revolving credit facilities                                |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Borrowings                                                 |  |        | 1,092,700 |   |                       |   | -        |                          |  |   | -            |   |  |   | 1,092,700 |  
|Repayments                                                 |  |        | (964,200  | ) |                       |   | -        |                          |  |   | -            |   |  |   | (964,200  | )
|Costs incurred in connection with financing arrangements   |  |        | (1,521    | ) |                       |   | -        |                          |  |   | -            |   |  |   | (1,521    | )
|Derivative settlements                                     |  |        | (361,451  | ) |                       |   | (3,481   | )                        |  |   | -            |   |  |   | (364,932  | )
|Investment in and advances to affiliates                   |  |        | 244,169   |   |                       |   | (244,169 | )                        |  |   | -            |   |  |   | -         |  
|Other                                                      |  |        | 3,344     |   |                       |   | -        |                          |  |   | -            |   |  |   | 3,344     |  
|                                                           |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Net cash provided by (used in) financing activities        |  |        | 13,041    |   |                       |   | (247,650 | )                        |  |   | -            |   |  |   | (234,609  | )
|                                                           |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Net increase (decrease) in cash and cash equivalents       |  |        | 423       |   |                       |   | (662     | )                        |  |   | -            |   |  |   | (239      | )
|Cash and cash equivalents, beginning of period             |  |        | 876       |   |                       |   | 669      |                          |  |   | -            |   |  |   | 1,545     |  
|                                                           |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  
|Cash and cash equivalents, end of period                   |  | $      | 1,299     |   |                       | $ | 7        |                          |  | $ | -            |   |  | $ | 1,306     |  
|                                                           |  |        |           |   |                       |   |          |                          |  |   |              |   |  |   |           |  



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2004

(in thousands of dollars)



|                                                                                        |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|--------------------------------------------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | - | -------- | -
|                                                                                        |  | Issuer |          |   | GuarantorSubsidiaries |   |         | IntercompanyEliminations |  |   | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                    |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Net income                                                                              |  | $      | (18,687  | ) |                       | $ | 34,297  |                          |  | $ | (34,297      | ) |  | $ | (18,687  | )
|Items not affecting cash flows from operating activities                                |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Depreciation, depletion, amortization and accretion                                     |  |        | 43,242   |   |                       |   | 51,000  |                          |  |   | -            |   |  |   | 94,242   |  
|Equity in earnings of subsidiaries                                                      |  |        | (34,297  | ) |                       |   | -       |                          |  |   | 34,297       |   |  |   | -        |  
|Deferred income taxes                                                                   |  |        | (32,126  | ) |                       |   | 20,755  |                          |  |   | -            |   |  |   | (11,371  | )
|Debt extinguishment costs                                                               |  |        | (4,453   | ) |                       |   | -       |                          |  |   | -            |   |  |   | (4,453   | )
|Commodity derivative contracts                                                          |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Loss (gain) on derivatives                                                              |  |        | 74,024   |   |                       |   | (7,818  | )                        |  |   | -            |   |  |   | 66,206   |  
|Reclassify financing derivative settlements                                             |  |        | 61,274   |   |                       |   | -       |                          |  |   | -            |   |  |   | 61,274   |  
|Noncash compensation                                                                    |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Stock appreciation rights                                                               |  |        | 17,884   |   |                       |   | -       |                          |  |   | -            |   |  |   | 17,884   |  
|Other                                                                                   |  |        | 6,736    |   |                       |   | -       |                          |  |   | -            |   |  |   | 6,736    |  
|Other noncash items                                                                     |  |        | (92      | ) |                       |   | -       |                          |  |   | -            |   |  |   | (92      | )
|Change in assets and liabilities from operating activities net of effect of acquisition |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Accounts receivable and other assets                                                    |  |        | 1,139    |   |                       |   | (9,340  | )                        |  |   | -            |   |  |   | (8,201   | )
|Accounts payable and other liabilities                                                  |  |        | 27,299   |   |                       |   | (3,463  | )                        |  |   | -            |   |  |   | 23,836   |  
|Commodity derivative contracts                                                          |  |        | 1,532    |   |                       |   | 21,263  |                          |  |   | -            |   |  |   | 22,795   |  
|                                                                                        |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Net cash provided by operating activities                                               |  |        | 143,475  |   |                       |   | 106,694 |                          |  |   | -            |   |  |   | 250,169  |  
|                                                                                        |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                    |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Exploration and development costs                                                       |  |        | (67,632  | ) |                       |   | (74,467 | )                        |  |   | -            |   |  |   | (142,099 | )
|Acquisition of Nuevo Energy Company, net of cash acquired                               |  |        | (14,156  | ) |                       |   | -       |                          |  |   | -            |   |  |   | (14,156  | )
|Proceeds from sales of properties                                                       |  |        | 58,076   |   |                       |   | 27,816  |                          |  |   | -            |   |  |   | 85,892   |  
|Other property and equipment                                                            |  |        | (5,382   | ) |                       |   | (357    | )                        |  |   | -            |   |  |   | (5,739   | )
|                                                                                        |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Net cash used in investing activities                                                   |  |        | (29,094  | ) |                       |   | (47,008 | )                        |  |   | -            |   |  |   | (76,102  | )
|                                                                                        |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                    |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Revolving credit facilities                                                             |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Borrowings                                                                              |  |        | 762,950  |   |                       |   | -       |                          |  |   | -            |   |  |   | 762,950  |  
|Repayments                                                                              |  |        | (710,950 | ) |                       |   | -       |                          |  |   | -            |   |  |   | (710,950 | )
|Proceeds from issuance of 7.125% Senior Notes                                           |  |        | 248,695  |   |                       |   | -       |                          |  |   | -            |   |  |   | 248,695  |  
|Retirement of debt assumed in acquisition of                                            |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Nuevo Energy Company                                                                    |  |        | (405,000 | ) |                       |   | -       |                          |  |   | -            |   |  |   | (405,000 | )
|Costs incurred in connection with financing arrangements                                |  |        | (8,988   | ) |                       |   | -       |                          |  |   | -            |   |  |   | (8,988   | )
|Derivative settlements                                                                  |  |        | 60,659   |   |                       |   | (60,659 | )                        |  |   | -            |   |  |   | -        |  
|Investment in and advances to affiliates                                                |  |        | (61,274  | ) |                       |   | -       |                          |  |   | -            |   |  |   | (61,274  | )
|Other                                                                                   |  |        | 913      |   |                       |   | -       |                          |  |   | -            |   |  |   | 913      |  
|                                                                                        |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Net cash provided by (used in) financing activities                                     |  |        | (112,995 | ) |                       |   | (60,659 | )                        |  |   | -            |   |  |   | (173,654 | )
|                                                                                        |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                    |  |        | 1,386    |   |                       |   | (973    | )                        |  |   | -            |   |  |   | 413      |  
|Cash and cash equivalents, beginning of period                                          |  |        | 403      |   |                       |   | 974     |                          |  |   | -            |   |  |   | 1,377    |  
|                                                                                        |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Cash and cash equivalents, end of period                                                |  | $      | 1,789    |   |                       | $ | 1       |                          |  | $ | -            |   |  | $ | 1,790    |  
|                                                                                        |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  



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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 six 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 September 30, 2005 we had approximately $505 million of availability under our revolving credit facility. We have a capital budget for 2005, excluding
acquisitions, of approximately $425 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, derivative obligations, 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 use derivative instruments to manage our commodity price risk. This practice may prevent us from receiving the full advantage of
increases in oil or gas prices above the maximum fixed amount specified in the derivative agreement. The level of derivative activity depends on our view of market conditions, available derivative prices and our operating strategy (see 
Derivative Instruments and Hedging).



Acquisitions and Dispositions



On April 1, 2005 we acquired certain California producing oil and gas
properties from a private company for $118 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 was financed under our credit
facility.



On September 8, 2005 we acquired 16.7% interest in the Point Arguello
Unit, Rocky Point development project and related facilities, offshore California, from subsidiaries of Chevron U.S.A. Inc. This acquisition, which was effective July 1, 2005, increased our working interest to 69.3%.



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,



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maintain financial flexibility and redeploy the proceeds therefrom to activities that we believe potentially have a higher financial return. On May 31, 2005
we closed the sale to XTO Energy, Inc. of interests in producing properties located in East Texas and Oklahoma for net proceeds of approximately $335 million. The proceeds were primarily used to fund the transactions to eliminate all of our 2006 oil
price swaps and collars as discussed in  Derivative Instruments and Hedging. 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% were proved developed. The properties produced approximately 5,800 net equivalent barrels per day at March 31, 2005.



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% were proved developed.



Derivative Instruments and Hedging



For the remainder of 2005 we have in place crude oil price collars on approximately 36,000 barrels per day (approximately 14,000 barrels per day with a floor of $26.00 and an average ceiling of $29.33 and 22,000 barrels per day
with a floor of $25.00 and an average ceiling of $34.76) and swaps on 5,000 MMbtu per day of natural gas sales at an average price of $4.40 per MMBtu. In addition, for 2007 and 2008 we have crude oil price collars on 22,000 barrels per day with a
floor of $25.00 and an average ceiling of $34.76. For 2006 and 2007 we have NYMEX crude oil put options with a strike price of $55.00 per barrel on 50,000 barrels per day. We also have NYMEX call options with a strike price of $12.00 per MMBTU on
30,000 MMbtus per day of natural gas for 2006. The oil collars, puts and calls 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 as changes occur in the NYMEX price index.



In May 2005 we completed
a series of transactions that eliminated our 2006 collars on 22,000 barrels of oil per day with a floor price of $25.00 and an average ceiling price of $34.76 and our 2006 swaps on 15,000 barrels of oil per day at an average price of $25.28 at a
pre-tax cost of approximately $292.7 million (approximately $145.4 million attributable to the collars and $147.3 million attributable to the swaps).



The collars were not accounted for as hedges, therefore, the $145.4 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 March 31, 2005. We used hedge accounting for the swaps through March 2005 and as a result the $145.8 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 $145.4 million cash payment for the collars is reflected as a financing cash outflow in our statement of cash flows and the $147.3 million cash payment
for the swaps is reflected as an operating cash outflow in our statement of cash flows. These payments reduced derivative liabilities on our balance sheet.



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 (EOR) credit carryforwards, we do not expect to pay any significant federal or state income taxes in 2005.



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##### Table of Contents

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.



Results Overview



In the third quarter of 2005 we reported a net loss of $31.8 million, or $0.41 per share, compared to a net loss of $48.0 million, or $0.62 per share, in the third quarter of 2004.
The loss in 2005 primarily reflects a $141.6 million derivative mark-to-market loss. Cash payments related to these derivative contracts that settled in the third quarter of 2005 totaled $101.4 million. The loss in 2004 primarily reflects a $124.7
million derivative mark-to-market loss. Cash payments related to these derivative contracts that settled in the third quarter of 2004 totaled $10.7 million.



Primarily as a result of a $629.6 million derivative mark-to-market loss, we reported a net loss of $284.8 million, or $3.67 per share for the first nine months of 2005 compared to
a net loss of $18.7 million, or $0.32 per diluted share for the first nine months of 2004. Cash payments related to mark-to-market derivative contracts totaled $334.6 million for the first nine months of 2005, including the $145.4 million cash
payment to eliminate our 2006 collars. In the first nine months of 2004 we reported a derivative mark-to-market loss of $125.8 million and cash settlements with respect to such derivatives totaled $16.3 million. 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.



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##### Table of Contents

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 MonthsEnded September 30, |        | Nine Months EndedSeptember 30,
|                                            |  | 2005                            |        | 2004                           |   | 2005    |  | 2004
|Sales Volumes                               |  |                                 |        |                                |   |         |  |      |        |  |   |        
|Oil and liquids (MBbls)                     |  |                                 | 4,635  |                                |   | 5,232   |  |      | 13,792 |  |   | 11,174 
|Gas (MMcf)                                  |  |                                 | 6,135  |                                |   | 10,863  |  |      | 23,913 |  |   | 27,731 
|MBOE                                        |  |                                 | 5,657  |                                |   | 7,043   |  |      | 17,777 |  |   | 15,796 
|                                            |  |                                 |        |                               
|Daily Average Sales Volumes                 |  |                                 |        |                                |   |         |  |      |        |  |   |        
|Oil and liquids (Bbls)                      |  |                                 | 50,374 |                                |   | 56,870  |  |      | 50,520 |  |   | 40,781 
|Gas (Mcf)                                   |  |                                 | 66,687 |                                |   | 118,076 |  |      | 87,593 |  |   | 101,208
|BOE                                         |  |                                 | 61,487 |                                |   | 76,549  |  |      | 65,117 |  |   | 57,650 
|                                            |  |                                 |        |                               
|Unit Economics (in dollars)                 |  |                                 |        |                                |   |         |  |      |        |  |   |        
|Average Prices                              |  |                                 |        |                                |   |         |  |      |        |  |   |        
|NYMEX Oil                                   |  | $                               | 63.16  |                                | $ | 43.85   |  | $    | 55.45  |  | $ | 39.13  
|Henry Hub gas                               |  |                                 | 8.52   |                                |   | 5.99    |  |      | 7.18   |  |   | 5.89   
|Average Realized Sales Price Before Hedging |  |                                 |        |                                |   |         |  |      |        |  |   |        
|Oil (per Bbl)                               |  | $                               | 52.53  |                                | $ | 36.64   |  | $    | 45.69  |  | $ | 34.20  
|Gas (per Mcf)                               |  |                                 | 7.37   |                                |   | 5.71    |  |      | 6.43   |  |   | 5.74   
|Per BOE                                     |  |                                 | 51.03  |                                |   | 36.03   |  |      | 44.08  |  |   | 34.28  
|Costs and Expenses per BOE                  |  |                                 |        |                                |   |         |  |      |        |  |   |        
|Production costs                            |  |                                 |        |                                |   |         |  |      |        |  |   |        
|Lease operating expenses                    |  | $                               | 6.41   |                                | $ | 6.32    |  | $    | 5.93   |  | $ | 5.83   
|Steam gas costs                             |  |                                 | 3.17   |                                |   | 2.03    |  |      | 2.87   |  |   | 1.43   
|Electricity                                 |  |                                 | 1.58   |                                |   | 1.31    |  |      | 1.33   |  |   | 1.38   
|Production and ad valorem taxes             |  |                                 | 0.90   |                                |   | 0.93    |  |      | 1.04   |  |   | 0.96   
|Gathering and transportation                |  |                                 | 0.44   |                                |   | 0.37    |  |      | 0.47   |  |   | 0.35   
|DD&A per BOE (oil and gas properties)       |  |                                 | 6.89   |                                |   | 5.93    |  |      | 7.06   |  |   | 5.45   



The following table reflects cash receipts
(payments) made with respect to derivative contracts that settled during the periods presented (in millions of dollars):



|                                               |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|---------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                               |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                               |  | 2005                            |        |   | 2004                           |   |       | 2005 |  |   | 2004   |  
|Contracts accounted for using hedge accounting |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Oil revenue                                    |  | $                               | -      |   |                                | $ | (67.0 | )    |  | $ | (53.0  | ) |  | $ | (122.8 | )
|Gas revenue                                    |  |                                 | (1.3   | ) |                                |   | (3.8  | )    |  |   | (3.7   | ) |  |   | (10.1  | )
|Steam gas costs                                |  |                                 | 2.3    |   |                                |   | 1.1   |      |  |   | 5.5    |   |  |   | 1.9    |  
|Mark-to-market contracts                       |  |                                 | (101.4 | ) |                                |   | (10.7 | )    |  |   | (189.3 | ) |  |   | (16.3  | )



Comparison of Three Months Ended
September 30, 2005 to Three Months Ended September 30, 2004



Oil and gas
revenues.    Oil and gas revenues increased $52.5 million, to $262.0 million for 2005 from $209.5 million for 2004. The increase is primarily due to higher realized prices partially offset by lower volumes.



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Oil revenues, excluding the effects of hedging, increased $51.8 million to $243.5 million for 2005 from $191.7 million for 2004
reflecting higher realized prices ($83.2 million) partially offset by lower production ($31.4 million). Our average realized price for oil increased $15.89 to $52.53 per Bbl for 2005 from $36.64 per Bbl for 2004. The increase is primarily
attributable to an improvement in the NYMEX oil price, which averaged $63.16 per Bbl in 2005 versus $43.85 per Bbl in 2004. Oil production decreased to 4.6 MMBbls in 2005 from 5.2 MMBbls in 2004 primarily due to the producing properties we sold in
the fourth quarter of 2004 and the second quarter of 2005.



Hedging had the effect of
decreasing our oil revenues by $25.7 million, or $5.55 per Bbl in 2005 compared to $43.0 million or $8.23 per Bbl in 2004. The 2005 amount is attributable to deferred losses related to 2005 swaps that were terminated in 2004. These losses were
deferred in OCI until the production that was originally hedged was produced and delivered during the third quarter of 2005.



Gas revenues, excluding the effects of hedging, decreased $16.8 million to $45.2 million in 2005 from $62.0 million in 2004 reflecting lower production ($34.9 million) partially
offset by higher realized prices ($18.1 million). Our average realized price for gas of $7.37 per Mcf for 2005 compared to $5.71 per Mcf for 2004. Gas production decreased from 10.9 Bcf in 2004 to 6.1 Bcf in 2005 primarily due to the sale of our
properties in East Texas and Oklahoma in the second quarter of 2005 and shut-in production due to hurricanes Katrina and Rita.



Hedging had the effect of decreasing our gas revenues by $1.0 million, or $0.16 per Mcf in 2005 compared to $1.2 million or $0.11 per Mcf in 2004.



Lease operating expenses.    Lease operating expenses (including steam gas
costs and electricity) decreased $4.9 million, to $63.1 million for 2005 from $68.0 million for 2004, primarily due to lower production volumes. On a per unit basis, lease operating expenses increased to $11.16 per BOE in 2005 versus $9.66 per BOE
in 2004. The per unit increase is primarily attributable to the steam gas costs attributable to the properties acquired from Nuevo. Steam gas costs averaged $3.17 per BOE in 2005 versus $2.03 per BOE in 2004.



Production and ad valorem taxes.    Production and ad valorem taxes
decreased $1.5 million, to $5.1 million for 2005 from $6.6 million for 2004 primarily due to lower production volumes, partially offset by increased oil and gas prices.



Gathering and transportation expenses.    Gathering and transportation expenses decreased $0.1 million, to
$2.5 million for 2005 from $2.6 million for 2004 primarily due to lower production volumes.



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



|                               |  |                                 |        |      |   |       
|------------------------------ |  | ------------------------------- | ------ | ---- | - | ------
|                               |  | Three Months EndedSeptember 30,
|                               |  | 2005                            |        | 2004
|G&A excluding items below      |  | $                               | 12,638 |      | $ | 12,236
|Stock appreciation rights      |  |                                 | 18,224 |      |   | 15,023
|Other stock-based compensation |  |                                 | 21,902 |      |   | 2,267 
|                               |  |                                 |        |      |   |       
|                               |  | $                               | 52,764 |      | $ | 29,526
|                               |  |                                 |        |      |   |       



G&A expense, excluding amounts attributable
to stock appreciation rights (SARs) and other stock based compensation, increased $0.4 million, to $12.6 million for 2005 from $12.2 million for 2004. The increase primarily reflects higher employee headcount and related
compensation costs offset by the absence of $2.4 million of merger related costs associated with the Nuevo acquisition that was included in 2004.



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G&A expense related to SARs was $18.2 million in 2005 and $15.0 million 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
increases in our stock price in 2005 and 2004. Our stock price was $42.82 per share on September 30, 2005 versus $35.53 per share on June 30, 2005 and $23.86 per share on September 30, 2004 versus $18.35 per share on
June 30, 2004. In 2005 and 2004 we made cash payments of $4.4 million and $0.7 million, respectively, for SARs that were exercised during the period.



G&A expense for 2005 and 2004 includes other stock based compensation costs of $21.9 million and $2.3 million, respectively, related to restricted
stock and restricted stock unit grants. Other stock based compensation costs for 2005 includes approximately $19 million related to restricted stock units that vested based on the performance of our common stock.



G&A expense does not include amounts capitalized as part of our acquisition, exploration and
development activities. We capitalized $6.4 million and $4.0 million of G&A expense in 2005 and 2004, respectively.



Depreciation, depletion and amortization, or DD&A.    DD&A expense decreased $2.2 million, to $40.6 million in 2005 from $42.8 million in
2004. Oil and gas DD&A decreased $2.8 million due to lower production partially offset by a higher per unit rate. Our oil and gas unit of production rate increased to $6.89 per BOE in 2005 compared to $5.93 per BOE in 2004. The
increase primarily reflects the effect of our property acquisitions and dispositions.



Accretion expense.    Accretion expense was $1.9 million in 2005 and $3.0 million 2004. The decrease was attributable to asset retirement obligations related to various property sales.



Interest expense.    Interest expense increased $3.5 million, to
$14.5 million for 2005 from $11.0 million for 2004 primarily due to higher outstanding debt as a result of property acquisitions. Interest expense does not include interest capitalized on oil and gas properties not subject to amortization.
We capitalized $0.8 million and $2.1 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 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.



As a result of the increase in oil prices, we recognized a $141.6 million loss related to mark-to-market derivative contracts in the third quarter of 2005. Cash payments related to
these contracts that settled in the third quarter of 2005 totaled $101.4 million. In the third quarter of 2004 we recognized a loss on mark-to-market derivative contracts of $124.7 million. Cash payments related to these contracts that
settled in the third quarter of 2004 totaled $10.8 million.



Income tax
expense.    During interim periods income tax expense is generally based on the estimated effective income tax rate that is expected for the entire year. Changes in the annual effective income tax rate are reflected on a
cumulative basis for the year-to-date in the period in which the change in estimate occurs. At September 30, 2005 the Company estimated its 2005 annual effective tax rate would be a 38.3% benefit compared to the 36.8% benefit we estimated at
June 30, 2005. The increase in the estimated annual effective tax rate primarily reflects the change in the relationship between the



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estimated 2005 financial statement pre-tax loss (which was higher at September 30 than at June 30 primarily due to higher estimated fair value losses on
mark-to-market derivatives) and certain permanent differences between book income and taxable income (primarily enhanced oil recovery (EOR) credits and certain expenses that are not deductible because of IRS limitations). To reflect the increase in
the estimated 2005 annual effective tax rate, the Companys tax rate for the third quarter of 2005 was approximately 47%. At September 30, 2004 we estimated our 2004 effective annual tax rate to be approximately 36.5%.



Variances in our reported tax rate from the 35% federal statutory rate are caused by state income
taxes, EOR credits and various other items. EOR credits are a credit against federal and state income taxes for certain costs related to extracting high-cost oil, utilizing certain prescribed enhanced (tertiary) recovery methods. During
periods when PXP reports net income, the benefit from the EOR credits will generally reduce our effective tax rate below the statutory rates. During periods when PXP reports a net loss, the benefit from the EOR credits will generally increase our
effective tax rate above the statutory rates. In the current period, PXP reported a net loss due to the mark-to-market derivative losses, and the EOR credits had the effect of increasing our tax benefit rate. The increase in the tax benefit rate
attributable to the EOR credits was offset by the items discussed above, resulting in the estimated annual benefit rate of 38.3% for 2005.



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 NOL and EOR credit carryforwards, we do
not expect to pay any significant federal or state income taxes in 2005. As a result of the recent increase in oil prices, in accordance with tax rules, the Company does not expect to earn EOR credits in 2006.



Comparison of Nine Months Ended September 30, 2005 to Nine Months Ended September 30, 2004



Oil and gas revenues.    Oil and gas revenues increased
$213.2 million, to $667.7 million for 2005 from $454.5 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.



Oil revenues, excluding the effects of hedging, increased $247.9 million, to $630.1
million for 2005 from $382.2 million for 2004, reflecting higher realized prices ($128.3 million) and higher production ($119.6 million). Our average realized price for oil increased $11.49 to $45.69 per Bbl for 2005 from $34.20 per
Bbl for 2004. The increase is primarily attributable to an improvement in the NYMEX oil price, which averaged $55.45 per Bbl in 2005 versus $39.13 per Bbl in 2004. Oil production increased to 13.8 MMBbls in 2005 from 11.2 MMBbls in 2004. Production
attributable to the properties acquired from Nuevo was 7.9 MMBbls in 2005 compared to 5.0 MMBbls in 2004.



Hedging had the effect of decreasing our oil revenues by $115.0 million, or $8.34 per Bbl in 2005 compared to $84.7 million or $7.58 per Bbl in 2004. The 2005 amount
includes $82.1 million of deferred losses related to 2005 swaps that were terminated in 2004. These losses were deferred in OCI until the production that was originally hedged was produced and delivered during the first nine months of 2005.



Gas revenues, excluding the effects of hedging, decreased $5.7 million, to $153.6
million in 2005 from $159.2 million in 2004 due to decreased production volumes ($24.5 million) partially offset by higher realized prices ($18.8 million). Our average realized price for gas was $6.43 per Mcf for 2005 compared to $5.74 per
Mcf for 2004. Gas production decreased from 27.7 Bcf in 2004 to 23.9 Bcf in 2005 primarily due to the sale of our properties in East Texas and Oklahoma in the second quarter of 2005 and shut-in production due to hurricanes Katrina and Rita.



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Hedging had the effect of decreasing our gas revenues by $1.0 million, or $0.04 per MCF and decreased our 2004 gas revenues by $2.2
million and our average price by $0.08 per Mcf.



Lease operating
expenses.    Lease operating expenses (including steam gas costs and electricity) increased $43.8 million, to $180.2 million for 2005 from $136.4 million for 2004, primarily due to the properties acquired from Nuevo
which accounted for $98.1 million of our operating expenses in 2005 compared to $63.6 million in 2004. On a per unit basis, lease operating expenses increased to $10.13 per BOE in 2005 versus $8.64 per BOE in 2004. The per unit increase is
primarily attributable to the steam gas costs attributable to the properties acquired from Nuevo. Steam gas costs averaged $2.87 per BOE in 2005 versus $1.43 per BOE in 2004.



Production and ad valorem taxes.    Production and ad valorem taxes increased $3.3 million, to $18.4 million for 2005
from $15.1 million for 2004 primarily due to the properties acquired from Nuevo ($6.9 million in 2005 versus $3.6 million in 2004) and increased oil and gas prices.



Gathering and transportation expenses.    Gathering and transportation expenses increased $2.8 million, to
$8.4 million for 2005 from $5.6 million for 2004 primarily due to the properties acquired from Nuevo ($5.1 million in 2005 versus $2.0 million in 2004).



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



|                               |  |                                 |         |      |   |       
|------------------------------ |  | ------------------------------- | ------- | ---- | - | ------
|                               |  | Nine Months Ended September 30,
|                               |  | 2005                            |         | 2004
|G&A excluding items below      |  | $                               | 35,876  |      | $ | 27,746
|Stock appreciation rights      |  |                                 | 44,101  |      |   | 28,449
|Other stock-based compensation |  |                                 | 28,657  |      |   | 6,645 
|                               |  |                                 |         |      |   |       
|                               |  | $                               | 108,634 |      | $ | 62,840
|                               |  |                                 |         |      |   |       



G&A expense, excluding amounts attributable
to SARs and other stock based compensation, increased $8.2 million, to $35.9 million for 2005 from $27.7 million for 2004, primarily reflecting increased costs resulting from the Nuevo acquisition and to a lesser extent Sarbanes-Oxley
compliance costs. G&A expense for 2004 includes $3.5 million of merger related costs associated with the Nuevo acquisition.



G&A expense related to SARs was $44.1 million in 2005 compared to $28.4 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 $42.82 per share on September 30, 2005 versus $26.00 per share on December 31, 2004 and $23.86 per share on September 30, 2004 versus $15.39 per share on December 31, 2003. In 2005 and 2004 we made cash
payments of $13.4 million and $10.6 million, respectively, for SARs that were exercised during the period.



G&A expense for 2005 and 2004 includes other stock based compensation costs of $28.7 million and $6.6 million, respectively, related to restricted stock and
restricted stock unit grants. Other stock based compensation costs for 2005 includes approximately $19 million related to restricted stock units that vested based on the performance of our common stock.



G&A expense does not include amounts capitalized as part of our acquisition, exploration and
development activities. We capitalized $17.2 million and $10.8 million of G&A expense in 2005 and 2004, respectively.



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Depreciation, depletion and amortization, or DD&A.    DD&A expense increased $41.3 million,
to $130.0 million in 2005 from $88.7 million in 2004. Approximately $39.4 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 $7.06 per BOE in 2005 compared to $5.45 per BOE in 2004. The increase primarily reflects the effect of the Nuevo acquisition and our property acquisitions, offset by the impact of various property sales.



Interest expense.    Interest expense increased $13.5 million, to
$40.0 million for 2005 from $26.5 million for 2004 primarily due to higher outstanding debt as a result of the Nuevo acquisition. Interest expense does not include interest capitalized on oil and gas properties not subject to amortization.
We capitalized $2.1 million and $4.9 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 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.



As a result of the increase in oil prices, we recognized a $629.6 million loss related to mark-to-market derivative contracts in the first nine months of 2005. Cash payments
related to these contracts that settled in the first nine months of 2005 totaled $189.3 million. In addition, we paid $145.4 million in connection with the elimination of our 2006 oil collars during this period. In the first nine months of 2004 we
recognized a loss on mark-to-market derivative contracts of $125.8 million. Cash payments related to these contracts that settled in the first nine months of 2004 totaled $16.3 million.



Debt extinguishment costs.    In connection with the retirement of the debt
assumed in the acquisition of Nuevo, in 2004 we recorded $19.7 million of debt extinguishment costs.



Income tax expense.    During interim periods income tax expense is generally based on the estimated effective income tax rate that is expected for the entire year. At September 30, 2005 we
estimated our 2005 annual effective tax rate to be a 38.3% benefit. Included in this benefit is (1) a cumulative charge of $5.7 million to income tax expense to reflect an increase in the estimated California apportionment factor as a result of
the sale of the Companys properties in East Texas and Oklahoma and the purchase of California properties, and (2) the $10.4 million effect of permanent differences primarily reflecting expenses that are not deductible because of IRS
limitations.



Variances in our reported tax rate from the 35% federal statutory rate are
caused by state income taxes, EOR credits and permanent differences primarily reflecting expenses that are not deductible because of IRS limitations. EOR credits are a credit against federal and state income taxes for certain costs related to
extracting high-cost oil, utilizing certain prescribed enhanced (tertiary) recovery methods. During periods when PXP reports net income, the benefit from the EOR credits will generally reduce our effective tax rate below the statutory
rates. During periods when PXP reports a net loss, the benefit from the EOR credits will generally increase our effective tax rate above the statutory rates. In the current period, PXP reported a net loss due to the mark-to-market derivative losses,
and the EOR credits had the effect of increasing our tax benefit rate. The increase in the tax benefit rate attributable to the EOR credits was offset by the items discussed above, resulting in the estimated annual benefit rate of 36.8% for 2005.
Our estimated effective tax rate was approximately 36.5% in 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 NOL and EOR credit carryforwards, we do not expect to pay any



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significant federal or state income taxes in 2005. As a result of the recent increase in oil prices, in accordance with tax rules, the Company does not expect to earn
EOR credits in 2006.



Liquidity and Capital Resources



Our primary sources of liquidity are cash generated from our operations and our revolving credit
facility. At September 30, 2005 we had approximately $505 million of availability under our revolving credit facility. 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, derivative obligations, 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 use derivative instruments to manage our commodity price risk. This practice may prevent us from receiving the full advantage of increases in oil or
gas prices above the maximum fixed amount specified in the derivative agreement. The level of derivative activity depends on our view of market conditions, available derivative 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, we eliminated all of our 2006 oil price swaps and collars at a cost of approximately $292.7 million which we paid with the proceeds from the property sale
discussed in  Acquisitions and Dispositions. 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



At September 30, 2005 we had a working capital deficit of approximately $168 million. Approximately $119 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. All seven of the financial institutions are participating lenders in our credit facility, with three such counterparties
holding contracts that represent approximately 89% of the fair value of all of our open positions at September 30, 2005. In addition, approximately $42 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 September 30, 2005.



Financing Activities



Senior Revolving Credit Facility.On May 16, 2005, we entered into an Amended and Restated Credit Agreement (the Amended Credit Agreement) which amended and restated our $500 million senior
revolving credit facility. The Amended Credit Agreement increased the facility size to $750 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 may be adjusted based on PXPs oil and gas properties, reserves, other indebtedness and other relevant factors. Our borrowing base was recently redetermined and is currently $1.2 billion. At this time we have not elected to
seek an increase



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in the size of our credit facility. Additionally, the Amended Credit Agreement contains a $75 million sub-limit for letters of credit. The Amended Credit Agreement
matures on May 16, 2010. Collateral consists of 100% of the shares of stock of our domestic subsidiaries and mortgages covering at least 80% of the total present value of our domestic oil and gas properties.



The Amended Credit Agreement also modifies certain covenants to provide additional flexibility
regarding the issuance of debt, the disposition of non oil and gas properties and mergers of subsidiaries. The Amended Credit Agreement also resets as of June 30, 2005 the financial covenant test with respect to tangible net worth. The
effective interest rate on our borrowings under the Amended Credit Agreement was 4.7% at September 30, 2005. At that date we were in compliance with the covenants contained in the Amended Credit Agreement and could have borrowed the full amount
available under the Amended Credit Agreement.



7.125% Senior
Notes.On September 30, 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 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. In the event of a change of control, as defined in the indenture, we will be required to make an offer to repurchase the 7.125% Notes
at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of the repurchase.



The 7.125% 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.



8.75% Senior
Subordinated Notes.    At September 30, 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 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 8.75% Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of the repurchase.



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.



Short-term Credit Facility.    In May 2005 we amended our uncommitted short-term credit facility to extend its term and
increase the facility size. We may make borrowings from time to time until May 27, 2006, not to exceed at any time the maximum principal amount of $25.0 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 May 27, 2006. Each advance under the short-term facility shall bear interest at a rate per annum mutually agreed on by the bank and the Company. No amounts were outstanding under the
short-term credit facility at September 30, 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 $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 the sale.



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Cash Flows



Net cash provided by operating activities was $288.2 million in 2005 compared to $250.2 million in 2004. The 2005 amount includes the effect of the $147.3 million payment
to eliminate all of our 2006 oil price swaps as discussed in Company Overview  Hedge Restructuring. 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 nine months of 2005 derivative cash settlements totaling
$364.9 million, including the $145.4 million payment to eliminate all of our 2006 oil price collars, have been reclassified to financing activities.



Net cash used in investing activities was $53.8 million in 2005 compared to $76.1 million in 2004. Property sales proceeds of $343.1 million in 2005 were partially
offset by outflows which included costs incurred in connection with our oil and gas acquisition, development and exploration activities of $261.6 million and costs associated with property acquisitions of $131.8 million. The 2004 outflows
include costs incurred in connection with our oil and gas acquisition, development and exploration activities of $142.1 million and costs associated with the Nuevo acquisition of $14.2 million, reduced by property sales proceeds of
$85.9 million.



Net cash used in financing activities in 2005 was
$234.6 million, primarily reflecting $128.5 million in net borrowings under our credit facility and the payment of $364.9 million in financing derivative settlements. Net cash used in financing activities in 2004 was
$173.7 million. During the period borrowings under our credit facility increased $52.0 million and we received $248.7 million in proceeds from the issuance of our 7.125% Senior Notes. These proceeds and funds generated by our operations
were used to retire $405.0 million in debt assumed in the Nuevo acquisition and to pay $9.0 million in debt financing costs and $61.3 million in derivative settlements.



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 $425 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, derivative obligations, 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 $42.82 per share on September 30, 2005 versus $26.00 per share on December 31, 2004 and we recognized
$44.1 million of expense in the first nine months of 2005. We incur cash expenditures upon the exercise of SARs, but our common shares outstanding do not increase. At September 30, 2005 we had approximately 2.9 million SARs
outstanding of which 1.8 million were vested. If all of the vested SARs were exercised, based on $42.82, the price of our common stock as of September 30, 2005, we would pay $59.3 million to holders of the SARs. In the first nine
months of 2005 we made cash payments of $13.4 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



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respect to grants of restricted stock and restricted stock units is recognized as it vests for accounting purposes. Pre-tax non-cash stock-based compensation expense
with respect to restricted stock and restricted stock units totaled $28.7 million in the first nine months of 2005.



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 nine months of 2005 and 2004 sales to Plains All American Pipeline, L.P. accounted for approximately 39% and 43%, respectively, of our total revenues and sales to ConocoPhillips accounted for approximately 44% and 31%,
respectively, 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. All seven of the financial institutions are participating lenders in our credit facility, with three such counterparties holding contracts that
represent approximately 89% of the fair value of all of our open positions at September 30, 2005.



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. Critical 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



SFAS No.123R (revised 2004), Share-Based Payment.    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 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.



Property Dispositions Under
Full Cost Accounting.    In February 2005, the SEC issued guidance concerning the specific circumstance of a property disposition by a company that follows the full cost



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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 FASB Statement
No. 141, Business Combinations 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. We determined that an evaluation
of goodwill for impairment under SFAS 142 was not required as a result of the property dispositions in the second quarter of 2005. 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.



FASB
Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations.    In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations (FIN 47). FIN 47clarifies 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. FIN 47 is intended to provide more information about long-lived assets and 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 FIN 47.



SFAS No. 154, Accounting Changes and Error
Corrections.    In June 2005 the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154), which changes the requirements for the accounting for and reporting of a change in
accounting principle by requiring voluntary changes in accounting principles to be reported using retrospective application, unless impracticable to do so. It also applies to changes required by an accounting pronouncement in the unusual instance
that the pronouncement does not include specific transition provisions. Application is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted. We do not
believe that our financial position, results of operations or cash flows will be impacted by SFAS 154.



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 did not enter into buy/sell contracts in periods prior to our acquisition of Nuevo Energy Company in May 2004.



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 sale of natural gas under such contracts is included in gas revenue and the cost to purchase natural gas under such contracts is included in production costs.



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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). In February 2005 the SEC staff directed companies to disclose on the face
of the income statement, if material, the amounts associated with buy/sell contracts and to discuss in a footnote to the financial statements the basis for the underlying accounting.



Our position in response to the SECs question is that our buy/sell contracts are monetary transactions that are outside the scope of APB 29
and that our accounting is also supported by the indicators of gross reporting of purchases and sales in paragraph 3 of Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an
Agent.



In September 2005 in Issue No. 04-13, Accounting for Purchases
and Sales of Inventory with the Same Counterparty. the EITF reached a consensus that two or more inventory transactions with the same counterparty should be viewed as a single nonmonetary transaction for the purposes of applying APB 29 if the
transactions were entered into in contemplation of one another (as determined in accordance with Issue No. 04-13). At its September 28, 2005 meeting, the FASB ratified the consensus reached by the EITF.



Issue No. 04-13 will be applied to transactions completed in reporting periods beginning after
March 15, 2006, whether pursuant to arrangements that were in place at the date of initial application of the consensus or arrangements executed subsequent to that date. Early application is permitted in periods for which financial statements
have not been issued.



We are in the process of reviewing our buy/sell contracts to
determine if transactions under such contracts should be presented net in accordance with Issue No. 04-13. Our financial position, results of operations or cash flows will not be impacted by the implementation of Issue No. 04-13. If we
determine that certain transactions should be presented net in accordance with Issue No. 04-13, certain costs currently included as operating costs will be reclassified as a reduction of revenues.



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. Although we believe that our expectations are based on reasonable assumptions, there are risks, uncertainties and other factors that could cause actual results to be
materially different from those in the forward-looking statements. These factors include, among other things:



| |  |  | 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



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| |  |  | 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 and our other filings with the SEC. Moreover, although we believe the expectations reflected in the forward-looking statements are based
upon reasonable 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  Quantitative and Qualitative 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. Cash flow is only impacted to the extent the actual settlements under the contracts result in making or receiving a
payment from the counterparty. 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.



The contract counterparties for our derivative commodity contracts are all major financial institutions
with Standard & Poors ratings of A or better. All seven of the financial institutions are participating lenders in our revolving credit facility, with three counterparties holding contracts that represent approximately
89% of the fair value of all open positions as of September 30, 2005.



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



Elimination of 2006 Swap & Collar Positions



In March 2005 we
executed a series of contracts that eliminated all of our 2006 oil price swaps and collars at a pre-tax cost of approximately $292.7 million. Approximately $145.4 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. The collars were not accounted for as hedges, therefore, the $145.4 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 March 31, 2005. Approximately $147.3 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 used hedge accounting for the
swaps through March 2005 and as a result the $145.8 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.



In May 2005 we completed the transactions to eliminate all of our 2006 oil price swaps and collars
and paid the $292.7 million due under the contracts with proceeds received from the property sale discussed under Acquisitions and Dispositions. Under SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, the collars were deemed to contain a significant financing element because they included off-market terms. Accordingly, the $145.4 million cash payment for the collars is reflected as a financing cash outflow in our statement of
cash flows. The $147.3 million cash payment for the swaps is reflected as an operating cash outflow in our statement of cash flows. These payments reduced derivative liabilities on our balance sheet.



Floors for 2006 and 2007 Oil Production



In the first half of 2005 we acquired NYMEX put options with a strike price of $45.00 per barrel on
50,000 barrels per day in 2006 and 20,000 barrels per day in 2007. In the third quarter of 2005 we entered into a series of transactions that resulted in us now holding NYMEX put options with a strike price of $55.00 per barrel on 50,000 barrels of
oil per day in 2006 and 2007. These put options cost an average of $4.91 per barrel for 2006 and $5.57 per barrel for 2007, which will be paid when the options are settled. We have elected not to use hedge accounting for the puts, consequently, the
puts are 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.



Ceilings for 2006 Natural Gas Purchases



We purchase natural gas that is utilized in our steam flood operations. In October 2005 we acquired NYMEX call options with a strike price of $12.00 per MMBtu on 30,000 MMBtu of
natural gas per day in 2006. These call options cost an average of $1.04 per MMBtu, which will be paid when the options are settled. We have elected not to use hedge accounting for the calls, consequently, the calls 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.



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Derivative Instruments Designated as Cash Flow Hedges.



We have the following open commodity derivative positions designated as cash flow hedges:



|                         |  |             |  |                 |  |               |  |               |  |      
|------------------------ |  | ----------- |  | --------------- |  | ------------- |  | ------------- |  | -----
|Period                   |  | Commodity   |  | Instrument Type |  | Daily Volumes |  | Average Price |  | Index
|Sales of Production      |  |             |  |                 |  |               |  |              
|2005                     |  |             |  |                 |  |               |  |               |  |      
|4th Quarter              |  | Natural gas |  | Swap            |  | 5,000 /MMBtu  |  | $4.40         |  | Waha 
|Purchases of Natural Gas |  |             |  |                 |  |               |  |              
|2005                     |  |             |  |                 |  |               |  |               |  |      
|4th Quarter              |  | 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.



We have 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                     |  |             |  |                 |  |                 |  |                            
|4th Quarter              |  | Crude oil   |  | Collar          |  | 14,000 /Barrels |  | $26.00 Floor-$29.33 Ceiling |  | WTI  
|4th Quarter              |  | Crude oil   |  | Collar          |  | 22,000 /Barrels |  | $25.00 Floor-$34.76 Ceiling |  | WTI  
|2006                     |  |             |  |                 |  |                 |  |                            
|January - December       |  | Crude oil   |  | Put options     |  | 50,000 /Barrels |  | $55.00 Strike price         |  | WTI  
|2007                     |  |             |  |                 |  |                 |  |                            
|January - December       |  | Crude oil   |  | Collar          |  | 22,000 /Barrels |  | $25.00 Floor-$34.76 Ceiling |  | WTI  
|January - December       |  | Crude oil   |  | Put options     |  | 50,000 /Barrels |  | $55.00 Strike price         |  | WTI  
|2008                     |  |             |  |                 |  |                 |  |                            
|January - December       |  | Crude oil   |  | Collar          |  | 22,000 /Barrels |  | $25.00 Floor-$34.76 Ceiling |  | WTI  
|Purchases of Natural Gas |  |             |  |                 |  |                 |  |                            
|2006                     |  |             |  |                 |  |                 |  |                            
|January - December       |  | Natural gas |  | Call options    |  | 30,000 /MMBtu   |  | $12.00 Strike price         |  | Socal



The average price for the put options and call
options do not reflect the cost to purchase such options.



During the three and nine
months ended September 30, 2005 we recognized pre-tax losses of $141.6 million and $629.6 million, respectively, from derivatives that do not qualify for hedge accounting. During the three and nine months ended
September 30, 2005 we made cash payments of $101.4 million and $189.3 million, respectively, on derivatives that do not qualify for hedge accounting that settled during the period. In addition, in the second quarter we made a
$145.4 million payment to eliminate our 2006 oil price collars.



Physical
Purchase Contracts.



Although not a derivative, at September 30, 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                     |  |             |  |                   |  |               |  |              
|4th Quarter              |  | Natural gas |  | Physical purchase |  | 10,000 /MMBtu |  | $4.19         |  | Socal



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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):



|                                                  |  |                    |        |   |                            |   |        |  
|------------------------------------------------- |  | ------------------ | ------ | - | -------------------------- | - | ------ | -
|                                                  |  | September 30, 2005 |       
|                                                  |  | FairValue          |        |   | Effect of 10%PriceIncrease |  
|Derivatives designated as cash flow hedges        |  | $                  | 3.7    |   |                            | $ | 0.4    |  
|Derivatives not designated as hedging instruments |  |                    | (385.7 | ) |                            |   | (157.3 | )



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 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.



We have NYMEX
put options with a strike price of $55.00 per barrel on 50,000 barrels of oil per day in 2006 and 2007. These put options cost an average of $4.91 per barrel for 2006 and $5.57 per barrel for 2007 (a total of $191 million), which will be paid
when the options are settled. Such amount is not included in the fair value of derivatives not designated as hedging instruments in the foregoing table.



ITEM 4  Controls and Procedures



Disclosure
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 September 30, 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.



Changes in Internal Control Over Financial Reporting



There were no changes in our internal control over financial reporting during the quarter ended
September 30, 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 2 
Unregistered Sales of Equity Securities and Use of Proceeds



Issuer Purchases of Equity Securities



|                                     |  |                                  |  |                              |       |                                                                                  |   |                                                                                                     |  
|------------------------------------ |  | -------------------------------- |  | ---------------------------- | ----- | -------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------- | -
|Period                               |  | Total Number of Shares Purchased |  | Average Price Paid per Share |       | Total Number of Shares Purchased As Part of Publicly Announced Plans
or Programs |   | Maximum Number (orApproximateDollar Value)of Sharesthat May YetBePurchasedUnder thePlans orPrograms
|September 1 to September 30, 2005(1) |  | 5,467                            |  | $                            | 37.45 |                                                                                  | - |                                                                                                     | -

---

|(1) | These shares were withheld upon the vesting of an employee restricted stock grant in order to pay required
withholding taxes.
|--- | -----------------------------------------------------------------------------------------------------------------------------



ITEM 6  Exhibits



|     |   |  |                                                                                                                                               
|---- | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|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, 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: November 3, 2005 |  |  |  |                                         
|                       |  |  | 
|                       |  |  |  | By:                                      |  | /s/ Stephen A. Thorington
|                       |  |  |  |                                          |  |                           |  | Stephen A. Thorington Executive Vice President and Chief Financial
Officer (Principal Financial Officer)



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