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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 March 31, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission file number: 001-31470

PLAINS EXPLORATION & PRODUCTION COMPANY

(Exact name of registrant as specified in its charter)



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

700 Milam Street, Suite 3100

Houston, Texas 77002

(Address of principal executive offices)

(Zip Code)

(713) 579-6000

(Registrants telephone number, including area code)

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

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                     Accelerated filer   ̈                     Non-accelerated filer   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ̈    Nox

71.7 million shares of Common Stock, $0.01 par
value, issued and outstanding at April 30, 2007.



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PLAINS EXPLORATION & PRODUCTION COMPANY

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PART I. FINANCIAL INFORMATION

ITEM 1. Unaudited Condensed Consolidated Financial Statements:



|                                                                                                            |  |   
|----------------------------------------------------------------------------------------------------------- |  | --
|Condensed Consolidated Balance SheetsMarch 31, 2007 and December 31, 2006                                   |  | 1 
|                                                                                                            | 
|Condensed Consolidated Statements of IncomeFor the three months ended March 31, 2007 and 2006               |  | 2 
|                                                                                                            | 
|Condensed Consolidated Statements of Cash FlowsFor the three months ended March 31, 2007 and 2006           |  | 3 
|                                                                                                            | 
|Condensed Consolidated Statements of Comprehensive IncomeFor the three months ended March 31, 2007 and 2006 |  | 4 
|                                                                                                            | 
|Condensed Consolidated Statement of Stockholders EquityFor the three months ended March 31, 2007           |  | 5 
|                                                                                                            | 
|Notes to Condensed Consolidated Financial Statements                                                        |  | 6 
|                                                                                                            | 
|ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations               |  | 20
|                                                                                                            | 
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risks                                         |  | 28
|                                                                                                            | 
|ITEM 4. Controls and Procedures                                                                             |  | 29
|                                                                                                            | 
|PART II. OTHER INFORMATION                                                                                  |  | 30



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands of dollars)



|                                                            |  |               |           |   |                  |   |           |  
|----------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                            |  | March 31,2007 |           |   | December 31,2006 |  
|ASSETS                                                      |  |               |           |   |                  |   |           |  
|Current Assets                                              |  |               |           |   |                  |   |           |  
|Cash and cash equivalents                                   |  | $             | 74,176    |   |                  | $ | 899       |  
|Accounts receivable                                         |  |               | 111,228   |   |                  |   | 113,193   |  
|Inventories                                                 |  |               | 14,586    |   |                  |   | 12,394    |  
|Deferred income taxes                                       |  |               | 46,973    |   |                  |   | 51,084    |  
|Other current assets                                        |  |               | 7,642     |   |                  |   | 7,226     |  
|                                                            |  |               |           |   |                  |   |           |  
|                                                            |  |               | 254,605   |   |                  |   | 184,796   |  
|                                                            |  |               |           |   |                  |   |           |  
|Property and Equipment, at cost                             |  |               |           |   |                  |   |           |  
|Oil and natural gas properties - full cost method           |  |               |           |   |                  |   |           |  
|Subject to amortization                                     |  |               | 2,729,360 |   |                  |   | 2,624,277 |  
|Not subject to amortization                                 |  |               | 161,072   |   |                  |   | 142,096   |  
|Other property and equipment                                |  |               | 45,782    |   |                  |   | 41,392    |  
|                                                            |  |               |           |   |                  |   |           |  
|                                                            |  |               | 2,936,214 |   |                  |   | 2,807,765 |  
|Less allowance for depreciation, depletion and amortization |  |               | (752,299  | ) |                  |   | (700,241  | )
|                                                            |  |               |           |   |                  |   |           |  
|                                                            |  |               | 2,183,915 |   |                  |   | 2,107,524 |  
|                                                            |  |               |           |   |                  |   |           |  
|Goodwill                                                    |  |               | 157,731   |   |                  |   | 158,515   |  
|                                                            |  |               |           |   |                  |   |           |  
|Other Assets                                                |  |               | 17,949    |   |                  |   | 12,393    |  
|                                                            |  |               |           |   |                  |   |           |  
|                                                            |  | $             | 2,614,200 |   |                  | $ | 2,463,228 |  
|                                                            |  |               |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |               |           |   |                  |   |           |  
|Current Liabilities                                         |  |               |           |   |                  |   |           |  
|Accounts payable                                            |  | $             | 126,254   |   |                  | $ | 131,639   |  
|Commodity derivative contracts                              |  |               | 90,736    |   |                  |   | 95,162    |  
|Royalties and revenues payable                              |  |               | 37,126    |   |                  |   | 38,159    |  
|Stock appreciation rights                                   |  |               | 52,080    |   |                  |   | 57,429    |  
|Income taxes payable                                        |  |               |          |   |                  |   | 94,272    |  
|Other current liabilities                                   |  |               | 28,749    |   |                  |   | 43,531    |  
|                                                            |  |               |           |   |                  |   |           |  
|                                                            |  |               | 334,945   |   |                  |   | 460,192   |  
|                                                            |  |               |           |   |                  |   |           |  
|Long-Term Debt                                              |  |               |           |   |                  |   |           |  
|Revolving credit facility                                   |  |               |          |   |                  |   | 235,500   |  
|7% Senior Notes                                             |  |               | 500,000   |   |                  |   |          |  
|                                                            |  |               |           |   |                  |   |           |  
|                                                            |  |               | 500,000   |   |                  |   | 235,500   |  
|                                                            |  |               |           |   |                  |   |           |  
|Other Long-Term Liabilities                                 |  |               |           |   |                  |   |           |  
|Asset retirement obligation                                 |  |               | 135,819   |   |                  |   | 133,420   |  
|Commodity derivative contracts                              |  |               | 19,603    |   |                  |   | 18,114    |  
|Other                                                       |  |               | 20,903    |   |                  |   | 19,040    |  
|                                                            |  |               |           |   |                  |   |           |  
|                                                            |  |               | 176,325   |   |                  |   | 170,574   |  
|                                                            |  |               |           |   |                  |   |           |  
|Deferred Income Taxes                                       |  |               | 472,989   |   |                  |   | 466,279   |  
|                                                            |  |               |           |   |                  |   |           |  
|Commitments and Contingencies (Note 5)                      |  |               |           |   |                  |   |           |  
|Stockholders Equity                                        |  |               |           |   |                  |   |           |  
|Common stock                                                |  |               | 795       |   |                  |   | 792       |  
|Additional paid-in capital                                  |  |               | 974,071   |   |                  |   | 964,472   |  
|Retained earnings                                           |  |               | 485,812   |   |                  |   | 463,864   |  
|Treasury stock, at cost                                     |  |               | (330,737  | ) |                  |   | (298,445  | )
|                                                            |  |               |           |   |                  |   |           |  
|                                                            |  |               | 1,129,941 |   |                  |   | 1,130,683 |  
|                                                            |  |               |           |   |                  |   |           |  
|                                                            |  | $             | 2,614,200 |   |                  | $ | 2,463,228 |  
|                                                            |  |               |           |   |                  |   |           |  

See notes to consolidated financial statements.



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)



|                                                                             |  |                             |         |   |      |   |          |  
|---------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | -------- | -
|                                                                             |  | Three Months EndedMarch 31, |        
|                                                                             |  | 2007                        |         |   | 2006 |  
|Revenues                                                                     |  |                             |         |   |      |   |          |  
|Oil sales                                                                    |  | $                           | 205,518 |   |      | $ | 251,467  |  
|Oil hedging                                                                  |  |                             |        |   |      |   | (36,539  | )
|Gas sales                                                                    |  |                             | 17,535  |   |      |   | 35,554   |  
|Other operating revenues                                                     |  |                             | 1,640   |   |      |   | 1,137    |  
|                                                                             |  |                             |         |   |      |   |          |  
|                                                                             |  |                             | 224,693 |   |      |   | 251,619  |  
|                                                                             |  |                             |         |   |      |   |          |  
|Costs and Expenses                                                           |  |                             |         |   |      |   |          |  
|Production costs                                                             |  |                             |         |   |      |   |          |  
|Lease operating expenses                                                     |  |                             | 44,663  |   |      |   | 42,165   |  
|Steam gas costs                                                              |  |                             | 26,357  |   |      |   | 12,776   |  
|Electricity                                                                  |  |                             | 8,767   |   |      |   | 8,832    |  
|Production and ad valorem taxes                                              |  |                             | 5,259   |   |      |   | 5,768    |  
|Gathering and transportation expenses                                        |  |                             | 186     |   |      |   | 1,584    |  
|General and administrative                                                   |  |                             | 22,497  |   |      |   | 22,972   |  
|Depreciation, depletion and amortization                                     |  |                             | 52,678  |   |      |   | 49,767   |  
|Accretion                                                                    |  |                             | 2,262   |   |      |   | 2,466    |  
|                                                                             |  |                             |         |   |      |   |          |  
|                                                                             |  |                             | 162,669 |   |      |   | 146,330  |  
|                                                                             |  |                             |         |   |      |   |          |  
|Income from Operations                                                       |  |                             | 62,024  |   |      |   | 105,289  |  
|Other Income (Expense)                                                       |  |                             |         |   |      |   |          |  
|Interest expense                                                             |  |                             | (5,360  | ) |      |   | (15,794  | )
|Loss on mark-to-market derivative contracts                                  |  |                             | (20,590 | ) |      |   | (169,328 | )
|Interest and other income                                                    |  |                             | 577     |   |      |   | 324      |  
|                                                                             |  |                             |         |   |      |   |          |  
|Income (Loss) Before Income Taxes and Cumulative Effect of Accounting Change |  |                             | 36,651  |   |      |   | (79,509  | )
|Income tax (expense) benefit                                                 |  |                             |         |   |      |   |          |  
|Current                                                                      |  |                             |        |   |      |   | (8,712   | )
|Deferred                                                                     |  |                             | (16,081 | ) |      |   | 38,751   |  
|                                                                             |  |                             |         |   |      |   |          |  
|Income (Loss) Before Cumulative Effect of Accounting Change                  |  |                             | 20,570  |   |      |   | (49,470  | )
|Cumulative effect of accounting change, net of tax benefit                   |  |                             |        |   |      |   | (2,182   | )
|                                                                             |  |                             |         |   |      |   |          |  
|Net Income (Loss)                                                            |  | $                           | 20,570  |   |      | $ | (51,652  | )
|                                                                             |  |                             |         |   |      |   |          |  
|Earnings (Loss) per Share                                                    |  |                             |         |   |      |   |          |  
|Basic                                                                        |  |                             |         |   |      |   |          |  
|Income (loss) before cumulative effect of accounting change                  |  | $                           | 0.28    |   |      | $ | (0.63    | )
|Cumulative effect of accounting change                                       |  |                             |        |   |      |   | (0.03    | )
|                                                                             |  |                             |         |   |      |   |          |  
|Net income (loss)                                                            |  | $                           | 0.28    |   |      | $ | (0.66    | )
|                                                                             |  |                             |         |   |      |   |          |  
|Diluted                                                                      |  |                             |         |   |      |   |          |  
|Income (loss) before cumulative effect of accounting change                  |  | $                           | 0.28    |   |      | $ | (0.63    | )
|Cumulative effect of accounting change                                       |  |                             |        |   |      |   | (0.03    | )
|                                                                             |  |                             |         |   |      |   |          |  
|Net income (loss)                                                            |  | $                           | 0.28    |   |      | $ | (0.66    | )
|                                                                             |  |                             |         |   |      |   |          |  
|Weighted Average Shares Outstanding                                          |  |                             |         |   |      |   |          |  
|Basic                                                                        |  |                             | 72,463  |   |      |   | 78,437   |  
|                                                                             |  |                             |         |   |      |   |          |  
|Diluted                                                                      |  |                             | 73,490  |   |      |   | 78,437   |  
|                                                                             |  |                             |         |   |      |   |          |  

See notes to consolidated financial statements.



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands of dollars)



|                                                           |  |                             |          |   |      |   |          |  
|---------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | -
|                                                           |  | Three Months EndedMarch 31, |         
|                                                           |  | 2007                        |          |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |                             |          |   |      |   |          |  
|Net income (loss)                                          |  | $                           | 20,570   |   |      | $ | (51,652  | )
|Items not affecting cash flows from operating activities   |  |                             |          |   |      |   |          |  
|Depreciation, depletion, amortization and accretion        |  |                             | 54,940   |   |      |   | 52,233   |  
|Deferred income taxes                                      |  |                             | 16,081   |   |      |   | (38,751  | )
|Cumulative effect of adoption of accounting change         |  |                             |         |   |      |   | 2,182    |  
|Commodity derivative contracts                             |  |                             | 20,590   |   |      |   | 205,867  |  
|Noncash compensation                                       |  |                             | 2,805    |   |      |   | 6,274    |  
|Other noncash items                                        |  |                             | (7       | ) |      |   | (23      | )
|Change in assets and liabilities from operating activities |  |                             |          |   |      |   |          |  
|Accounts receivable and other assets                       |  |                             | 1,126    |   |      |   | 14,141   |  
|Income taxes payable                                       |  |                             | (94,272  | ) |      |   |         |  
|Accounts payable and other liabilities                     |  |                             | (1,879   | ) |      |   | (18,980  | )
|                                                           |  |                             |          |   |      |   |          |  
|Net cash provided by operating activities                  |  |                             | 19,954   |   |      |   | 171,291  |  
|                                                           |  |                             |          |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |                             |          |   |      |   |          |  
|Additions to oil and gas properties                        |  |                             | (144,901 | ) |      |   | (139,489 | )
|Derivative settlements                                     |  |                             | (23,528  | ) |      |   | (17,300  | )
|Other                                                      |  |                             | (4,390   | ) |      |   | (1,530   | )
|                                                           |  |                             |          |   |      |   |          |  
|Net cash used in investing activities                      |  |                             | (172,819 | ) |      |   | (158,319 | )
|                                                           |  |                             |          |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |                             |          |   |      |   |          |  
|Revolving credit facilities                                |  |                             |          |   |      |   |          |  
|Borrowings                                                 |  |                             | 336,775  |   |      |   | 385,200  |  
|Repayments                                                 |  |                             | (572,275 | ) |      |   | (370,200 | )
|Proceeds from issuance of 7% Senior Notes                  |  |                             | 500,000  |   |      |   |         |  
|Cost incurred in connection with financing arrangements    |  |                             | (7,945   | ) |      |   |         |  
|Derivative settlements                                     |  |                             |         |   |      |   | (28,579  | )
|Purchase of treasury stock                                 |  |                             | (32,292  | ) |      |   |         |  
|Other                                                      |  |                             | 1,879    |   |      |   | 214      |  
|                                                           |  |                             |          |   |      |   |          |  
|Net cash provided by (used in) financing activities        |  |                             | 226,142  |   |      |   | (13,365  | )
|                                                           |  |                             |          |   |      |   |          |  
|Net decrease in cash and cash equivalents                  |  |                             | 73,277   |   |      |   | (393     | )
|Cash and cash equivalents, beginning of period             |  |                             | 899      |   |      |   | 1,552    |  
|                                                           |  |                             |          |   |      |   |          |  
|Cash and cash equivalents, end of period                   |  | $                           | 74,176   |   |      | $ | 1,159    |  
|                                                           |  |                             |          |   |      |   |          |  

See notes to consolidated financial statements.



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands of dollars)



|                                                     |  |                             |        |      |   |         |  
|---------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------- | -
|                                                     |  | Three Months EndedMarch 31, |       
|                                                     |  | 2007                        |        | 2006 |  
|Net Income (Loss)                                    |  | $                           | 20,570 |      | $ | (51,652 | )
|Other Comprehensive Income (Loss)                    |  |                             |        |      |   |         |  
|Commodity hedging contracts                          |  |                             |        |      |   |         |  
|Reclassification adjustment for terminated contracts |  |                             |       |      |   | 36,539  |  
|Related tax benefit                                  |  |                             |       |      |   | (13,828 | )
|                                                     |  |                             |        |      |   |         |  
|                                                     |  |                             |       |      |   | 22,711  |  
|                                                     |  |                             |        |      |   |         |  
|Comprehensive Income (Loss)                          |  | $                           | 20,570 |      | $ | (28,941 | )
|                                                     |  |                             |        |      |   |         |  

See notes to consolidated financial statements.



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PLAINS EXPLORATION AND PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (Unaudited)

(share and dollar amounts in thousands)



|                                                |  |              |  |        |     |                            |   |                             |  |   |         |  |        |       |  |   |          |   |  |   |           |  
|----------------------------------------------- |  | ------------ |  | ------ | --- | -------------------------- | - | --------------------------- |  | - | ------- |  | ------ | ----- |  | - | -------- | - |  | - | --------- | -
|                                                |  |              |  |        |     | Additional Paid-in Capital |   | Retained Earnings (Deficit) |  |   |         |  |        |       |  |   |         
|                                                |  | Common Stock |  |        |     | Treasury Stock             |   |                             |  |  
|                                                |  | Shares       |  | Amount |     |                            |   | Shares                      |  |   | Amount  |  |        | Total | 
|Balance at December 31, 2006                    |  | 79,172       |  |        | 792 |                            |   | 964,472                     |  |   | 463,864 |  | (6,730 | )     |  |   | (298,445 | ) |  |   | 1,130,683 |  
|Cumulative effect of accounting change (Note 4) |  |             |  |        |    |                            |   |                            |  |   | 1,378   |  |       |       |  |   |         |   |  |   | 1,378     |  
|Net income                                      |  |             |  |        |    |                            |   |                            |  |   | 20,570  |  |       |       |  |   |         |   |  |   | 20,570    |  
|Restricted stock awards                         |  | 300          |  |        | 3   |                            |   | 9,540                       |  |   |        |  |       |       |  |   |         |   |  |   | 9,543     |  
|Treasury stock transactions                     |  |             |  |        |    |                            |   |                            |  |   |        |  | (703   | )     |  |   | (32,292  | ) |  |   | (32,292   | )
|Exercise of stock options and other             |  | 5            |  |        |    |                            |   | 59                          |  |   |        |  |       |       |  |   |         |   |  |   | 59        |  
|                                                |  |              |  |        |     |                            |   |                             |  |   |         |  |        |       |  |   |          |   |  |   |           |  
|Balance at March 31, 2007                       |  | 79,477       |  | $      | 795 |                            | $ | 974,071                     |  | $ | 485,812 |  | (7,433 | )     |  | $ | (330,737 | ) |  | $ | 1,129,941 |  
|                                                |  |              |  |        |     |                            |   |                             |  |   |         |  |        |       |  |   |          |   |  |   |           |  

See notes to consolidated financial statements.



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PLAINS EXPLORATION & PRODUCTION COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1Organization and Significant Accounting Policies

The condensed consolidated financial statements of Plains Exploration & Production Company, a Delaware corporation, (PXP, us, our, or we) include the accounts of all its wholly owned
subsidiaries. All significant intercompany transactions have been eliminated. Certain reclassifications have been made to prior year statements to conform to the current year presentation.

We are an independent energy company that is engaged in the upstream oil and gas business. The upstream business acquires, exploits, develops, explores for and produces oil and gas. Our
upstream activities are all located in the United States.

These condensed consolidated financial statements and related notes present our
consolidated financial position as of March 31, 2007 and December 31, 2006, the results of our operations, cash flows and comprehensive income for the three months ended March 31, 2007 and 2006 and the changes in
stockholders equity for the three months ended March 31, 2007. 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. The results of our operations for the three months ended March 31, 2007 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, 2006.

Asset Retirement
Obligations. The following table reflects the changes in our asset retirement obligation during the three months ended March 31, 2007 (in thousands):



|                                                  |  |   |         |  
|------------------------------------------------- |  | - | ------- | -
|Asset retirement obligation - December 31, 2006   |  | $ | 137,311 |  
|Settlements                                       |  |   | (841    | )
|Accretion expense                                 |  |   | 2,262   |  
|Asset retirement additions                        |  |   | 528     |  
|                                                  |  |   |         |  
|Asset retirement obligation - March 31, 2007 (1)  |  | $ | 139,260 |  
|                                                  |  |   |         |  
|(1) $3.4 million included in current liabilities. |  |   |         |  

Earnings Per Share. For the three months ended March 31, 2007 and 2006 the weighted
average shares outstanding for computing basic and diluted earnings per share (EPS) were (in thousands):



|                                                                                                                             |  |                             |  |       
|---------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- |  | ------
|                                                                                                                             |  | Three MonthsEnded March 31,
|                                                                                                                             |  | 2007                        |  | 2006  
|Common shares outstanding - basic                                                                                            |  | 72,463                      |  | 78,437
|Unvested restricted stock, restricted stock units and stock options                                                          |  | 1,027                       |  |      
|                                                                                                                             |  |                             |  |       
|Common shares outstanding - diluted                                                                                          |  | 73,490                      |  | 78,437
|                                                                                                                             |  |                             |  |       
|Unvested restricted stock, restricted stock units and stock options not included in computing EPS due to antidilutive effect |  |                            |  | 896   
|                                                                                                                             |  |                             |  |       

In computing earnings per share, no adjustments were made to reported net income.



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Inventories. Oil inventories are carried at the lower of the cost to produce or market value and
materials and supplies inventories are stated at the lower of cost or market with cost determined on an average cost method. Our inventories consist of (in thousands):



|                       |  |               |        |                  |   |       
|---------------------- |  | ------------- | ------ | ---------------- | - | ------
|                       |  | March 31,2007 |        | December 31,2006
|Oil                    |  | $             | 5,299  |                  | $ | 4,954 
|Materials and supplies |  |               | 9,287  |                  |   | 7,440 
|                       |  |               |        |                  |   |       
|                       |  | $             | 14,586 |                  | $ | 12,394
|                       |  |               |        |                  |   |       

Stockholders Equity. Our Board of Directors has authorized the repurchase of up to $500
million of our common stock. The shares are repurchased from time to time in open market transactions or privately negotiated transactions at our discretion, subject to market conditions and other factors. In the three months ended
March 31, 2007 we repurchased 0.7 million common shares at a cost of $32 million. As of March 31, 2007 we had repurchased a total of 7.3 million common shares at a cost of $327 million.

Stock Based Compensation. We account for stock based compensation in accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No.123R Share-Based Payment (SFAS 123R) that requires that the compensation cost relating to share-based payment transactions be recognized in financial statements.

Stock based compensation expense for the three months ended March 31, 2007 was $7.3 million of which $5.6 million is included in general and
administrative expense (G&A), $0.3 million is included in lease operating expense and $1.4 million is included in oil and natural gas properties. Stock based compensation expense for the three months ended March 31,
2006 was $9.1 million of which $7.7 million is included in G&A and $1.4 million is included in oil and natural gas properties.

During the three months ended March 31, 2007 0.7 million stock appreciation rights (SARs) were granted. At March 31, 2007 there were 2.8 million SARs outstanding with a weighted average exercise price of
$27.20 and 1.5 million of such SARs were exercisable with a weighted exercise price of $13.35. During the three months ended March 31, 2007 1.0 million restricted stock units (RSUs) were granted. At
March 31, 2007 5.2 million RSUs were outstanding, 3.9 million of which are classified as equity instruments and 1.3 million of which are classified as liability instruments.

Income Taxes. Effective January 1, 2007 we adopted FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (an
interpretation of FASB Statement No. 109) (FIN 48). This interpretation clarified the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement
attribute for a tax position taken or expected to be taken in a tax return. See Note 4.

Recent Accounting Pronouncements. In September 2006,
the FASB issued SFAS No. 157, Fair Value Measurements which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework
for measuring fair value and expands the related disclosure requirements. We are currently evaluating the potential impact of this statement.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115 which is effective for fiscal years beginning after
November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value
option has been elected will be reported in earnings. We are currently evaluating the potential impact of this statement.



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Note 2Long-Term Debt

At March 31, 2007 and December 31, 2006 long-term debt consisted of (in thousands):



|                                 |  |               |         |                  |   |        
|-------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                                 |  | March 31,2007 |         | December 31,2006
|Senior revolving credit facility |  | $             |        |                  | $ | 235,500
|7% senior notes                  |  |               | 500,000 |                  |   |       
|                                 |  |               |         |                  |   |        
|                                 |  | $             | 500,000 |                  | $ | 235,500
|                                 |  |               |         |                  |   |        

In March 2007 we issued $500 million of 7% Senior Notes due 2017 (the 7% Senior Notes) at
par. The net proceeds were used to repay borrowings under our senior revolving credit facility and for general corporate purposes. We may redeem all or part of the 7% Senior Notes on or after March 15, 2012 at specified redemption prices
and prior to such date at a make-whole redemption price. In addition, prior to March 15, 2010 we may, at our option, redeem up to 35% of the 7% Senior Notes with the proceeds from certain equity offerings. 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% Senior Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of the repurchase.

The 7% Senior Notes are our general unsecured, senior obligations. The 7% Senior Notes are jointly and severally guaranteed on a senior unsecured basis by certain
of our existing domestic subsidiaries. In the future, the guarantees may be released or terminated under certain circumstances. The 7% Senior Notes rank senior in right of payment to all of our future subordinated indebtedness; pari passu in
right of payment with any of our senior unsecured indebtedness that is not by its terms subordinated to the 7% Senior Notes; effectively junior to our existing and future secured indebtedness, including indebtedness under our revolving credit
facility, to the extent of the value of our assets constituting collateral securing that indebtedness; and effectively subordinate to all existing and future indebtedness and other liabilities (other than indebtedness and liabilities owed to us) of
our non-guarantor subsidiaries.

The indenture governing the 7% Senior Notes contains covenants that, among other things, limit our ability and the
ability of our restricted subsidiaries to incur additional debt; make certain investments or pay dividends or distributions on our capital stock or purchase or redeem or retire capital stock; sell assets, including capital stock of our restricted
subsidiaries; restrict dividends or other payments by restricted subsidiaries; create liens that secure debt; enter into transactions with affiliates; and merge or consolidate with another company.

Subsequent Event

On April 23, 2007, we entered into an Amended
and Restated Credit Agreement (the Amended Credit Agreement) under which the aggregate commitments of the lenders is $1.0 billion and can be increased to $1.15 billion if certain conditions are met. The Amended Credit Agreement
provides for an initial borrowing base of $1.0 billion that will be redetermined on an 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. The Amended Credit Agreement also contains a $150 million sub-limit on letters of credit. The Amended Credit Agreement matures on April 23, 2012. Collateral
consists of 100% of the shares of stock of our material domestic subsidiaries and mortgages covering at least 75% of the total present value of our domestic oil and gas properties.

The Amended Credit Agreement contains negative covenants that limit our ability, as well as the ability of our restricted subsidiaries to, among other things, incur additional debt, pay dividends on stock,
make distributions of cash or property, change the nature of our business or operations, redeem stock or redeem subordinated debt, make investments, create liens, enter into leases, sell assets, sell capital stock of subsidiaries, guarantee other
indebtedness, enter into agreements that restrict dividends from subsidiaries, enter into certain types of swap agreements, enter into gas imbalance or take-or-pay arrangements, merge or consolidate and enter into transactions with affiliates. In
addition, we are required to maintain a ratio of debt to EBITDAX (as defined) of no greater than 4.25 to 1.00.

In connection with the closing of the
property acquisition discussed in Note 7, we have received a commitment from our lead bank, subject to certain conditions and contingencies, for up to $1.3 billion in availability under this credit facility.



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Note 3Derivative Instruments and Hedging Activities

General

We use various derivative instruments to manage our exposure to commodity price risk on sales of oil and gas
production. All derivative instruments are recorded on the balance sheet at fair value. If a derivative does not qualify as a hedge or is not designated as a hedge, the changes in fair value, both realized and unrealized, are recognized currently in
our income statement as a gain or loss on mark-to-market derivative contracts. Cash flows are only impacted to the extent the actual settlements under the contracts result in making a payment to or receiving a payment from the counterparty. We do
not currently use hedge accounting for our derivative instruments, because the derivatives do not qualify or we have elected not to use hedge accounting. 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.

Under SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, in 2006 certain of our derivatives were deemed to contain a significant financing element because they included off-market terms and cash settlements with respect to such derivatives are required
to be reflected as financing activities in the Statement of Cash Flows. Cash settlements with respect to derivatives that are qualified for hedge accounting and do not have a significant financing element are reflected as operating activities in the
Statement of Cash Flows. Cash settlements with respect to derivatives that are not qualified for hedge accounting and do not have a significant financing element are reflected as investing activities in the Statement of Cash Flows.

At March 31, 2007 we had the following open commodity derivative positions, none of which were designated as hedging instruments:



|                              |  |                |  |              |  |              |                    |       |    
|----------------------------- |  | -------------- |  | ------------ |  | ------------ | ------------------ | ----- | ---
|Period                        |  | InstrumentType |  | DailyVolumes |  | AveragePrice |                    | Index
|Sales of Crude Oil Production |  |                |  |              |  |              |                    |       |    
|2007                          |  |                |  |              |  |              |                    |       |    
|April - Dec                   |  | Put options    |  | 50,000 Bbls  |  | $            | 55.00 Strike price |       | WTI
|2008                          |  |                |  |              |  |              |                    |       |    
|Jan - Dec                     |  | Put options    |  | 42,000 Bbls  |  | $            | 55.00 Strike price |       | WTI

The average strike price for the put options does not reflect the cost to purchase such options. The only
cash settlements we are required to make on these contracts are option premiums of $84 million for the last nine months of 2007 and $58 million for 2008, including interest.

Income Statement, Cash Payments and Other Comprehensive Income

During the three months ended March 31, 2007
and 2006 pre-tax losses recognized in our income statement for derivatives were as follows (in thousands):



|                                              |  |                             |        |      |   |        
|--------------------------------------------- |  | --------------------------- | ------ | ---- | - | -------
|                                              |  | Three Months EndedMarch 31,
|                                              |  | 2007                        |        | 2006
|Loss on mark-to-market derivative contracts   |  | $                           | 20,590 |      | $ | 169,328
|Loss reclassified from OCI and recognized in: |  |                             |        |      |   |        
|Oil revenues                                  |  |                             |       |      |   | 36,539 

At December 31, 2006 there were no amounts in OCI. The 2006 amounts that were reclassified from OCI and
recognized in oil revenues represent deferred losses attributable to 2006 swaps that were cancelled in 2005.



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During the three months ended March 31, 2007 and 2006 cash (payments)/receipts for derivatives were as
follows (in thousands):



|                                               |  |                             |         |   |      |   |         |  
|---------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                               |  | Three Months EndedMarch 31, |        
|                                               |  | 2007                        |         |   | 2006 |  
|Mark-to-market contracts                       |  |                             |         |   |      |   |         |  
|Crude oil options                              |  | $                           | (23,528 | ) |      | $ | (44,393 | )
|Natural gas call options                       |  |                             |        |   |      |   | (2,817  | )
|Contracts accounted for using hedge accounting |  |                             |         |   |      |   |         |  
|Natural gas purchases                          |  |                             |        |   |      |   | 1,331   |  

Note 4Income Taxes

Effective January 1, 2007 we adopted FIN 48. This interpretation clarified the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. At January 1, 2007 we recorded the cumulative effect of the change in accounting principle as a $1.4 million increase
in the opening balance of retained earnings, a $0.8 million decrease in goodwill and a $2.2 million reduction in our existing reserves for uncertain tax positions. The adjustment to goodwill relates to tax positions taken with respect to
Nuevo Energy Company (Nuevo) and 3TEC Energy Corporation in periods prior to our mergers in 2004 and 2003, respectively.

We file income
tax returns in the U.S. federal jurisdiction, and various state jurisdictions. We are no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 1996. The Internal Revenue Service (IRS)
commenced an examination of our U.S. income tax returns for 2003 and 2004 that is anticipated to be completed by the end of 2007. In addition, the IRS has commenced an examination of Nuevos U.S. income tax returns for 2003 and 2004 that is
anticipated to be completed by the end of 2007. As of March 31, 2007, the IRS had not proposed any significant adjustments that would result in a material change to our financial position.

We recognize interest and penalties related to unrecognized tax positions in income tax expense. At January 1, 2007 and March 31, 2007 we had
approximately $18.4 million of unrecognized tax benefits, approximately $5.5 million of which would affect our effective tax rate if recognized. Included in such amounts are interest and penalties of an immaterial amount.

Note 5Commitments and Contingencies

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

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. We cannot assure you 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. The present value of such abandonment costs, $39 million ($78 million undiscounted), 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 $46 million). To secure its abandonment obligations the purchaser of the properties is required to periodically deposit



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funds into an escrow account. At March 31, 2007 the escrow account had a balance of $6 million. The fair value of our guarantee, $0.3 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 population density of southern California. Although we maintain insurance coverage
considered to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of high premium costs. We maintain coverage for earthquake damages in California but this coverage may not
provide for the full effect of damages that could occur and we may be subject to additional liabilities. The occurrence of a significant event that is not fully insured against could have a material adverse effect on our financial position. Our
insurance does not cover every potential risk associated with operating our pipelines, including the potential loss of significant revenues. Consistent with insurance coverage generally available to the industry, our insurance policies provide
limited coverage for losses or liabilities relating to pollution, with broader coverage for sudden and accidental occurrences.

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

CMS sold its interest in the Congolese properties to a
subsidiary of Perenco, S.A. (Perenco) in 2002. Both CMS and Perenco, have received from the IRS, in accordance with the U.S. consolidated return regulations, a closing agreement confirming that the transaction will not trigger recapture.
In 2004 Nuevo sold its interest in the Congolese properties to Perenco. We and Perenco have finalized closing agreements 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. There is no remaining contingent liability relative to Nuevos former interest. At December 31, 2006 the estimated remaining contingent liability relative to CMS former interest is $19.5 million, 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.

On November 15, 2005, the United States Court of Federal Claims issued a ruling granting the plaintiffs motion for summary
judgment as to liability and partial summary judgment as to damages in the breach of contract lawsuit Amber Resources Company et al. v. United States, Case No. 02-30c. The Courts ruling also denied the United States motion to
dismiss and motion for summary judgment. The United States Court of Federal Claims ruled that the federal governments imposition of new and onerous requirements that stood as a significant obstacle to oil and gas development breached
agreements that it made when it sold 36 federal leases offshore California. The Court further ruled that the Government must give back to the current lessees the more than $1.1 billion in lease bonuses it had received at the time of sale. On
October 31, 2006, the Court issued an unfavorable decision on the plaintiffs motion for partial summary judgment concerning plaintiffs additional claims regarding the hundreds of millions of dollars that have been spent in the
successful efforts to find oil and gas in the disputed lease area, and other matters. Plaintiffs filed a motion for final judgment on November 29, 2006 and the court granted such motion on January 11, 2007. Judgment on the $1.1
billion was filed January 12, 2007. The United States has filed its notice of appeal and Plaintiffs intend to file a cross-appeal concerning the Courts October 31, 2006 decision. No payments will be made until all appeals have
either been waived or exhausted. We are among the current lessees of the 36 leases. Our share of the $1.1 billion award is in excess of $80 million.

We are a defendant in various other 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.



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Note 6Consolidating Financial Statements

We are the issuer of the 7% Senior Notes, which are jointly and severally guaranteed on a full and unconditional basis by certain of our existing domestic subsidiaries (referred to as Guarantor Subsidiaries).
Certain of our subsidiaries do not guarantee the Senior Notes (referred to as Non-Guarantor Subsidiaries).

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



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



| |  |  | the Guarantor Subsidiaries on a combined basis;
| | - |  | -----------------------------------------------



| |  |  | the Non-Guarantor Subsidiaries on a combined basis;
| | - |  | ---------------------------------------------------



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



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



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

MARCH 31, 2007

(in thousands)



|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|----------------------------------------------------------- |  | ------ | --------- | - | --------------------- | - | -------- | ------------------------- |  | ------------------------ | ------ |  | ------------ | -------- | - |  | - | --------- | -
|                                                            |  | Issuer |           |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  | IntercompanyEliminations |        |  | Consolidated |         
|ASSETS                                                      |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Current Assets                                              |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Cash and cash equivalents                                   |  | $      | 74,175    |   |                       | $ | 1        |                           |  | $                        |       |  | $            |         |   |  | $ | 74,176    |  
|Accounts receivable and other current assets                |  |        | 152,370   |   |                       |   | 28,059   |                           |  |                          |       |  |              |         |   |  |   | 180,429   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|                                                            |  |        | 226,545   |   |                       |   | 28,060   |                           |  |                          |       |  |              |         |   |  |   | 254,605   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Property and Equipment, at cost                             |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Oil and natural gas properties - full cost method           |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Subject to amortization                                     |  |        | 2,206,409 |   |                       |   | 522,951  |                           |  |                          |       |  |              |         |   |  |   | 2,729,360 |  
|Not subject to amortization                                 |  |        | 141,858   |   |                       |   | 19,214   |                           |  |                          |       |  |              |         |   |  |   | 161,072   |  
|Other property and equipment                                |  |        | 32,812    |   |                       |   | 1,938    |                           |  |                          | 11,032 |  |              |         |   |  |   | 45,782    |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|                                                            |  |        | 2,381,079 |   |                       |   | 544,103  |                           |  |                          | 11,032 |  |              |         |   |  |   | 2,936,214 |  
|Less allowance for depreciation, depletion and amortization |  |        | (417,221  | ) |                       |   | (390,967 | )                         |  |                          |       |  |              | 55,889   |   |  |   | (752,299  | )
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|                                                            |  |        | 1,963,858 |   |                       |   | 153,136  |                           |  |                          | 11,032 |  |              | 55,889   |   |  |   | 2,183,915 |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Investment in and Advances to Subsidiaries                  |  |        | 295,598   |   |                       |   |         |                           |  |                          |       |  |              | (295,598 | ) |  |   |          |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Other Assets                                                |  |        | 1,577     |   |                       |   | 174,103  |                           |  |                          |       |  |              |         |   |  |   | 175,680   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|                                                            |  | $      | 2,487,578 |   |                       | $ | 355,299  |                           |  | $                        | 11,032 |  | $            | (239,709 | ) |  | $ | 2,614,200 |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|                                                            |  |        |           |   |                      
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Current Liabilities                                         |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Accounts payable and other current liabilities              |  | $      | 195,310   |   |                       | $ | 48,899   |                           |  | $                        |       |  | $            |         |   |  | $ | 244,209   |  
|Commodity derivative contracts                              |  |        | 90,736    |   |                       |   |         |                           |  |                          |       |  |              |         |   |  |   | 90,736    |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|                                                            |  |        | 286,046   |   |                       |   | 48,899   |                           |  |                          |       |  |              |         |   |  |   | 334,945   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Long-Term Debt                                              |  |        | 500,000   |   |                       |   |         |                           |  |                          |       |  |              |         |   |  |   | 500,000   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Other Long-Term Liabilities                                 |  |        | 156,766   |   |                       |   | 19,559   |                           |  |                          |       |  |              |         |   |  |   | 176,325   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Payable to Parent                                           |  |        |          |   |                       |   | (154,944 | )                         |  |                          | 8,027  |  |              | 146,917  |   |  |   |          |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Deferred Income Taxes                                       |  |        | 414,825   |   |                       |   | 34,724   |                           |  |                          |       |  |              | 23,440   |   |  |   | 472,989   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|Stockholders Equity                                        |  |        | 1,129,941 |   |                       |   | 407,061  |                           |  |                          | 3,005  |  |              | (410,066 | ) |  |   | 1,129,941 |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  
|                                                            |  | $      | 2,487,578 |   |                       | $ | 355,299  |                           |  | $                        | 11,032 |  | $            | (239,709 | ) |  | $ | 2,614,200 |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |        |  |              |          |   |  |   |           |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

DECEMBER 31, 2006

(in thousands)



|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|----------------------------------------------------------- |  | ------ | --------- | - | --------------------- | - | -------- | ------------------------- |  | ------------------------ | ----- |  | ------------ | -------- | - |  | - | --------- | -
|                                                            |  | Issuer |           |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  | IntercompanyEliminations |       |  | Consolidated |         
|ASSETS                                                      |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Current Assets                                              |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Cash and cash equivalents                                   |  | $      | 896       |   |                       | $ | 3        |                           |  | $                        |      |  | $            |         |   |  | $ | 899       |  
|Accounts receivable and other current assets                |  |        | 156,242   |   |                       |   | 27,655   |                           |  |                          |      |  |              |         |   |  |   | 183,897   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|                                                            |  |        | 157,138   |   |                       |   | 27,658   |                           |  |                          |      |  |              |         |   |  |   | 184,796   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Property and Equipment, at cost                             |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Oil and natural gas properties - full cost method           |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Subject to amortization                                     |  |        | 2,131,959 |   |                       |   | 492,318  |                           |  |                          |      |  |              |         |   |  |   | 2,624,277 |  
|Not subject to amortization                                 |  |        | 124,830   |   |                       |   | 17,266   |                           |  |                          |      |  |              |         |   |  |   | 142,096   |  
|Other property and equipment                                |  |        | 31,237    |   |                       |   | 1,564    |                           |  |                          | 8,591 |  |              |         |   |  |   | 41,392    |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|                                                            |  |        | 2,288,026 |   |                       |   | 511,148  |                           |  |                          | 8,591 |  |              |         |   |  |   | 2,807,765 |  
|Less allowance for depreciation, depletion and amortization |  |        | (390,931  | ) |                       |   | (309,310 | )                         |  |                          |      |  |              |         |   |  |   | (700,241  | )
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|                                                            |  |        | 1,897,095 |   |                       |   | 201,838  |                           |  |                          | 8,591 |  |              |         |   |  |   | 2,107,524 |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Investment in and Advances to Subsidiaries                  |  |        | 352,667   |   |                       |   |         |                           |  |                          |      |  |              | (352,667 | ) |  |   |          |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Other Assets                                                |  |        | (1,674    | ) |                       |   | 172,582  |                           |  |                          |      |  |              |         |   |  |   | 170,908   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|                                                            |  | $      | 2,405,226 |   |                       | $ | 402,078  |                           |  | $                        | 8,591 |  | $            | (352,667 | ) |  | $ | 2,463,228 |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Current Liabilities                                         |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Accounts payable and other current liabilities              |  | $      | 320,899   |   |                       | $ | 44,131   |                           |  | $                        |      |  | $            |         |   |  | $ | 365,030   |  
|Commodity derivative contracts                              |  |        | 95,162    |   |                       |   |         |                           |  |                          |      |  |              |         |   |  |   | 95,162    |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|                                                            |  |        | 416,061   |   |                       |   | 44,131   |                           |  |                          |      |  |              |         |   |  |   | 460,192   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Long-Term Debt                                              |  |        | 235,500   |   |                       |   |         |                           |  |                          |      |  |              |         |   |  |   | 235,500   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Other Long-Term Liabilities                                 |  |        | 151,365   |   |                       |   | 19,209   |                           |  |                          |      |  |              |         |   |  |   | 170,574   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Payable to Parent                                           |  |        |          |   |                       |   | (101,526 | )                         |  |                          | 5,585 |  |              | 95,941   |   |  |   |          |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Deferred Income Taxes                                       |  |        | 471,617   |   |                       |   | (5,338   | )                         |  |                          |      |  |              |         |   |  |   | 466,279   |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|Stockholders Equity                                        |  |        | 1,130,683 |   |                       |   | 445,602  |                           |  |                          | 3,006 |  |              | (448,608 | ) |  |   | 1,130,683 |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  
|                                                            |  | $      | 2,405,226 |   |                       | $ | 402,078  |                           |  | $                        | 8,591 |  | $            | (352,667 | ) |  | $ | 2,463,228 |  
|                                                            |  |        |           |   |                       |   |          |                           |  |                          |       |  |              |          |   |  |   |           |  



14



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED MARCH 31, 2007

(in thousands)



|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|--------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------- | ------------------------- |  | ------------------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                    |  | Issuer |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  | IntercompanyEliminations |   |  | Consolidated |        
|Revenues                                            |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Oil sales                                           |  | $      | 180,387 |   |                       | $ | 25,131  |                           |  | $                        |  |  | $            |        |   |  | $ | 205,518 |  
|Gas sales                                           |  |        | 7,312   |   |                       |   | 10,223  |                           |  |                          |  |  |              |        |   |  |   | 17,535  |  
|Other operating revenues                            |  |        | 1,491   |   |                       |   | 149     |                           |  |                          |  |  |              |        |   |  |   | 1,640   |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|                                                    |  |        | 189,190 |   |                       |   | 35,503  |                           |  |                          |  |  |              |        |   |  |   | 224,693 |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Costs and Expenses                                  |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Production costs                                    |  |        | 71,795  |   |                       |   | 13,437  |                           |  |                          |  |  |              |        |   |  |   | 85,232  |  
|General and administrative                          |  |        | 20,193  |   |                       |   | 2,304   |                           |  |                          |  |  |              |        |   |  |   | 22,497  |  
|Depreciation, depletion, amortization and accretion |  |        | 28,699  |   |                       |   | 82,130  |                           |  |                          |  |  |              | (55,889 | ) |  |   | 54,940  |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|                                                    |  |        | 120,687 |   |                       |   | 97,871  |                           |  |                          |  |  |              | (55,889 | ) |  |   | 162,669 |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Income (Loss) from Operations                       |  |        | 68,503  |   |                       |   | (62,368 | )                         |  |                          |  |  |              | 55,889  |   |  |   | 62,024  |  
|Other Income (Expense)                              |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Equity in earnings of subsidiaries                  |  |        | (6,093  | ) |                       |   |        |                           |  |                          |  |  |              | 6,093   |   |  |   |        |  
|Interest expense                                    |  |        | (832    | ) |                       |   | (4,528  | )                         |  |                          |  |  |              |        |   |  |   | (5,360  | )
|Loss on mark-to-market derivative contracts         |  |        | (20,590 | ) |                       |   |        |                           |  |                          |  |  |              |        |   |  |   | (20,590 | )
|Interest and other income                           |  |        | 577     |   |                       |   |        |                           |  |                          |  |  |              |        |   |  |   | 577     |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Income (Loss) Before Income Taxes                   |  |        | 41,565  |   |                       |   | (66,896 | )                         |  |                          |  |  |              | 61,982  |   |  |   | 36,651  |  
|Income tax benefit (expense)                        |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Current                                             |  |        | 236     |   |                       |   | (236    | )                         |  |                          |  |  |              |        |   |  |   |        |  
|Deferred                                            |  |        | (21,231 | ) |                       |   | 28,590  |                           |  |                          |  |  |              | (23,440 | ) |  |   | (16,081 | )
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Net Income (Loss)                                   |  | $      | 20,570  |   |                       | $ | (38,542 | )                         |  | $                        |  |  | $            | 38,542  |   |  | $ | 20,570  |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  



15



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED MARCH 31, 2006

(in thousands)



|                                                                             |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|---------------------------------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | - | -------- | -
|                                                                             |  | Issuer |          |   | GuarantorSubsidiaries |   |         | IntercompanyEliminations |  |   | Consolidated |  
|Revenues                                                                     |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Oil and liquids                                                              |  | $      | 184,155  |   |                       | $ | 30,773  |                          |  | $ |             |   |  | $ | 214,928  |  
|Natural gas                                                                  |  |        | 5,341    |   |                       |   | 30,213  |                          |  |   |             |   |  |   | 35,554   |  
|Other operating revenues                                                     |  |        | 581      |   |                       |   | 556     |                          |  |   |             |   |  |   | 1,137    |  
|                                                                             |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|                                                                             |  |        | 190,077  |   |                       |   | 61,542  |                          |  |   |             |   |  |   | 251,619  |  
|                                                                             |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Costs and Expenses                                                           |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Production costs                                                             |  |        | 51,900   |   |                       |   | 19,225  |                          |  |   |             |   |  |   | 71,125   |  
|General and administrative                                                   |  |        | 22,603   |   |                       |   | 369     |                          |  |   |             |   |  |   | 22,972   |  
|Depreciation, depletion and amortization and accretion                       |  |        | 16,066   |   |                       |   | 36,167  |                          |  |   |             |   |  |   | 52,233   |  
|                                                                             |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|                                                                             |  |        | 90,569   |   |                       |   | 55,761  |                          |  |   |             |   |  |   | 146,330  |  
|                                                                             |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Income from Operations                                                       |  |        | 99,508   |   |                       |   | 5,781   |                          |  |   |             |   |  |   | 105,289  |  
|Other Income (Expense)                                                       |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Equity in earnings of subsidiaries                                           |  |        | 1,408    |   |                       |   |        |                          |  |   | (1,408       | ) |  |   |         |  
|Interest expense                                                             |  |        | (12,990  | ) |                       |   | (2,804  | )                        |  |   |             |   |  |   | (15,794  | )
|Loss on mark-to-market derivative contracts                                  |  |        | (169,328 | ) |                       |   |        |                          |  |   |             |   |  |   | (169,328 | )
|Interest and other income                                                    |  |        | 324      |   |                       |   |        |                          |  |   |             |   |  |   | 324      |  
|                                                                             |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Income (Loss) Before Income Taxes and Cumulative Effect of Accounting Change |  |        | (81,078  | ) |                       |   | 2,977   |                          |  |   | (1,408       | ) |  |   | (79,509  | )
|Income tax benefit (expense)                                                 |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Current                                                                      |  |        | 9,855    |   |                       |   | (18,567 | )                        |  |   |             |   |  |   | (8,712   | )
|Deferred                                                                     |  |        | 21,753   |   |                       |   | 16,998  |                          |  |   |             |   |  |   | 38,751   |  
|                                                                             |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Net Income (Loss) Before Cumulative Effect of Accounting Change              |  |        | (49,470  | ) |                       |   | 1,408   |                          |  |   | (1,408       | ) |  |   | (49,470  | )
|Cumulative effect of accounting change, net of tax benefit                   |  |        | (2,182   | ) |                       |   |        |                          |  |   |             |   |  |   | (2,182   | )
|                                                                             |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Net Income (Loss)                                                            |  | $      | (51,652  | ) |                       | $ | 1,408   |                          |  | $ | (1,408       | ) |  | $ | (51,652  | )
|                                                                             |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  



16



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2007

(in thousands of dollars)



|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|---------------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | ------- | - |  | - | -------- | -
|                                                           |  | Issuer |          |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |        
|                                                           |  |        |          |   |                      
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Net income (loss)                                          |  | $      | 20,570   |   |                       | $ | (38,542 | )                         |  | $ |                         |   |  | $            | 38,542  |   |  | $ | 20,570   |  
|Items not affecting cash flows from operating activities   |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Depreciation, depletion, amortization and accretion        |  |        | 28,699   |   |                       |   | 82,130  |                           |  |   |                         |   |  |              | (55,889 | ) |  |   | 54,940   |  
|Equity in earnings of subsidiaries                         |  |        | 6,093    |   |                       |   |        |                           |  |   |                         |   |  |              | (6,093  | ) |  |   |         |  
|Deferred income taxes                                      |  |        | 21,231   |   |                       |   | (28,590 | )                         |  |   |                         |   |  |              | 23,440  |   |  |   | 16,081   |  
|Commodity derivative contracts                             |  |        | 20,590   |   |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | 20,590   |  
|Noncash compensation                                       |  |        | 2,805    |   |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | 2,805    |  
|Other noncash items                                        |  |        | (7       | ) |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | (7       | )
|Change in assets and liabilities from operating activities |  |        |         |   |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   |         |  
|Accounts receivable and other assets                       |  |        | 3,140    |   |                       |   | (2,014  | )                         |  |   |                         |   |  |              |        |   |  |   | 1,126    |  
|Accounts payable and other liabilities                     |  |        | (1,404   | ) |                       |   | (475    | )                         |  |   |                         |   |  |              |        |   |  |   | (1,879   | )
|Income tax payable                                         |  |        | (94,272  | ) |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | (94,272  | )
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Net cash provided by operating activities                  |  |        | 7,445    |   |                       |   | 12,509  |                           |  |   |                         |   |  |              |        |   |  |   | 19,954   |  
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|                                                           |  |        |          |   |                      
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Additions to oil and gas properties                        |  |        | (117,530 | ) |                       |   | (27,371 | )                         |  |   |                         |   |  |              |        |   |  |   | (144,901 | )
|Derivative settlements                                     |  |        | (23,528  | ) |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | (23,528  | )
|Other                                                      |  |        | (1,576   | ) |                       |   | (373    | )                         |  |   | (2,441                   | ) |  |              |        |   |  |   | (4,390   | )
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Net cash used in investing activities                      |  |        | (142,634 | ) |                       |   | (27,744 | )                         |  |   | (2,441                   | ) |  |              |        |   |  |   | (172,819 | )
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|                                                           |  |        |          |   |                      
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Revolving credit facilities                                |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Borrowings                                                 |  |        | 336,775  |   |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | 336,775  |  
|Repayments                                                 |  |        | (572,275 | ) |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | (572,275 | )
|Proceeds for issuance of debt                              |  |        | 500,000  |   |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | 500,000  |  
|Cost incurred in connection with financing arrangements    |  |        | (7,945   | ) |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | (7,945   | )
|Investment in and advances to affiliates                   |  |        | (17,674  | ) |                       |   | 15,233  |                           |  |   | 2,441                    |   |  |              |        |   |  |   |         |  
|Purchase of treasury stock                                 |  |        | (32,292  | ) |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | (32,292  | )
|Other                                                      |  |        | 1,879    |   |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | 1,879    |  
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Net cash provided by (used in) financing activities        |  |        | 208,468  |   |                       |   | 15,233  |                           |  |   | 2,441                    |   |  |              |        |   |  |   | 226,142  |  
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|                                                           |  |        |          |   |                      
|Net increase (decrease) in cash and cash equivalents       |  |        | 73,279   |   |                       |   | (2      | )                         |  |   |                         |   |  |              |        |   |  |   | 73,277   |  
|Cash and cash equivalents, beginning of period             |  |        | 896      |   |                       |   | 3       |                           |  |   |                         |   |  |              |        |   |  |   | 899      |  
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Cash and cash equivalents, end of period                   |  | $      | 74,175   |   |                       | $ | 1       |                           |  | $ |                         |   |  | $            |        |   |  | $ | 74,176   |  
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2006

(in thousands of dollars)



|                                                           |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|---------------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | - | -------- | -
|                                                           |  | Issuer |          |   | GuarantorSubsidiaries |   |         | IntercompanyEliminations |  |   | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|                                                           |  |        |          |  
|Net income (loss)                                          |  | $      | (51,652  | ) |                       | $ | 1,408   |                          |  | $ | (1,408       | ) |  | $ | (51,652  | )
|Items not affecting cash flows from operating activities   |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Depreciation, depletion, amortization and accretion        |  |        | 16,066   |   |                       |   | 36,167  |                          |  |   |             |   |  |   | 52,233   |  
|Equity in earnings of subsidiaries                         |  |        | (1,408   | ) |                       |   |        |                          |  |   | 1,408        |   |  |   |         |  
|Deferred income taxes                                      |  |        | (21,753  | ) |                       |   | (16,998 | )                        |  |   |             |   |  |   | (38,751  | )
|Cumulative effect of accounting change                     |  |        | 2,182    |   |                       |   |        |                          |  |   |             |   |  |   | 2,182    |  
|Commodity derivative contracts                             |  |        | 193,314  |   |                       |   | 12,553  |                          |  |   |             |   |  |   | 205,867  |  
|Noncash compensation                                       |  |        | 6,274    |   |                       |   |        |                          |  |   |             |   |  |   | 6,274    |  
|Other noncash items                                        |  |        | (23      | ) |                       |   |        |                          |  |   |             |   |  |   | (23      | )
|Change in assets and liabilities from operating activities |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Accounts receivable and other assets                       |  |        | 3,473    |   |                       |   | 10,668  |                          |  |   |             |   |  |   | 14,141   |  
|Accounts payable and other liabilities                     |  |        | (16,473  | ) |                       |   | (2,507  | )                        |  |   |             |   |  |   | (18,980  | )
|                                                           |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Net cash provided by operating activities                  |  |        | 130,000  |   |                       |   | 41,291  |                          |  |   |             |   |  |   | 171,291  |  
|                                                           |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|                                                           |  |        |          |  
|Additions to oil and gas properties                        |  |        | (77,465  | ) |                       |   | (62,024 | )                        |  |   |             |   |  |   | (139,489 | )
|Derivative settlements                                     |  |        | (17,300  | ) |                       |   |        |                          |  |   |             |   |  |   | (17,300  | )
|Other                                                      |  |        | (1,099   | ) |                       |   | (431    | )                        |  |   |             |   |  |   | (1,530   | )
|                                                           |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Net cash used in investing activities                      |  |        | (95,864  | ) |                       |   | (62,455 | )                        |  |   |             |   |  |   | (158,319 | )
|                                                           |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|                                                           |  |        |          |  
|Revolving credit facilities                                |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Borrowings                                                 |  |        | 385,200  |   |                       |   |        |                          |  |   |             |   |  |   | 385,200  |  
|Repayments                                                 |  |        | (370,200 | ) |                       |   |        |                          |  |   |             |   |  |   | (370,200 | )
|Derivative settlements                                     |  |        | (28,579  | ) |                       |   |        |                          |  |   |             |   |  |   | (28,579  | )
|Investment in and advances to affiliates                   |  |        | (21,162  | ) |                       |   | 21,162  |                          |  |   |              |   |  |   |         |  
|Other                                                      |  |        | 214      |   |                       |   |        |                          |  |   |             |   |  |   | 214      |  
|Net cash provided by (used in) financing activities        |  |        | (34,527  | ) |                       |   | 21,162  |                          |  |   |             |   |  |   | (13,365  | )
|                                                           |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents       |  |        | (391     | ) |                       |   | (2      | )                        |  |   |             |   |  |   | (393     | )
|Cash and cash equivalents, beginning of period             |  |        | 1,548    |   |                       |   | 4       |                          |  |   |             |   |  |   | 1,552    |  
|                                                           |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  
|Cash and cash equivalents, end of period                   |  | $      | 1,157    |   |                       | $ | 2       |                          |  | $ |             |   |  | $ | 1,159    |  
|                                                           |  |        |          |   |                       |   |         |                          |  |   |              |   |  |   |          |  



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Note 7Subsequent Event

On April 18, 2007 we entered into a definitive agreement to acquire from a private company all of its interests in oil and gas producing properties covering over 60,000 gross (55,000 net) acres in the Mesaverde geologic section of
the Piceance Basin in Colorado plus the associated midstream assets, including a 25 percent interest in the Collbran Valley Gathering System. We will pay $900 million in cash and issue one million shares of common stock. Based on the average
closing price of our common stock during the five business days commencing two business days before the transaction was announced, the transaction is valued at approximately $945 million. The transaction will be financed using our senior
revolving credit facility. The transaction is expected to close in the second quarter of 2007 and will have an effective date of January 1, 2007.



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##### Table of Contents

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 Form 10-K for the year ended December 31, 2006.

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. Our core areas of operations are:



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



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



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

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 senior revolving credit facility. In March 2007 we issued $500 million of 7% Senior Notes due 2017 (the 7% Senior Notes) and
a portion of the net proceeds was used to repay the then outstanding balance on our senior revolving credit facility and short-term credit facility. At March 31, 2007 we had no amounts outstanding under our senior revolving credit facility
and we had $74 million in cash and cash equivalents. In April 2007 we entered into an Amended and Restated Credit Agreement (the Amended Credit Agreement) under which the aggregate commitments of the lenders is $1.0 billion and
can be increased to $1.15 billion if certain conditions are met. See  Financing Activities. In connection with the closing of the property acquisition discussed below, we have received a commitment from our lead bank, subject
to certain conditions and contingencies, for up to $1.3 billion in availability under this credit facility. Currently, we believe that we have sufficient liquidity through our cash from operations and borrowing capacity under the Amended Credit
Agreement to meet our short-term and long-term normal recurring operating needs 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. The level of derivative activity depends on our view of market conditions, available derivative prices and our operating
strategy. For 2007 and 2008 our derivative position consists exclusively of purchased put option contracts with a strike price of $55.00 on 50,000 barrels per day for 2007 and 42,000 barrels per day for 2008. The only cash settlements we are
required to make on these contracts are option premiums and interest, which are expected to total approximately $84 million in the last nine months of 2007 and $58 million in 2008. In return, to the extent the daily average NYMEX price for
West Texas Intermediate crude oil is less than $55.00, we will receive the difference between $55.00 and the daily average NYMEX price for West Texas Intermediate crude oil. Since our remaining derivative position consists entirely of crude oil put
options, there will continue to be volatility in derivative gains or losses on our income statement, however, our ultimate potential loss will be limited to the cost of the options. See Item 3 - Quantitative and Qualitative Disclosures About
Market Risks.

Property Acquisition

On
April 18, 2007 we entered into a definitive agreement to acquire from a private company all of its interests in oil and gas producing properties covering over 60,000 gross (55,000 net) acres in the Mesaverde geologic section of the
Piceance Basin in Colorado plus the associated midstream assets, including a 25 percent interest in the Collbran Valley Gathering System. The properties, which include over 200 producing/productive wells and over 3,000 additional potential drilling
locations, are currently producing approximately 6,000 barrels of oil equivalent per day of which nearly 97 percent is natural gas. We will pay $900 million in cash and issue one million shares of common stock. Based on the closing price of our
common stock during the five business days commencing two business days before the transaction was announced the transaction is valued at approximately $945 million. The transaction will be financed using our Amended Credit Agreement. The
transaction is expected to close in the second quarter of 2007 and will have an effective date of January 1, 2007.



20



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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, our reserve volumes 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, electricity
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 (including stock based
compensation), office rent, systems costs and other administrative costs.

Results Overview

Our earnings are subject to volatility due to: (i) gains and losses on derivative contracts subject to mark-to-market accounting as changes occur in the NYMEX price indexes; and (ii) stock
appreciation rights (SARs) and certain of our restricted stock units, which are accounted for as liability awards under SFAS 123R and are remeasured to fair value each reporting period. The fair value of SARs and restricted stock units
is related to the market price of our common stock and will fluctuate with movements in our stock price.

In the first quarter of 2007 we reported
net income of $20.6 million, or $0.28 per diluted share. In the first quarter of 2006, primarily as a result of a $169.3 million derivative mark-to-market loss, we reported a net loss of $51.7 million, or $0.66 per share. Our net loss in 2006
includes a non-cash, after-tax expense related to the adoption of SFAS 123R of $2.2 million, or $0.03 per share.

Results of Operations

On September 29, 2006 we closed the sale of non-strategic oil and gas properties located primarily in California and Texas to subsidiaries of Occidental
Petroleum Corporation (Occidental). The properties included our interests in the Asphalto, Buena Vista and Mt. Poso fields in the San Joaquin Valley, the Sansinena field in the Los Angeles Basin, the Pakenham field in West Texas and
various other minor properties. This transaction had an effective date of October 1, 2006. On a barrel of oil equivalent basis, these properties represented approximately 12% of our sales volumes for the first quarter of 2006.



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



|                                            |  |                              |        |      |   |       
|------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------
|                                            |  | Three Months Ended March 31,
|                                            |  | 2007                         |        | 2006
|Sales Volumes                               |  |                              |        |      |   |       
|Oil and liquids sales (MBbls)               |  |                              | 4,262  |      |   | 4,716 
|Gas (MMcf)                                  |  |                              |        |      |   |       
|Production                                  |  |                              | 3,055  |      |   | 5,825 
|Used in steam operations                    |  |                              | 579    |      |   | 1,356 
|Sales                                       |  |                              | 2,476  |      |   | 4,469 
|MBOE                                        |  |                              |        |      |   |       
|Production                                  |  |                              | 4,771  |      |   | 5,687 
|Sales                                       |  |                              | 4,674  |      |   | 5,461 
|Daily Average Volumes                       |  |                              |        |      |   |       
|Oil and liquids sales (Bbls)                |  |                              | 47,350 |      |   | 52,404
|Gas (Mcf)                                   |  |                              |        |      |   |       
|Production                                  |  |                              | 33,943 |      |   | 64,723
|Used in steam operations                    |  |                              | 6,432  |      |   | 15,067
|Sales                                       |  |                              | 27,511 |      |   | 49,656
|BOE                                         |  |                              |        |      |   |       
|Production                                  |  |                              | 53,008 |      |   | 63,191
|Sales                                       |  |                              | 51,936 |      |   | 60,680
|Unit Economics (in dollars)                 |  |                              |        |      |   |       
|Average NYMEX Prices                        |  |                              |        |      |   |       
|Oil                                         |  | $                            | 58.27  |      | $ | 63.51 
|Gas                                         |  |                              | 6.78   |      |   | 8.94  
|Average Realized Sales Price Before         |  |                              |        |      |   |       
|Derivative Transactions                     |  |                              |        |      |   |       
|Oil (per Bbl)                               |  | $                            | 48.22  |      | $ | 53.32 
|Gas (per Mcf)                               |  |                              | 7.08   |      |   | 7.95  
|Per BOE                                     |  |                              | 47.72  |      |   | 52.56 
|Costs and Expenses per BOE Production costs |  |                              |        |      |   |       
|Lease operating expenses                    |  | $                            | 9.56   |      | $ | 7.72  
|Steam gas costs                             |  |                              | 5.64   |      |   | 2.34  
|Electricity                                 |  |                              | 1.88   |      |   | 1.62  
|Production and ad valorem taxes             |  |                              | 1.13   |      |   | 1.06  
|Gathering and transportation                |  |                              | 0.04   |      |   | 0.29  

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



|                                               |  |                             |         |   |      |   |         |  
|---------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                               |  | Three Months EndedMarch 31, |        
|                                               |  | 2007                        |         |   | 2006 |  
|Mark-to-market contracts                       |  |                             |         |   |      |   |         |  
|Crude oil options                              |  | $                           | (23,528 | ) |      | $ | (44,393 | )
|Natural gas call options                       |  |                             |        |   |      |   | (2,817  | )
|Contracts accounted for using hedge accounting |  |                             |         |   |      |   |         |  
|Natural gas purchases                          |  |                             |        |   |      |   | 1,331   |  

Comparison of Three Months Ended March 31, 2007 to Three Months Ended March 31, 2006

Oil and gas revenues. Oil and gas revenues decreased $27.4 million, to $223.1 million for 2007 from $250.5 million for 2006 primarily due to
the property sale and a decrease in realized prices of $4.84 per BOE, partially offset by the absence of an oil revenue hedging loss in 2007. Excluding the properties sold from 2006 revenues, oil and gas revenues increased $4.5 million, to
$223.1 million for 2007 from $218.6 million for 2006 primarily due to the absence of an oil revenue hedging loss in 2007 partially offset by a decrease in price of $5.51 per BOE in 2007.



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Oil revenues excluding the effects of hedging, decreased $46.0 million to $205.5 million for 2007 from
$251.5 million for 2006 reflecting lower realized prices ($24.1 million) and lower sales volumes ($21.9 million). Our average realized price for oil decreased $5.10 to $48.22 per Bbl for 2007 from $53.32 per Bbl for 2006. The decrease
is primarily attributable to lower NYMEX oil price, which averaged $58.27 per Bbl in 2007 versus $63.51 per Bbl in 2006. Oil sales volumes decreased 5.0 MBbls per day to 47.4 MBbls per day in 2007 from 52.4 MBbls per
day in 2006, primarily reflecting the properties sold which had sales of 4.3 MBbls per day in the first quarter of 2006. Hedging had the effect of decreasing our oil revenues by $36.5 million, or $7.75 per Bbl in 2006.

Gas revenues decreased $18.0 million to $17.5 million in 2007 from $35.5 million in 2006 due to decreased sales volumes ($14.1 million) and a
decrease in realized prices ($3.9 million). Our average realized price for gas was $7.08 per Mcf in 2007 compared to $7.95 per Mcf in 2006. Gas sales volumes decreased from 49.7 MMcf per day in 2006 to
27.5 MMcf per day in 2007, primarily reflecting the properties sold which had sales of 18.2 MMcf per day in the first quarter of 2006.

Lease operating expenses. Lease operating expenses increased $2.5 million, to $44.7 million in 2007 from $42.2 million in 2006. Excluding the properties sold from 2006 costs, lease operating expenses increased
$8.9 million, to $44.7 million in 2007 from $35.8 million in 2006. The increase is primarily attributable to higher expenditures for well workovers and repairs and maintenance, increased labor costs and general cost increases from
service providers. Excluding the properties sold, on a per unit basis lease operating expenses increased to $9.56 per BOE in 2007 versus $7.47 per BOE in 2006.

Steam gas costs. Steam gas costs increased $13.6 million, to $26.4 million in 2007 from $12.8 million in 2006, primarily reflecting higher steam volumes and higher cost of gas used in steam
generation. In 2007 we burned approximately 4.2 Bcf of natural gas at a cost of approximately $6.34 per Mcf compared to 3.2 Bcf at a cost of approximately $4.05 per Mcf in 2006. The higher cost per Mcf in 2007 principally reflects the fact that all
the gas burned in 2007 was purchased while in 2006 almost half of the gas burned was produced from the Companys properties and costs for these volumes consisted only of transportation costs.

Electricity. Electricity decreased $0.1 million, to $8.7 million in 2007 from $8.8 million in 2006. Excluding the properties sold from 2006 costs,
electricity increased $0.6 million, to $8.7 million in 2007 from $8.1 million in 2006, primarily reflecting higher usage. Excluding the properties sold, on a per unit basis electricity increased to $1.88 per BOE in 2007 versus
$1.70 per BOE in 2006.

Production and ad valorem taxes. Production and ad valorem taxes decreased $0.5 million, to
$5.3 million in 2007 from $5.8 million in 2006. Excluding the properties sold from 2006 costs, production and ad valorem taxes increased $1.3 million, to $5.3 million in 2007 from $4.0 million in 2006 primarily reflecting
higher ad valorem taxes due to higher property tax basis as a result of increased oil prices.

General and administrative
expense. G&A expense decreased $0.5 million, to $22.5 million in 2007 from $23.0 million in 2006. The net decrease is due to lower stock based compensation expense ($2.1 million) as a result of a decrease in the fair
value of our SARs partially offset by increases in other G&A expenses ($1.6 million) primarily due to increased employee and aircraft costs.

G&A expense does not include amounts capitalized as part of our acquisition, exploration and development activities. We capitalized $8.0 million and $7.9 million of G&A expense in 2007 and 2006, respectively.

Depreciation, depletion and amortization, or DD&A. DD&A expense increased $2.9 million, to $52.7 million in 2007 from
$49.8 million in 2006. The increase was attributable to our oil and gas DD&A, primarily due to a higher per unit rate. Our oil and gas unit of production rate increased to $10.67 per BOE in 2007 compared to $8.45 per BOE in 2006. The
increase primarily reflects the effect of increased future development costs, higher cost reserve additions and exploration costs.

Accretion
expense. Accretion expense decreased $0.2 million, to $2.3 million in 2007 from $2.5 million in 2006. Accretion expense for 2006 included $0.4 million attributable to the properties sold to Occidental. Excluding such
expense the $0.2 million increase primarily reflects higher estimated future costs of our abandonment obligations.

Interest
expense. Interest expense decreased $10.4 million, to $5.4 million in 2007 from $15.8 million in 2006 due to lower outstanding debt. Interest expense for 2006 included $8.6 million attributable to certain senior notes
that were retired in the fourth quarter of 2006. In addition, 2006 expense included $4.2 million attributable to our revolving credit facility compared to $3.2 million in 2007. Interest expense does not include interest capitalized on oil and
gas



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##### Table of Contents

properties not subject to amortization. We capitalized $2.1 million and $1.4 million of interest in 2007 and 2006, respectively.

Gain (loss) on mark-to-market derivative contracts. We do not currently use hedge accounting for 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.

In 2007 we recognized a $20.6 million loss related to mark-to-market derivative contracts and cash payments related to contracts that settled totaled
$23.5 million. In 2006 we recognized a $169.3 million loss related to mark-to-market derivative contracts and cash payments related to contracts that settled totaled $45.9 million.

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. At March 31, 2007 our estimated 2007 annual effective tax rate was approximately 44%. At March 31, 2006 our estimated 2006 annual effective tax rate was approximately 38%. Variances in our estimated annual effective tax rate from the
35% federal statutory rate primarily result from the effect of state income taxes and estimated permanent differences primarily reflecting expenses that are not deductible because of IRS limitations.

Liquidity and Capital Resources

Our primary sources of liquidity are
cash generated from our operations and our senior revolving credit facility. In April 2007 we entered into the Amended and Restated Credit Agreement under which the aggregate commitments of the lenders is $1.0 billion and can be increased to
$1.15 billion if certain conditions are met (see  Financing Activities). We have made and will continue to make substantial capital expenditures for the acquisition, exploitation, development, exploration and production of oil
and gas. As discussed in Company Overview  Property Acquisition we have recently committed to expend $900 million in cash for the purchase of oil and gas producing properties. In connection with the closing of this transaction, we
have received a commitment from our lead bank, subject to certain conditions and contingencies, for up to $1.3 billion in availability under our senior revolving credit facility. In addition, upon closing this transaction we will have a capital
budget for 2007, excluding acquisitions, of approximately $750 million. Currently, we believe that we have sufficient liquidity through our cash from operations and borrowing capacity under our Amended Credit Agreement to meet our short-term
and long-term normal recurring operating needs 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. 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.

Working Capital

At March 31, 2007 we had a working capital
deficit of approximately $80 million. Our working capital deficit is affected by fluctuations in the fair value of our commodity derivative instruments and SARs. At March 31, 2007, we had net short-term liabilities of $62 million
and $32 million for derivatives and SARs, respectively. Excluding such items our working capital surplus was approximately $14 million. We generally have a working capital deficit because we use excess cash to pay down borrowings under our
senior revolving credit facility.

Financing Activities

7% Senior Notes. In March 2007 we issued the $500 million of 7% Senior Notes at par. We may redeem all or part of the 7% Senior Notes on or after March 15, 2012 at specified redemption prices and prior to such date at
a make-whole redemption price. In addition, prior to March 15, 2010 we may, at our option, redeem up to 35% of the 7% Senior Notes with the proceeds from certain equity offerings. 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% Senior Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of the repurchase.



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The 7% Senior Notes are our general unsecured, senior obligations. The 7% Senior Notes are jointly and severally
guaranteed on a senior unsecured basis by certain of our existing domestic subsidiaries. In the future, the guarantees may be released or terminated under certain circumstances. The 7% Senior Notes rank senior in right of payment to all of our
future subordinated indebtedness; pari passu in right of payment with any of our senior unsecured indebtedness that is not by its terms subordinated to the 7% Senior Notes; effectively junior to our existing and future secured indebtedness,
including indebtedness under our revolving credit facility, to the extent of the value of our assets constituting collateral securing that indebtedness; and effectively subordinate to all existing and future indebtedness and other liabilities (other
than indebtedness and liabilities owed to us) of our non-guarantor subsidiaries.

The indenture governing the 7% Senior Notes contains covenants
that, among other things, limit our ability and the ability of our restricted subsidiaries to incur additional debt; make certain investments or pay dividends or distributions on our capital stock or purchase or redeem or retire capital stock; sell
assets, including capital stock of our restricted subsidiaries; restrict dividends or other payments by restricted subsidiaries; create liens that secure debt; enter into transactions with affiliates; and merge or consolidate with another company.

Amended Credit Agreement.On April 23, 2007, we entered into the Amended Credit Agreement under which the aggregate commitments of
the lenders is $1.0 billion and can be increased to $1.15 billion if certain conditions are met. The Amended Credit Agreement provides for an initial borrowing base of $1.0 billion that will be redetermined on an 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. The Amended Credit Agreement also
contains a $150 million sub-limit on letters of credit. The Amended Credit Agreement matures on April 23, 2012. Collateral consists of 100% of the shares of stock of our material domestic subsidiaries and mortgages covering at least
75% of the total present value of our domestic oil and gas properties.

The Amended Credit Agreement contains negative covenants that limit our
ability, as well as the ability of our restricted subsidiaries to, among other things, incur additional debt, pay dividends on stock, make distributions of cash or property, change the nature of our business or operations, redeem stock or redeem
subordinated debt, make investments, create liens, enter into leases, sell assets, sell capital stock of subsidiaries, guarantee other indebtedness, enter into agreements that restrict dividends from subsidiaries, enter into certain types of swap
agreements, enter into gas imbalance or take-or-pay arrangements, merge or consolidate and enter into transactions with affiliates. In addition, we are required to maintain a ratio of debt to EBITDAX (as defined) of no greater than 4.25 to 1.00.

Short-term Credit Facility. We have an uncommitted short-term unsecured credit facility under the terms of which we may make borrowings from
time to time until May 1, 2008, not to exceed at any time the maximum principal amount of $50.0 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 1, 2008. 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
April 30, 2007.

Cash Flows



|                            |  |                 |        |   |      |   |        |  
|--------------------------- |  | --------------- | ------ | - | ---- | - | ------ | -
|                            |  | Three Months    |       
|                            |  | Ended March 31, |       
|                            |  | 2007            |        |   | 2006 |  
|                            |  | (in millions)   |       
|Cash provided by (used in): |  |                 |        |   |      |   |        |  
|Operating activities        |  | $               | 20.0   |   |      | $ | 171.3  |  
|Investing activities        |  |                 | (172.8 | ) |      |   | (158.3 | )
|Financing activities        |  |                 | 226.1  |   |      |   | (13.4  | )

Net cash provided by operating activities was $20.0 million in 2007 compared to $171.3 million in
2006. The decrease in net cash provided by operating activities in 2007 primarily reflects the payment of approximately $94 million of income taxes, primarily related to the 2006 property sales, and lower operating income primarily related to
the 2006 property sales and lower commodity prices. As discussed below, certain of our derivative cash payments are classified as financing or investing activities.

Net cash used in investing activities was $172.8 million in 2007 primarily reflecting additions to oil and gas properties of $144.9 million and derivative settlements of $23.5 million. Net cash used in investing
activities was $158.3 million in



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2006 primarily reflecting additions to oil and gas properties of $139.5 million and derivative settlements of $17.3 million. Derivative settlements related
to derivatives that have not been qualified for hedge accounting and do not contain a significant financing element are reflected as investing activities.

Net cash provided by financing activities of $226.1 million in 2007 primarily reflects the $492.1 million net proceeds from the sale of the 7% Senior Notes partially offset by $235.5 million in net reduction in borrowings
under our senior revolving credit facility and the purchase of $32.3 million of treasury stock. Net cash used in financing activities in 2006 was $13.4 million, primarily reflecting $15.0 million in net borrowings under our senior
revolving credit facility and the payment of $28.6 million in financing derivative settlements. In 2006 certain of our derivatives were deemed to contain a significant financing element and cash settlements with respect to such derivatives are
required to be reflected as financing activities.

Stock Repurchase Program

Our Board of Directors has authorized the repurchase of up to $500 million of our common stock. The shares will be repurchased from time to time in open market transactions or privately negotiated transactions at our
discretion, subject to market conditions and other factors. We expect that the funds for these purchases will come primarily from cash flow in excess of capital investments. As of April 30, 2007 we had made purchases totaling
$342 million under this program.

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, future development and abandonment costs, DD&A, stock based compensation and goodwill are discussed in our Annual Report on Form 10-K
for the year ended December 31, 2006.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement
defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. We are currently evaluating the potential impact of this statement.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115 which is
effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and
losses on items for which the fair value option has been elected will be reported in earnings. We are currently evaluating the potential impact of this statement.



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Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking information regarding Plains Exploration & Production Company that is intended to be covered by the safe harbor for 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:



| |  |  | completion of the proposed acquisition;
| | - |  | ---------------------------------------



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



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



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



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



| |  |  | the success of our derivative activities;
| | - |  | -----------------------------------------



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



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



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



| |  |  | 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 Item 1A  Risk Factors and Item 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations  Critical Accounting Policies and Factors That May Affect Future Results
in our Annual Report on Form 10-K for the year ended December 31, 2006 for additional discussions of risks and uncertainties.



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Item 3  Quantitative and Qualitative Disclosures About Market Risks

Commodity Price Risk

Our primary market risk is oil and gas commodity prices. Historically the markets for oil and gas have been volatile and are likely to continue to be volatile in
the future. We use various derivative instruments to manage our exposure to commodity price risk on sales of oil and gas. 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 a gain or loss on mark-to-market derivative contracts. Cash flows are only impacted to the extent the actual
settlements under the contracts result in making a payment to or receiving a payment from the counterparty. We do not currently use hedge accounting for our derivative instruments, because the derivatives do not qualify or we have elected not to use
hedge accounting. If a derivative is designated as a cash flow hedge and qualifies for hedge accounting, any unrealized gain or loss is deferred in 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.

See Note 3 to the
Consolidated Financial Statements  Derivative Instruments and Hedging Activities for a discussion of our derivative activities.

At
March 31, 2007 we had the following open commodity derivative positions, none of which were designated as hedging instruments:



|                              |  |                |  |              |  |              |                    |       |    
|----------------------------- |  | -------------- |  | ------------ |  | ------------ | ------------------ | ----- | ---
|Period                        |  | InstrumentType |  | DailyVolumes |  | AveragePrice |                    | Index
|Sales of Crude Oil Production |  |                |  |              |  |              |                    |       |    
|2007                          |  |                |  |              |  |              |                    |       |    
|April - Dec                   |  | Put options    |  | 50,000 Bbls  |  | $            | 55.00 Strike price |       | WTI
|2008                          |  |                |  |              |  |              |                    |       |    
|Jan - Dec                     |  | Put options    |  | 42,000 Bbls  |  | $            | 55.00 Strike price |       | WTI

The only cash settlements we are required to make on these put contracts are option premiums and interest,
which are expected to total approximately $84 million in the last nine months of 2007 and $58 million in 2008. Such amounts are not included in the fair value of derivatives not designated as hedging instruments in the following table.

The fair value of outstanding crude oil commodity derivative instruments at March 31, 2007 and the change in fair value that would be
expected from a 10% price increase/decrease is shown below (in millions):



|                                                  |  |            |               |               |   |               |   |  |   |     
|------------------------------------------------- |  | ---------- | ------------- | ------------- | - | ------------- | - |  | - | ----
|                                                  |  | Fair Value |               | Effect of 10%
|                                                  |  |            | PriceIncrease |               |   | PriceDecrease
|Derivatives not designated as hedging instruments |  | $          | 35.7          |               | $ | (17.8         | ) |  | $ | 35.5

The fair value of the commodity derivative 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 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 or decrease 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.

The five financial institutions that are contract counterparties for our derivative commodity contracts all
have Standard & Poors ratings of A or better and all such financial institutions are participating lenders in our revolving credit facility. At March 31, 2007 we were in a net liability position with all such counterparties.
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.



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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 March 31, 2007 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 March 31, 2007 that materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.



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##### Table of Contents

PART II. OTHER INFORMATION

ITEM 2  Unregistered Sales of Equity Securities and Use of Proceeds

Our Board of Directors has authorized the repurchase of up to $500 million of PXP common stock. The shares are repurchased from time to time in open market
transactions or privately negotiated transactions at our discretion, subject to market conditions and other factors. The following is a summary of all repurchases by the Company of its common stock during the three-month period ended
March 31, 2007:

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) ofShares thatMay Yet BePurchasedUnder the Plansor Programs
|January 1 to January 31, 2007 |  | 7,700                            |  | $                            | 47.48 |                                                                                  | 6,649,100 |                                                                                                       | $ | 205,452,000
|March 1 to March 31, 2007     |  | 695,000                          |  | $                            | 45.91 |                                                                                  | 7,344,100 |                                                                                                       | $ | 173,547,000

ITEM 6  Exhibits



|            |  |                                                                                                                                                                                                                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                         
|1.1         |  | Underwriting Agreement, dated March 8, 2007, by and among Plains Exploration & Production Company, the guarantors parties thereto, J.P. Morgan Securities Inc., Lehman Brothers Inc. and the
underwriters parties thereto (incorporated by reference to Exhibit 1.1 to the March 13, 2007 Form 8-K (the March 13, 2007 Form 8-K)).
|            | 
|4.1         |  | Indenture, dated as of March 13, 2007, between Plains Exploration & Production Company and Wells Fargo Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the March 13, 2007 Form
8-K).                                                                                                                            
|            | 
|4.2         |  | First Supplemental Indenture, dated March 13, 2007, to Indenture, dated as of March 13, 2007, among PXP, the subsidiary guarantors parties thereto and Wells Fargo Bank, N.A., as trustee (including form of
7% Senior Notes due 2017) (incorporated by reference to Exhibit 4.2 to the March 13, 2007 Form 8-K).                   
|            | 
|10.1*       |  | Third Amendment to the Plains Exploration & Production Company 2002 Stock Incentive Plan.                                                                                                                                                                                                                                           
|            | 
|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, 1A, 3, 4 and 5 are not applicable and
have been omitted.



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SIGNATURES

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



|                  |  |  |  |                                         |  |                        |  |                                                     
|----------------- |  |  |  | --------------------------------------- |  | ---------------------- |  | ----------------------------------------------------
|                  |  |  |  | PLAINS EXPLORATION & PRODUCTION COMPANY
|                  |  |  | 
|Date: May 3, 2007 |  |  |  | By:                                     |  | /s/ Winston M. Talbert
|                  |  |  |  |                                         |  |                        |  | Winston M. Talbert                                  
|                  |  |  |  |                                         |  |                        |  | Executive Vice President and Chief Financial Officer
|                  |  |  |  |                                         |  |                        |  | (Principal Financial Officer)                       



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                         
|1.1         |  | Underwriting Agreement, dated March 8, 2007, by and among Plains Exploration & Production Company, the guarantors parties thereto, J.P. Morgan Securities Inc., Lehman Brothers Inc. and the
underwriters parties thereto (incorporated by reference to Exhibit 1.1 to the March 13, 2007 Form 8-K (the March 13, 2007 Form 8-K)).
|            | 
|4.1         |  | Indenture, dated as of March 13, 2007, between Plains Exploration & Production Company and Wells Fargo Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the March 13, 2007 Form
8-K).                                                                                                                            
|            | 
|4.2         |  | First Supplemental Indenture, dated March 13, 2007, to Indenture, dated as of March 13, 2007, among PXP, the subsidiary guarantors parties thereto and Wells Fargo Bank, N.A., as trustee (including form of
7% Senior Notes due 2017) (incorporated by reference to Exhibit 4.2 to the March 13, 2007 Form 8-K).                   
|            | 
|10.1*       |  | Third Amendment to the Plains Exploration & Production Company 2002 Stock Incentive Plan.                                                                                                                                                                                                                                           
|            | 
|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
|- | --------------



32