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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 June 30, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   ̈    No   ̈

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



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

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

122.0 million shares of Common Stock, $0.01 par value, issued and
outstanding at July 31, 2009.









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PLAINS EXPLORATION & PRODUCTION COMPANY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PART I. FINANCIAL INFORMATION

ITEM 1. Unaudited Consolidated Financial Statements:



|                                                                                                        |  |   
|------------------------------------------------------------------------------------------------------- |  | --
|Consolidated Balance SheetsJune 30, 2009 and December 31, 2008                                          |  | 1 
|                                                                                                        | 
|Consolidated Statements of IncomeFor the three months ended and six months ended June 30, 2009 and
2008 |  | 2 
|                                                                                                        | 
|Consolidated Statements of Cash FlowsFor the six months ended June 30, 2009 and 2008                    |  | 3 
|                                                                                                        | 
|Consolidated Statement of Stockholders EquityFor the six months ended June 30, 2009                    |  | 4 
|                                                                                                        | 
|Notes to Consolidated Financial Statements                                                              |  | 5 
|                                                                                                        | 
|ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 28
|                                                                                                        | 
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risks                                     |  | 41
|                                                                                                        | 
|ITEM 4. Controls and Procedures                                                                         |  | 42
|                                                                                                        | 
|PART II. OTHER INFORMATION                                                                              |  | 43



(i)



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands of dollars)



|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ---------- | - | ---------------- | - | ---------- | -
|                                                                                                                                                                   |  | June 30,2009 |            |   | December 31,2008 |  
|ASSETS                                                                                                                                                             |  |              |            |   |                  |   |            |  
|Current Assets                                                                                                                                                     |  |              |            |   |                  |   |            |  
|Cash and cash equivalents                                                                                                                                          |  | $            | 455,845    |   |                  | $ | 311,875    |  
|Accounts receivable                                                                                                                                                |  |              | 175,875    |   |                  |   | 175,896    |  
|Commodity derivative contracts                                                                                                                                     |  |              | 138,457    |   |                  |   | 945,838    |  
|Inventories                                                                                                                                                        |  |              | 19,718     |   |                  |   | 23,368     |  
|Other current assets                                                                                                                                               |  |              | 35,775     |   |                  |   | 19,464     |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|                                                                                                                                                                   |  |              | 825,670    |   |                  |   | 1,476,441  |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|                                                                                                                                                                   |  |             
|Property and Equipment, at cost                                                                                                                                    |  |              |            |   |                  |   |            |  
|Oil and natural gas properties - full cost method                                                                                                                  |  |              |            |   |                  |   |            |  
|Subject to amortization                                                                                                                                            |  |              | 7,808,889  |   |                  |   | 7,106,785  |  
|Not subject to amortization                                                                                                                                        |  |              | 2,606,628  |   |                  |   | 2,513,424  |  
|Other property and equipment                                                                                                                                       |  |              | 120,350    |   |                  |   | 110,990    |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|                                                                                                                                                                   |  |              | 10,535,867 |   |                  |   | 9,731,199  |  
|Less allowance for depreciation, depletion, amortization and impairment                                                                                            |  |              | (5,391,935 | ) |                  |   | (5,217,803 | )
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|                                                                                                                                                                   |  |              | 5,143,932  |   |                  |   | 4,513,396  |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|Goodwill                                                                                                                                                           |  |              | 535,265    |   |                  |   | 535,265    |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|Commodity Derivative Contracts                                                                                                                                     |  |              | 852        |   |                  |   | 530,181    |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|Other Assets                                                                                                                                                       |  |              | 58,338     |   |                  |   | 56,632     |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|                                                                                                                                                                   |  | $            | 6,564,057  |   |                  | $ | 7,111,915  |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                               |  |              |            |   |                  |   |            |  
|Current Liabilities                                                                                                                                                |  |              |            |   |                  |   |            |  
|Accounts payable                                                                                                                                                   |  | $            | 350,542    |   |                  | $ | 363,713    |  
|Royalties and revenues payable                                                                                                                                     |  |              | 73,532     |   |                  |   | 87,874     |  
|Interest payable                                                                                                                                                   |  |              | 34,528     |   |                  |   | 20,843     |  
|Income taxes payable                                                                                                                                               |  |              |           |   |                  |   | 102,948    |  
|Deferred income taxes                                                                                                                                              |  |              | 91,385     |   |                  |   | 285,426    |  
|Other current liabilities                                                                                                                                          |  |              | 114,234    |   |                  |   | 132,841    |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|                                                                                                                                                                   |  |              | 664,221    |   |                  |   | 993,645    |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|Long-Term Debt                                                                                                                                                     |  |              | 2,024,129  |   |                  |   | 2,805,000  |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|Other Long-Term Liabilities                                                                                                                                        |  |              |            |   |                  |   |            |  
|Asset retirement obligation                                                                                                                                        |  |              | 166,429    |   |                  |   | 159,473    |  
|Other                                                                                                                                                              |  |              | 45,125     |   |                  |   | 32,061     |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|                                                                                                                                                                   |  |              | 211,554    |   |                  |   | 191,534    |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|Deferred Income Taxes                                                                                                                                              |  |              | 955,124    |   |                  |   | 744,456    |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|Commitments and Contingencies (Note 6)                                                                                                                             |  |              |            |   |                  |   |            |  
|Stockholders Equity                                                                                                                                               |  |              |            |   |                  |   |            |  
|Common stock, $0.01 par value, 250.0 million shares authorized, 126.7 million and 112.9 million shares issued at June 30, 2009 and December 31, 2008,
respectively |  |              | 1,267      |   |                  |   | 1,129      |  
|Additional paid-in capital                                                                                                                                         |  |              | 2,987,761  |   |                  |   | 2,739,625  |  
|Retained earnings (deficit)                                                                                                                                        |  |              | (36,254    | ) |                  |   | (85,101    | )
|Accumulated other comprehensive income (loss)                                                                                                                      |  |              |           |   |                  |   | (684       | )
|Treasury stock, at cost, 4.7 million shares and 5.3 million shares at June 30, 2009 and December 31, 2008, respectively                                            |  |              | (243,745   | ) |                  |   | (277,689   | )
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|                                                                                                                                                                   |  |              | 2,709,029  |   |                  |   | 2,377,280  |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  
|                                                                                                                                                                   |  | $            | 6,564,057  |   |                  | $ | 7,111,915  |  
|                                                                                                                                                                   |  |              |            |   |                  |   |            |  

See notes to consolidated financial statements.



1



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per
share data)



|                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | --------- | -
|                                            |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                            |  | 2009                       |         |   | 2008                     |   |         | 2009 |  |   | 2008    |  
|Revenues                                    |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|Oil sales                                   |  | $                          | 219,589 |   |                          | $ | 545,767 |      |  | $ | 376,203 |   |  | $ | 1,002,351 |  
|Gas sales                                   |  |                            | 58,541  |   |                          |   | 182,334 |      |  |   | 129,805 |   |  |   | 346,403   |  
|Other operating revenues                    |  |                            | 551     |   |                          |   | 4,602   |      |  |   | 1,185   |   |  |   | 7,026     |  
|                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|                                            |  |                            | 278,681 |   |                          |   | 732,703 |      |  |   | 507,193 |   |  |   | 1,355,780 |  
|                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|Costs and Expenses                          |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|Production costs                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|Lease operating expenses                    |  |                            | 63,404  |   |                          |   | 85,248  |      |  |   | 134,288 |   |  |   | 159,756   |  
|Steam gas costs                             |  |                            | 10,912  |   |                          |   | 40,599  |      |  |   | 26,469  |   |  |   | 72,757    |  
|Electricity                                 |  |                            | 12,368  |   |                          |   | 10,661  |      |  |   | 23,310  |   |  |   | 22,298    |  
|Production and ad valorem taxes             |  |                            | 10,457  |   |                          |   | 24,181  |      |  |   | 22,078  |   |  |   | 50,409    |  
|Gathering and transportation expenses       |  |                            | 8,671   |   |                          |   | 2,462   |      |  |   | 15,318  |   |  |   | 10,951    |  
|General and administrative                  |  |                            | 37,554  |   |                          |   | 45,203  |      |  |   | 74,647  |   |  |   | 85,131    |  
|Depreciation, depletion and amortization    |  |                            | 90,822  |   |                          |   | 130,749 |      |  |   | 178,936 |   |  |   | 271,602   |  
|Accretion                                   |  |                            | 3,556   |   |                          |   | 3,223   |      |  |   | 7,087   |   |  |   | 6,610     |  
|Legal settlement recovery                   |  |                            | (87,272 | ) |                          |   |        |      |  |   | (87,272 | ) |  |   |          |  
|Other operating expenses                    |  |                            | 1,499   |   |                          |   |        |      |  |   | 5,956   |   |  |   |          |  
|                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|                                            |  |                            | 151,971 |   |                          |   | 342,326 |      |  |   | 400,817 |   |  |   | 679,514   |  
|                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|Income from Operations                      |  |                            | 126,710 |   |                          |   | 390,377 |      |  |   | 106,376 |   |  |   | 676,266   |  
|Other Income (Expense)                      |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|Gain on sale of assets                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   | 34,658    |  
|Interest expense                            |  |                            | (15,935 | ) |                          |   | (23,511 | )    |  |   | (37,932 | ) |  |   | (54,120   | )
|Debt extinguishment costs                   |  |                            | (667    | ) |                          |   |        |      |  |   | (10,910 | ) |  |   | (10,263   | )
|Loss on mark-to-market derivative contracts |  |                            | (89,717 | ) |                          |   | (51,427 | )    |  |   | (1,578  | ) |  |   | (60,908   | )
|Other income                                |  |                            | 899     |   |                          |   | 1,686   |      |  |   | 192     |   |  |   | 1,661     |  
|                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|Income Before Income Taxes                  |  |                            | 21,290  |   |                          |   | 317,125 |      |  |   | 56,148  |   |  |   | 587,294   |  
|Income tax benefit (expense)                |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|Current                                     |  |                            | 43,730  |   |                          |   | (61,716 | )    |  |   | (12,061 | ) |  |   | (102,253  | )
|Deferred                                    |  |                            | (21,371 | ) |                          |   | (52,491 | )    |  |   | 4,760   |   |  |   | (118,622  | )
|                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|Net Income                                  |  | $                          | 43,649  |   |                          | $ | 202,918 |      |  | $ | 48,847  |   |  | $ | 366,419   |  
|                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|Earnings per Share                          |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|Basic                                       |  | $                          | 0.37    |   |                          | $ | 1.88    |      |  | $ | 0.43    |   |  | $ | 3.33      |  
|Diluted                                     |  | $                          | 0.37    |   |                          | $ | 1.84    |      |  | $ | 0.43    |   |  | $ | 3.27      |  
|Weighted Average Shares Outstanding         |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|Basic                                       |  |                            | 118,145 |   |                          |   | 107,707 |      |  |   | 112,979 |   |  |   | 109,939   |  
|                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  
|Diluted                                     |  |                            | 118,798 |   |                          |   | 110,138 |      |  |   | 113,541 |   |  |   | 112,147   |  
|                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |           |  

See notes to consolidated financial statements.



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands of
dollars)



|                                                                                           |  |                          |            |   |      |   |            |  
|------------------------------------------------------------------------------------------ |  | ------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                           |  | Six Months EndedJune 30, |           
|                                                                                           |  | 2009                     |            |   | 2008 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                       |  |                          |            |   |      |   |            |  
|Net income                                                                                 |  | $                        | 48,847     |   |      | $ | 366,419    |  
|Items not affecting cash flows from operating activities                                   |  |                          |            |   |      |   |            |  
|Gain on sale of assets                                                                     |  |                          |           |   |      |   | (34,658    | )
|Depreciation, depletion, and amortization                                                  |  |                          | 178,936    |   |      |   | 271,602    |  
|Accretion                                                                                  |  |                          | 7,087      |   |      |   | 6,610      |  
|Deferred income tax (benefit) expense                                                      |  |                          | (4,760     | ) |      |   | 118,622    |  
|Debt extinguishment costs                                                                  |  |                          | 10,910     |   |      |   | 10,263     |  
|Loss on mark-to-market derivative contracts                                                |  |                          | 1,578      |   |      |   | 60,908     |  
|Noncash compensation                                                                       |  |                          | 32,566     |   |      |   | 40,451     |  
|Other noncash items                                                                        |  |                          | 2,913      |   |      |   | 2,886      |  
|Change in assets and liabilities from operating activities                                 |  |                          |            |   |      |   |            |  
|Accounts receivable and other assets                                                       |  |                          | 22,667     |   |      |   | (99,046    | )
|Accounts payable and other liabilities                                                     |  |                          | (15,130    | ) |      |   | (76,847    | )
|Stock appreciation rights                                                                  |  |                          | (305       | ) |      |   | (58,357    | )
|Income taxes receivable/payable and prepaid                                                |  |                          | (143,619   | ) |      |   | 509        |  
|                                                                                           |  |                          |            |   |      |   |            |  
|Net cash provided by operating activities                                                  |  |                          | 141,690    |   |      |   | 609,362    |  
|                                                                                           |  |                          |            |   |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                       |  |                          |            |   |      |   |            |  
|Additions to oil and gas properties                                                        |  |                          | (826,961   | ) |      |   | (441,123   | )
|Acquisition of oil and gas properties                                                      |  |                          |           |   |      |   | (331,293   | )
|Acquisition of Pogo Producing Company                                                      |  |                          |           |   |      |   | (74,844    | )
|Proceeds from sales of oil and gas properties and related assets,net of costs and expenses |  |                          |           |   |      |   | 1,717,781  |  
|Derivative settlements                                                                     |  |                          | 1,380,322  |   |      |   | (29,593    | )
|Decrease in restricted cash                                                                |  |                          |           |   |      |   | 59,092     |  
|Additions to other property and equipment                                                  |  |                          | (9,360     | ) |      |   | (27,443    | )
|Other                                                                                      |  |                          |           |   |      |   | (1,229     | )
|                                                                                           |  |                          |            |   |      |   |            |  
|Net cash provided by investing activities                                                  |  |                          | 544,001    |   |      |   | 871,348    |  
|                                                                                           |  |                          |            |   |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                       |  |                          |            |   |      |   |            |  
|Revolving credit facilities                                                                |  |                          |            |   |      |   |            |  
|Borrowings                                                                                 |  |                          | 2,240,090  |   |      |   | 4,237,756  |  
|Repayments                                                                                 |  |                          | (3,545,090 | ) |      |   | (5,831,756 | )
|Proceeds from issuance of Senior Notes                                                     |  |                          | 523,099    |   |      |   | 400,000    |  
|Cost incurred in connection with financing arrangements                                    |  |                          | (12,114    | ) |      |   | (6,064     | )
|Derivative settlements                                                                     |  |                          | 1,392      |   |      |   | (13,088    | )
|Issuance of common stock                                                                   |  |                          | 250,874    |   |      |   |           |  
|Purchase of treasury stock                                                                 |  |                          |           |   |      |   | (304,192   | )
|Other                                                                                      |  |                          | 28         |   |      |   | 13,682     |  
|                                                                                           |  |                          |            |   |      |   |            |  
|Net cash used in financing activities                                                      |  |                          | (541,721   | ) |      |   | (1,503,662 | )
|                                                                                           |  |                          |            |   |      |   |            |  
|Net increase (decrease) in cash and cash equivalents                                       |  |                          | 143,970    |   |      |   | (22,952    | )
|Cash and cash equivalents, beginning of period                                             |  |                          | 311,875    |   |      |   | 25,446     |  
|                                                                                           |  |                          |            |   |      |   |            |  
|Cash and cash equivalents, end of period                                                   |  | $                        | 455,845    |   |      | $ | 2,494      |  
|                                                                                           |  |                          |            |   |      |   |            |  

See notes to consolidated financial statements.



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (Unaudited)

(share
and dollar amounts in thousands)



|                                                      |  |              |  |                          |       |  |                           |           |        |                                            |   |         |                |  |   |       |   |  |        |   |  |   |          |   |  |   |          
|----------------------------------------------------- |  | ------------ |  | ------------------------ | ----- |  | ------------------------- | --------- | ------ | ------------------------------------------ | - | ------- | -------------- |  | - | ----- | - |  | ------ | - |  | - | -------- | - |  | - | ---------
|                                                      |  | Common Stock |  | AdditionalPaid-inCapital |       |  | RetainedEarnings(Deficit) |           |        | AccumulatedOtherComprehensiveIncome (Loss) |   |         | Treasury Stock |  |   | Total
|                                                      |  | Shares       |  | Amount                   |       |  |                           |           | Shares |                                            |   | Amount  |                | 
|Balance at December 31, 2008                          |  | 112,874      |  | $                        | 1,129 |  | $                         | 2,739,625 |        |                                            | $ | (85,101 | )              |  | $ | (684  | ) |  | (5,283 | ) |  | $ | (277,689 | ) |  | $ | 2,377,280
|Net income                                            |  |             |  |                          |      |  |                           |          |        |                                            |   | 48,847  |                |  |   |      |   |  |       |   |  |   |         |   |  |   | 48,847   
|Issuance of common stock                              |  | 13,800       |  |                          | 138   |  |                           | 250,736   |        |                                            |   |        |                |  |   |      |   |  |       |   |  |   |         |   |  |   | 250,874  
|Restricted stock awards                               |  |             |  |                          |      |  |                           | 31,289    |        |                                            |   |        |                |  |   |      |   |  |       |   |  |   | 27       |   |  |   | 31,316   
|Issuance of treasury stockfor restricted stock awards |  |             |  |                          |      |  |                           | (33,917   | )      |                                            |   |        |                |  |   |      |   |  | 615    |   |  |   | 33,917   |   |  |   |         
|Other comprehensive income                            |  |             |  |                          |      |  |                           |          |        |                                            |   |        |                |  |   | 684   |   |  |       |   |  |   |         |   |  |   | 684      
|Exercise of stock options and other                   |  |             |  |                          |      |  |                           | 28        |        |                                            |   |        |                |  |   |      |   |  |       |   |  |   |         |   |  |   | 28       
|                                                      |  |              |  |                          |       |  |                           |           |        |                                            |   |         |                |  |   |       |   |  |        |   |  |   |          |   |  |   |          
|Balance at June 30, 2009                              |  | 126,674      |  | $                        | 1,267 |  | $                         | 2,987,761 |        |                                            | $ | (36,254 | )              |  | $ |      |   |  | (4,668 | ) |  | $ | (243,745 | ) |  | $ | 2,709,029
|                                                      |  |              |  |                          |       |  |                           |           |        |                                            |   |         |                |  |   |       |   |  |        |   |  |   |          |   |  |   |          

See notes to consolidated financial statements.



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PLAINS EXPLORATION & PRODUCTION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1Organization and
Significant Accounting Policies

The accompanying 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. 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 six months ended June 30, 2009 are not necessarily
indicative of the results to be expected for the full year.

These consolidated 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 consolidated 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, 2008.

We are an independent energy company that is engaged in the upstream oil and gas business. The upstream business acquires, develops, explores for
and produces oil and gas. Our upstream activities are primarily located in the United States. We also have interests in an exploration prospect offshore Vietnam.

Asset Retirement Obligation. The following table reflects the changes in our asset retirement obligation during the six months ended June 30, 2009 (in thousands):



|                                                |  |   |         |  
|----------------------------------------------- |  | - | ------- | -
|Asset retirement obligation - December 31, 2008 |  | $ | 169,809 |  
|Settlements                                     |  |   | (1,895  | )
|Accretion expense                               |  |   | 7,087   |  
|Additions                                       |  |   | 1,074   |  
|                                                |  |   |         |  
|Asset retirement obligation - June 30, 2009(1)  |  | $ | 176,075 |  
|                                                |  |   |         |  

| | (1) | $9.7 million is included in other current liabilities.
| | --- | ------------------------------------------------------

Earnings Per Share. For the three and six months ended June 30, 2009 and 2008 the weighted average shares outstanding for computing basic and diluted earnings per share were (in thousands):



|                                                                    |  |                            |  |                          |  |         |  |        
|------------------------------------------------------------------- |  | -------------------------- |  | ------------------------ |  | ------- |  | -------
|                                                                    |  | Three MonthsEnded June 30, |  | Six MonthsEnded June 30,
|                                                                    |  | 2009                       |  | 2008                     |  | 2009    |  | 2008   
|Weighted average common shares outstanding - basic                  |  | 118,145                    |  | 107,707                  |  | 112,979 |  | 109,939
|Unvested restricted stock, restricted stock units and stock options |  | 653                        |  | 2,431                    |  | 562     |  | 2,208  
|                                                                    |  |                            |  |                          |  |         |  |        
|Weighted average common shares outstanding - diluted                |  | 118,798                    |  | 110,138                  |  | 113,541 |  | 112,147
|                                                                    |  |                            |  |                          |  |         |  |        

In the three and six months ended June 30, 2009, 3.0 million and 3.2 million restricted stock
units, respectively, were excluded in computing diluted earnings per share because they were antidilutive due to the impact of the unrecognized compensation cost on the calculation of assumed proceeds in the application of the treasury stock method.
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. At June 30, 2009 and December 31, 2008, inventories consisted of (in thousands):



|                       |  |              |        |                  |   |       
|---------------------- |  | ------------ | ------ | ---------------- | - | ------
|                       |  | June 30,2009 |        | December 31,2008
|Oil                    |  | $            | 6,224  |                  | $ | 6,689 
|Materials and supplies |  |              | 13,494 |                  |   | 16,679
|                       |  |              |        |                  |   |       
|                       |  | $            | 19,718 |                  | $ | 23,368
|                       |  |              |        |                  |   |       

Impairment of oil and gas properties. Under the SECs full cost accounting rules for oil
and gas activities, we review the carrying value of our proved oil and gas properties each quarter. Under these rules, capitalized costs of oil and gas properties (net of accumulated depreciation, depletion, amortization and impairment and related
deferred income taxes) may not exceed a ceiling equal to:



| |  |  | the present value discounted at 10% of estimated future net cash flows from proved oil and gas reserves, net of estimated future income taxes; plus
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the lower of cost or fair value of unproved properties not included in the costs being amortized (net of related tax effects).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------

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. Such prices
are utilized except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including derivative contracts that qualify and are designated for hedge accounting treatment. None of our
derivative contracts were designated as hedges during 2008 or 2009. The rules require an impairment if our capitalized costs exceed this ceiling, even if prices declined for only a short period of time.

During the fourth quarter of 2008, oil and gas prices declined significantly and we recorded an impairment of our oil and gas properties related to our year-end
ceiling test. At June 30, 2009 and March 31, 2009, the ceiling with respect to our oil and gas properties exceeded the net capitalized costs of those properties by approximately 28% and 4%, respectively, and we did not record an
impairment. 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 change in the near term. If oil and gas prices decline in the future, additional
impairments of our oil and gas properties could occur. Impairments required by these rules do not impact our cash flows from operating activities.

Goodwill. In a purchase transaction, goodwill represents the excess of the purchase price plus the liabilities assumed, including deferred income taxes recorded in connection with the transaction, over the fair value of the net
assets acquired. At June 30, 2009, goodwill totaled $535.3 million and represented approximately 8% of our total assets.

We account for
goodwill in accordance with Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142). Goodwill is not amortized; instead it is tested at least annually for
impairment at a level of reporting referred to as a reporting unit. Impairment occurs when the carrying amount of goodwill exceeds its implied fair value. A two-step impairment test is used to identify potential goodwill impairment and measure the
amount of goodwill impairment loss to be recognized, if any. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds
its carrying amount, goodwill of the reporting unit is considered not to be impaired, thus the second step of the impairment test is unnecessary.

The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the reporting units goodwill with the carrying amount of that goodwill. If the carrying amount of that
reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill.



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As discussed above, we follow the full cost method of accounting for oil and gas activities and all of our
producing properties are located in the United States. We have determined that for the purpose of performing an impairment test in accordance with SFAS 142, we have one reporting unit. SFAS 142 states that quoted market prices in active markets are
the best evidence of fair value and should be used as the basis for the fair value measurement, if available. Accordingly, we use the quoted market price of our common stock as a starting point in determining the fair value of our reporting unit.

We perform our goodwill impairment test annually as of December 31. We also perform interim impairment tests if events occur or circumstances
change that would indicate the fair value of our reporting unit may be below its carrying amount. Due to the adverse market conditions that continued to have a pervasive impact on the U.S. business climate in the first quarter of 2009, we performed
an interim goodwill impairment test as of March 31, 2009. In determining the fair value of our reporting unit in the first step of the goodwill impairment test, we applied a control premium to the quoted market price of our common stock, and we
concluded that our goodwill was not impaired as of that date. We determined the control premium through reference to control premiums in merger and acquisition transactions for our industry and other comparable industries. If the price of our common
stock declines, we could have an impairment of our goodwill in future periods.

An impairment of goodwill could significantly reduce earnings during
the period in which the impairment occurs and would result in a corresponding reduction to goodwill and stockholders equity.

Stock-Based
Compensation.Stock-based compensation for the three and six months ended June 30, 2009 and 2008 was (in thousands):



|                                      |  |                            |        |                          |   |        |  |      |        |  |   |       
|------------------------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                      |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                                      |  | 2009                       |        | 2008                     |   | 2009   |  | 2008
|Stock-based compensation included in: |  |                            |        |                          |   |        |  |      |        |  |   |       
|General and administrative expense    |  | $                          | 15,397 |                          | $ | 20,571 |  | $    | 29,914 |  | $ | 32,316
|Lease operating expenses              |  |                            | 2,671  |                          |   | 7,807  |  |      | 2,652  |  |   | 8,135 
|Oil and natural gas properties        |  |                            | 4,872  |                          |   | 8,704  |  |      | 8,272  |  |   | 11,543
|                                      |  |                            |        |                          |   |        |  |      |        |  |   |       
|Total stock-based compensation        |  | $                          | 22,940 |                          | $ | 37,082 |  | $    | 40,838 |  | $ | 51,994
|                                      |  |                            |        |                          |   |        |  |      |        |  |   |       

During the first six months of 2009, we granted 1.3 million restricted stock units at an average fair
value of $22.27 per share and 836 thousand stock appreciation rights with an average exercise price of $21.15 per share.

Comprehensive
Income. Other comprehensive income for the three and six months ended June 30, 2009 and 2008 consisted of (in thousands):



|                                                 |  |                            |        |      |                          |         |      |  |      |        |  |   |         |  
|------------------------------------------------ |  | -------------------------- | ------ | ---- | ------------------------ | ------- | ---- |  | ---- | ------ |  | - | ------- | -
|                                                 |  | Three Months EndedJune 30, |        |      | Six Months EndedJune 30, |        
|                                                 |  | 2009                       |        | 2008 |                          |         | 2009 |  | 2008 |       
|Net Income                                       |  | $                          | 43,649 |      | $                        | 202,918 |      |  | $    | 48,847 |  | $ | 366,419 |  
|Other Comprehensive Income                       |  |                            |        |      |                          |         |      |  |      |        |  |   |         |  
|Pension liability adjustment, net of tax benefit |  |                            | 678    |      |                          | (23     | )    |  |      | 684    |  |   | (47     | )
|                                                 |  |                            |        |      |                          |         |      |  |      |        |  |   |         |  
|Comprehensive Income                             |  | $                          | 44,327 |      | $                        | 202,895 |      |  | $    | 49,531 |  | $ | 366,372 |  
|                                                 |  |                            |        |      |                          |         |      |  |      |        |  |   |         |  

When we acquired Pogo Producing Company on November 6, 2007, we assumed responsibility for a defined
benefit pension plan for Pogo employees. In May 2009, we made final lump sum distributions and annuity purchases in settlement of the plans obligations and cleared the remaining balance in accumulated other comprehensive income.



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Recent Accounting Pronouncements.In December 2008, the SEC issued a final rule, Modernization of Oil
and Gas Reporting, which is effective January 1, 2010 for reporting 2009 oil and gas reserve information. The new disclosure requirements permit the use of new technologies to determine proved reserves if those technologies have been
demonstrated empirically to lead to reliable conclusions about reserve volumes. The new disclosure also requires companies to include nontraditional resources such as oil sands, shale, coalbeds or other nonrenewable natural resources in reserves if
they are intended to be upgraded to synthetic oil and gas. Currently the SEC requires that reserve volumes are determined using prices on the last day of the reporting period; however, the new disclosure requirements provide for reporting oil and
gas reserves using an average price based upon the prior twelve-month period rather than year-end prices. The twelve-month average price will also be used for purposes of calculating future net cash flows from proved oil and gas reserves for the SEC
full cost ceiling limitations, and the results will not be subject to a single day pricing mechanism. Although the Financial Accounting Standards Board (FASB) currently requires the price on the last day of the reporting period to be
used for accounting purposes, the FASB has added it to their agenda to conform with the SEC. The new requirements also will allow companies to disclose their probable and possible reserves to investors and will require companies to report the
independence and qualifications of their reserve preparer or auditor. We will adopt the provisions of the release as of December 31, 2009 for our 2009 Annual Report on Form 10-K. We are currently evaluating the impact of the release.

In April 2009, the FASB issued FASB Staff Position (FSP) FAS 157-4 Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly(FSP FAS 157-4) and FSP FAS 107-1 and APB 28-1 Interim Disclosures about Fair Value of Financial Instruments(FSP FAS
107-1 and APB 28-1). These FSPs are effective for interim reporting periods ending after June 15, 2009, with early adoption permitted; however, early adoption requires that the FSPs are adopted concurrently.

We early adopted these FSPs effective January 1, 2009, and the FSPs did not have a material impact on our consolidated financial position, results of
operations or cash flows:



| |  |  | FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements(SFAS 157), when the
volume and level of activity for the asset or liability have significantly decreased, as well as guidance for identifying circumstances that indicate a transaction is not orderly. This FSP emphasizes that even if there has been a significant
decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In May 2009, the FASB issued SFAS No. 165, Subsequent Events
(SFAS 165), which establishes principles and requirements for subsequent events. This statement defines the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that
may occur for potential recognition or disclosure in the financial statements, and the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. SFAS 165 also sets
forth the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim or annual periods ending after June 15, 2009. The adoption of SFAS 165 did not have an
impact on our consolidated financial position, results of operations or cash flows. We have evaluated events or transactions through August 6, 2009, in conjunction with our preparation of these financial statements.



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In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
(FIN) No. 46(R) (FIN 46(R)),(SFAS 167). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for
determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. This statement is effective for fiscal years beginning after November 15,
2009, and for interim periods within that first annual reporting period. We are currently evaluating the impact of the standard.

Note 2Long-Term
Debt

At June 30, 2009 and December 31, 2008, long-term debt consisted of (in thousands):



|                                                                       |  |          |           |              |   |          
|---------------------------------------------------------------------- |  | -------- | --------- | ------------ | - | ---------
|                                                                       |  | June 30, |           | December 31,
|                                                                       |  | 2009     |           | 2008        
|Senior revolving credit facility                                       |  | $        |          |              | $ | 1,305,000
|73/4% Senior Notes due 2015                                            |  |          | 600,000   |              |   | 600,000  
|10% Senior Notes due 2016 (less unamortized discount of $40.9 million) |  |          | 524,129   |              |   |         
|7% Senior Notes due 2017                                               |  |          | 500,000   |              |   | 500,000  
|75/8% Senior Notes due 2018                                            |  |          | 400,000   |              |   | 400,000  
|                                                                       |  |          |           |              |   |          
|                                                                       |  | $        | 2,024,129 |              | $ | 2,805,000
|                                                                       |  |          |           |              |   |          

On March 13, 2009, we entered into an amendment to our senior revolving credit facility. The amendment
reduced the borrowing base and commitments from $2.7 billion and $2.3 billion, respectively, to $1.5 billion. This reduction gives consideration to our derivative monetization (See Note 3  Derivative Instruments). Our borrowing base and
commitments were further reduced to $1.34 billion in recognition of our issuances of $565 million of 10% senior notes due 2016, which closed in March and April 2009 (10% Senior Notes). We recognized $10.9 million of debt extinguishment
costs in connection with the reductions in our commitments.

In addition, the amendment increased the cost of borrowings under
the facility. Amounts borrowed under our senior revolving credit facility bear an interest rate, at our election, equal to either: (i) the Eurodollar rate, which is based on LIBOR, plus an additional variable amount ranging from 2.00% to 2.75%;
(ii) the greater of (1) the prime rate, as determined by JPMorgan Chase Bank, (2) the federal funds rate, plus 1/2of 1%, and (3) the adjusted LIBOR rate plus 1%; or (iii) the over-night federal funds rate plus an additional variable amount ranging from 2.00% to 2.75% for swingline loans. The
additional variable amount of interest payable on outstanding borrowings is based on (1) the utilization rate as a percentage of the total amount of funds borrowed under our senior revolving credit facility to the conforming borrowing base, and
(2) our long-term debt ratings. Letter of credit fees under our senior revolving credit facility are based on the utilization rate and our long-term debt rating and range from 2.0% to 2.75%. Commitment fees are 0.50% of the amount available for
borrowing.

Our senior revolving credit facility is secured by 100% of the shares of stock in certain of our domestic and 65% of certain
foreign subsidiaries and mortgages covering at least 75% of the total present value of our domestic oil and gas properties. Our senior revolving credit facility, as amended, contains negative covenants that limit our ability, as well as the ability
of our restricted subsidiaries, among other things, to 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
take-or-pay or other prepayment 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.

As of June 30, 2009, we had no borrowings outstanding, $1.3 million in letters of credit outstanding and approximately $1.34 billion available for future
secured borrowings under our senior revolving credit facility.



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In March 2009, we issued $365 million of 10% Senior Notes due 2016, which were sold to the public at 92.373% of the
face value to yield 11.625% to maturity. In April 2009, an additional $200 million of 10% Senior Notes due 2016 were sold to the public at 92.969% of the face value, plus interest accrued from March 6, 2009, to yield 11.5% to maturity. The 10%
Senior Notes were issued under one indenture. We received approximately $330 million and $181 million of net proceeds, respectively, after deducting the underwriting discount, original issue discount and offering expenses. The net proceeds were used
to reduce indebtedness outstanding under our senior revolving credit facility and for general corporate purposes, including capital expenditures. We may redeem all or part of the 10% Senior Notes on or after March 1, 2013 at specified
redemption prices and prior to such date at a make-whole redemption price. In addition, prior to March 1, 2012 we may, at our option, redeem up to 35% of the 10% Senior Notes with the proceeds of 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 10% Senior Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase.

The 10% Senior Notes are general unsecured senior obligations. The 10% Senior Notes are jointly and severally guaranteed on a full and unconditional basis by
certain of our existing domestic subsidiaries. In the future, the guarantees may be released or terminated under certain circumstances. The 10% Senior Notes rank senior in right of payment to all of our existing and future subordinated indebtedness;
pari passu in right of payment with any of our existing and future unsecured indebtedness that is not by its terms subordinated to the 10% Senior Notes; effectively junior to our existing and future secured indebtedness, including
indebtedness under our senior revolving credit facility, to the extent 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.

Note 3Derivative Instruments

General

We are exposed to various market risks, including
volatility in oil and gas commodity prices, interest rates and foreign currency exchange rates. The level of derivative activity we engage in depends on our view of market conditions, available derivative prices and operating strategy. A variety of
derivative instruments may be utilized to manage our exposure to the volatility of oil and gas commodity prices, such as swaps, collars, puts, calls and various combinations of these instruments. Currently, we do not use derivatives to manage our
interest rate or foreign currency risk. Our senior notes are at fixed interest rates, and our revolving credit facility is at variable interest rates, although there are no amounts outstanding under our revolving credit facility as of June 30,
2009. Our foreign currency risk in Vietnam has been minimal due to the size of our operations.

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 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.

Under SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149), certain of our
derivatives were deemed to contain a significant financing element. 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 not accounted for under hedge accounting and do not have a significant financing element are reflected as investing activities in the Statement of Cash Flows.

For put options, we pay a premium to the counterparty in exchange for the sale of a put option. If the index price is below the strike price of the put option, we receive the difference between the strike price and the index
price multiplied by the contract volumes less the premium. If the market price settles at or above the strike price of the put option, we pay only the option premium.



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In a typical collar transaction, if the floating price based on a market index is below the floor price in the
derivative contract, we receive from the counterparty an amount equal to this difference multiplied by the specified volume. If the floating price exceeds the floor price and is less than the ceiling price, no payment is required by either party. If
the floating price exceeds the ceiling price, we must pay the counterparty an amount equal to the difference multiplied by the specified quantity. If we have less production than the volumes we have specified under the collar transaction when the
floating price exceeds the ceiling price, we must make payments against which there are no offsetting revenues from production.

In the first quarter
of 2009, we monetized our 2009 and 2010 crude oil put option contracts on 40,000 BOPD with weighted average strike prices of $106.16 per barrel and $111.49 per barrel, respectively. In addition, we terminated our crude oil swaps on 20,000 BOPD in
2009. As a result of this monetization, we received approximately $1.1 billion in net proceeds, which we used to reduce the outstanding balance on our senior revolving credit facility and for other general corporate purposes.

As of June 30, 2009, we had the following outstanding commodity derivative contracts, all of which settle monthly, and none of which were designated as
hedging instruments:



|                                |  |                      |  |               |  |                                |  |                        |  |          
|------------------------------- |  | -------------------- |  | ------------- |  | ------------------------------ |  | ---------------------- |  | ---------
|Period                          |  | InstrumentType       |  | DailyVolumes  |  | AveragePrice (1)               |  | AverageDeferredPremium |  | Index    
|Sales of Crude Oil Production   |  |                      |  |               |  |                                |  |                       
|2009                            |  |                      |  |               |  |                                |  |                        |  |          
|July - Dec                      |  | Put options          |  | 32,500 Bbls   |  | $55.00 Strike price            |  | $3.38 per Bbl          |  | WTI      
|                                |  |                      |  |               | 
|2010                            |  |                      |  |               |  |                                |  |                        |  |          
|Jan - Dec                       |  | Put options          |  | 40,000 Bbls   |  | $55.00 Strike price            |  | $5.00 per Bbl (2)      |  | WTI      
|                                |  |                      |  |               | 
|Sales of Natural Gas Production |  |                      |  |               |  |                                |  |                        |  |          
|2009                            |  |                      |  |               |  |                                |  |                        |  |          
|July - Dec                      |  | Collars              |  | 150,000 MMBtu |  | $10.00 Floor - $20.00 Ceiling  |  | $0.346 per MMBtu       |  | Henry Hub
|                                |  |                      |  |               | 
|2010                            |  |                      |  |               |  |                                |  |                        |  |          
|Jan - Dec                       |  | Three-way collars(3) |  | 85,000 MMBtu  |  | $6.12 Floor with a $4.64 Limit |  | $0.034 per MMBtu       |  | Henry Hub
|                                |  |                      |  |               |  | $8.00 Ceiling                  |  |                        |  |          



|(1) | The average strike prices do not reflect the cost to purchase the put options or collars.
|--- | -----------------------------------------------------------------------------------------

|(2) | In addition to the deferred premium, a premium averaging $3.86 per barrel was paid from the proceeds of our first quarter 2009 derivative monetization upon entering into these derivative contracts.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | If NYMEX is less than the $6.12 per MMBtu floor, we receive the difference between NYMEX and the
$6.12 per MMBtu floor up to a maximum of $1.48 per MMBtu. We pay the difference between NYMEX and $8.00 per MMBtu if NYMEX is greater than the $8.00 ceiling.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Balance Sheet

At June 30, 2009 and December 31, 2008, we had the following outstanding commodity derivative contracts, none of which were designated as hedging
instruments, recorded in our consolidated balance sheets (in thousands):



|                                                        |  |                                                     |  |                      |         |                  |   |          
|------------------------------------------------------- |  | --------------------------------------------------- |  | -------------------- | ------- | ---------------- | - | ---------
|                                                        |  |                                                     |  | Estimated Fair Value
|Instrument Type                                         |  | Balance Sheet Classification                        |  | June 30,2009         |         | December 31,2008
|Derivative assets not designated as hedging instruments |  |                                                     |  |                      |         |                 
|Crude oil puts                                          |  | Commodity derivative contracts - current assets     |  | $                    | 21,300  |                  | $ | 882,179  
|Crude oil swaps                                         |  | Commodity derivative contracts - current assets     |  |                      |        |                  |   | 5,124    
|Natural gas collars                                     |  | Commodity derivative contracts - current assets     |  |                      | 161,017 |                  |   | 215,391  
|Crude oil puts                                          |  | Commodity derivative contracts - non-current assets |  |                      | 20,930  |                  |   | 693,148  
|Natural gas collars                                     |  | Commodity derivative contracts - non-current assets |  |                      | 1,391   |                  |   |         
|                                                        |  |                                                     |  |                      |         |                  |   |          
|Total derivative assets                                 |  |                                                     |  | $                    | 204,638 |                  | $ | 1,795,842
|                                                        |  |                                                     |  |                      |         |                  |   |          



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##### Table of Contents

The following table provides supplemental information to reconcile the fair value of our derivative assets to our
consolidated balance sheets at June 30, 2009 and December 31, 2008, considering the deferred premiums and accrued interest and related settlement (payable) receivable amounts which are not included in the fair value disclosed in the table
above (in thousands):



|                                                          |  |              |          |      |                  |   |           |  
|--------------------------------------------------------- |  | ------------ | -------- | ---- | ---------------- | - | --------- | -
|                                                          |  | June 30,2009 |          |      | December 31,2008 |  
|Net fair value asset                                      |  | $            | 204,638  |      |                  | $ | 1,795,842 |  
|Deferred premium and accrued interest on puts and collars |  |              | (102,002 | )    |                  |   | (333,156  | )
|Settlement (payable) receivable                           |  |              | (3,294   | )    |                  |   | 13,333    |  
|                                                          |  |              |          |      |                  |   |           |  
|Net commodity derivative asset                            |  | $            | 99,342   |      |                  | $ | 1,476,019 |  
|                                                          |  |              |          |      |                  |   |           |  
|                                                          |  |             
|Commodity derivative contracts - current asset            |  | $            | 138,457  |      |                  | $ | 945,838   |  
|Commodity derivative contracts - non-current asset        |  |              | 852      |      |                  |   | 530,181   |  
|Commodity derivative contracts - current liability        |  |              | (24,935  | )(1) |                  |   |          |  
|Commodity derivative contracts - non-current liability    |  |              | (15,032  | )(2) |                  |   |          |  
|                                                          |  |              |          |      |                  |   |           |  
|                                                          |  | $            | 99,342   |      |                  | $ | 1,476,019 |  
|                                                          |  |              |          |      |                  |   |           |  
|                                                          |  |              |          |      |                  |   |           |  

| | (1) | Amount is included in other current liabilities.
| | --- | ------------------------------------------------

| | (2) | Amount is included in other long-term liabilities.
| | --- | --------------------------------------------------

We present the fair value of our derivatives on a net basis in accordance with FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts an interpretation of APB Opinion No. 10 and FASB Statement
No. 105(FIN 39).

Income Statement

During the three and six months ended June 30, 2009 and 2008, pre-tax amounts recognized in our consolidated statements of income were as follows (in thousands):



|                                            |  |                            |         |   |                          |   |         |      |  |   |        |   |  |   |         |  
|------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                            |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                            |  | 2009                       |         |   | 2008                     |   |         | 2009 |  |   | 2008   |  
|Loss on mark-to-market derivative contracts |  | $                          | (89,717 | ) |                          | $ | (51,427 | )    |  | $ | (1,578 | ) |  | $ | (60,908 | )

Cash Payments and Receipts

During the six months ended June 30, 2009 and 2008, cash receipts (payments) for derivatives were as follows (in thousands):



|                                         |  |                          |           |      |   |         |  
|---------------------------------------- |  | ------------------------ | --------- | ---- | - | ------- | -
|                                         |  | Six Months EndedJune 30, |          
|                                         |  | 2009                     |           | 2008 |  
|Mark-to-market derivative contracts      |  |                          |           |      |   |         |  
|Oil sales                                |  |                          |           |      |   |         |  
|Settlements                              |  | $                        | 159,592   |      | $ | (43,108 | )
|Monetization of crude oil puts and swaps |  |                          | 1,074,361 |      |   |        |  
|Gas sales                                |  |                          | 147,761   |      |   | 427     |  
|                                         |  |                          |           |      |   |         |  
|                                         |  | $                        | 1,381,714 |      | $ | (42,681 | )
|                                         |  |                          |           |      |   |         |  



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##### Table of Contents

Credit Risk

We
do not require collateral or other security to support derivative instruments subject to credit risk. However, the agreements with each of the counterparties to our derivative instruments contain netting provisions within the agreements. If a
default occurs under the agreements, the non-defaulting party can offset the amount payable to the defaulting party under the derivative contracts with the amount due from the defaulting party under the derivatives contracts. As a result of the
netting provisions under the agreements, our maximum amount of loss due to credit risk is limited to the net amounts due to and from the counterparties under the derivative contracts. The maximum amount of loss due to credit risk that we would incur
if all the counterparties to our derivative contracts failed to perform according to the terms of the derivative contracts at June 30, 2009 is $100.5 million.

At June 30, 2009, we had the following commodity derivative net asset (liability) balances with counterparties rated by Standard & Poors (S&P) (in thousands):



|              |  |               |         |                          |   |                      |  |   |         |  
|------------- |  | ------------- | ------- | ------------------------ | - | -------------------- |  | - | ------- | -
|S&P Rating    |  | FairValue (1) |         | DeferredPremiumLiability |   | NetAsset (Liability) | 
|AA / Negative |  | $             | 17,892  |                          | $ | 34,815               |  | $ | (16,923 | )
|AA- /Negative |  |               | 5,607   |                          |   | 324                  |  |   | 5,283   |  
|A+ / Stable   |  |               | 105,355 |                          |   | 9,839                |  |   | 95,516  |  
|A / Negative  |  |               | 75,784  |                          |   | 57,024               |  |   | 18,760  |  
|              |  |               |         |                          |   |                      |  |   |         |  
|              |  | $             | 204,638 |                          | $ | 102,002              |  | $ | 102,636 |  
|              |  |               |         |                          |   |                      |  |   |         |  
|              |  |               |         |                          |   |                      |  |   |         |  

| | (1) | The fair value is reduced by approximately $1.2 million,
representing an estimate of the effect of the credit quality of our counterparties as of June 30, 2009. The fair value does not include the settlements payable of $3.3 million at June 30, 2009.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Contingent Features

The counterparties to our commodity
derivative contracts consist of eight financial institutions. Our counterparties or their affiliates are generally also lenders under our senior revolving credit facility. As a result, the counterparties to our derivative agreements share in the
collateral supporting our senior revolving credit facility. Therefore, we are not generally required to post additional collateral under our derivative agreements.

Certain of our derivative agreements contain provisions that require cross defaults and acceleration of those instruments to any material debt. If we were to default on any of our material debt agreements, it would be a
violation of these provisions, and the counterparties to the derivative instruments could request immediate payment on derivative instruments that are in a net liability position at that time. As of June 30, 2009, we are in a net liability
position with three of the counterparties to our derivative instruments, totaling $36.1 million.

Note 4Fair Value Measurements of Assets and Liabilities

We adopted SFAS No. 157 on January 1, 2008 for our financial assets and liabilities measured on a recurring basis. On January 1,
2009, we adopted FSP FAS 157-2 Effective Date of FASB Statement No. 157(FSP FAS 157-2) for our nonfinancial assets and liabilities, such as asset retirement obligations, goodwill and other property and equipment, which we
disclose or recognize at fair value on a nonrecurring basis. As none of our assets and liabilities within the scope of this statement are impaired at the end of the second quarter and no other fair value measurements were required to be recognized
on a nonrecurring basis, no additional disclosures are provided at June 30, 2009. The adoption of FSP FAS 157-2 did not have a material impact on our consolidated financial position, results of operations or cash flows. We early adopted FSP FAS
157-4 and FSP FAS 107-1 and APB 28-1 during the first quarter of 2009 as described in Note 1.



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##### Table of Contents

SFAS No. 157 defines fair value and establishes disclosure requirements for assets and liabilities presented
at fair value on our consolidated balance sheets. Fair value is the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants. A liability is quantified at
the price it would take to transfer the liability to a new obligor, not at the amount that would be paid to settle the liability with the creditor. SFAS No. 157 establishes a three-level hierarchy, prioritizing and defining the types of inputs
used to measure fair value. Level 1 inputs consist of unadjusted quoted prices for identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments which are directly or indirectly observable for substantially
the full term of the asset or liability. Level 3 valuations are derived from significant inputs which are unobservable.

The following table
presents, for each fair value hierarchy level, our commodity derivative assets which are measured at fair value on a recurring basis as of June 30, 2009 (in thousands):



|                            |  |              |                                                            |                                                 |                                           |   |                                        |   |        |  |   |        
|--------------------------- |  | ------------ | ---------------------------------------------------------- | ----------------------------------------------- | ----------------------------------------- | - | -------------------------------------- | - | ------ |  | - | -------
|                            |  | FairValue(1) |                                                            | Fair Value Measurements at Reporting Date Using
|                            |  |              | Quoted Prices inActive MarketsforIdentical Assets(Level 1) |                                                 | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level 3)
|June 30, 2009               |  |              |                                                            |                                                 |                                           |   |                                        |   |        |  |   |        
|Commodity derivative assets |  | $            | 204,638                                                    |                                                 | $                                         |  |                                        | $ | 42,230 |  | $ | 162,408



|(1) | Option premium, interest and settlement payable are not
included in the fair value of derivatives.
|--- | --------------------------------------------------------------------------------------------------

We estimate the fair values of our derivative instruments, including crude oil put
options and natural gas collars, using an option-pricing model, which uses various inputs including NYMEX price quotations, volatilities, interest rates and contract terms. We adjust the valuations from the model for credit quality, using the
counterpartys credit quality for asset balances and our credit quality for liability balances. For asset balances, we use the credit default swap value for counterparties when available, or the spread between the risk-free interest rate and
the yield on the counterpartys publicly-traded debt for similar maturities. We consider the impact of netting agreements on counterparty credit risk, including whether the position with the counterparty is a net asset or net liability.

We classify derivatives that have identical assets or liabilities with quoted, unadjusted prices in active markets as Level 1. We classify our
derivatives as Level 2 if the inputs used in the valuation model are directly or indirectly observable for substantially the full term of the instrument; however, if the significant inputs are not observable for substantially the full term of the
instrument, we classify those derivatives as Level 3. We determine whether the market for our derivative instruments is active or inactive based on transaction volume for such instruments and classify as Level 3 those instruments that are not
actively traded. For these inputs, we utilize pricing and volatility information from other instruments with similar characteristics and extrapolate data between data points for thinly traded instruments. Our crude oil put options are classified as
Level 2, and our natural gas collars are classified as Level 3 instruments.



14



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##### Table of Contents

The following table presents a reconciliation of changes in fair value of financial assets and liabilities
classified as Level 3 for the six months ended June 30, 2009 (in thousands):

|                                                                                                             |  |                                   |            |  
|------------------------------------------------------------------------------------------------------------ |  | --------------------------------- | ---------- | -
|                                                                                                             |  | Six Months EndedJune 30, 2009 (1) |           
|Fair value at beginning of period                                                                            |  | $                                 | 1,790,718  |  
|Realized and unrealized gains included in earnings(2)                                                        |  |                                   | 204,568    |  
|Purchases and settlements                                                                                    |  |                                   | (1,708,188 | )
|Transfers                                                                                                    |  |                                   | (124,690   | )
|                                                                                                             |  |                                   |            |  
|Fair value at end of period                                                                                  |  | $                                 | 162,408    |  
|                                                                                                             |  |                                   |            |  
|                                                                                                             | 
|Change in unrealized gains and losses relating to assets and liabilities held as of the end of the period(2) |  | $                                 | 59,077     |  
|                                                                                                             |  |                                   |            |  
|                                                                                                             |  |                                   |            |  

| | (1) | Deferred option premiums and accrued interest are not included in the fair value of derivatives.
| | --- | ------------------------------------------------------------------------------------------------

| | (2) | Realized and unrealized gains and losses included in earnings
for the period are reported as loss on mark-to-market derivative contracts in our consolidated statement of income.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following
disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments (SFAS 107) and FSP FAS 107-1 and
APB 28-1, which we early adopted effective January 1, 2009 as described in Note 1. The estimated fair value amounts have been determined using available market information and valuation methodologies described below. Considerable judgment
is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

The carrying values of items comprising current assets and current liabilities approximate fair value due to the short-term maturities of these instruments.
Derivative financial instruments included in our financial statements are stated at fair value; however, certain of our derivative financial instruments have a deferred premium, including our crude oil put option contracts and natural gas collars.
We offset the fair value of the derivative financial instruments by the amount of deferred premium in accordance with FIN 39.

The carrying amounts and fair values
of our other financial instruments are as follows (in thousands):



|                                         |  |                |         |                   |   |                |  |           |           |  |   |          
|---------------------------------------- |  | -------------- | ------- | ----------------- | - | -------------- |  | --------- | --------- |  | - | ---------
|                                         |  | June 30, 2009  |         | December 31, 2008
|                                         |  | CarryingAmount |         | FairValue         |   | CarryingAmount |  | FairValue
|Current Liability                        |  |                |         |                   |   |                |  |           |           |  |   |          
|Deferred premium on derivative contracts |  | $              | 65,501  |                   | $ | 65,501         |  | $         | 170,189   |  | $ | 170,189  
|Non-Current Liability                    |  |                |         |                   |   |                |  |           |           |  |   |          
|Deferred premium on derivative contracts |  |                | 36,501  |                   |   | 36,501         |  |           | 162,967   |  |   | 162,967  
|Long-Term Debt                           |  |                |         |                   |   |                |  |           |           |  |   |          
|Senior revolving credit facility         |  |                |        |                   |   |               |  |           | 1,305,000 |  |   | 1,125,945
|73/4% Senior Notes                       |  |                | 600,000 |                   |   | 561,000        |  |           | 600,000   |  |   | 453,000  
|10% Senior Notes                         |  |                | 565,000 |                   |   | 580,538        |  |           |          |  |   |         
|7% Senior Notes                          |  |                | 500,000 |                   |   | 436,250        |  |           | 500,000   |  |   | 342,500  
|75/8% Senior Notes                       |  |                | 400,000 |                   |   | 358,000        |  |           | 400,000   |  |   | 274,000  



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##### Table of Contents

The fair value of our senior revolving credit facility as of December 31, 2008 is based on rates then
available for debt instruments with similar terms and average maturities from companies with similar credit ratings in our industry. The fair value of our Senior Notes is based on quoted market prices from trades of such debt.

Note 5Income Taxes

Income tax expense during interim periods is
based on the estimated annual effective income tax rate plus any significant unusual or infrequently occurring items which are recorded in the period that the specific item occurs. For the three months ended June 30, 2009, our income tax
benefit was approximately negative 105% of pre-tax income, and for the six months ended June 30, 2009, income tax expense was approximately 13% of pretax income. Variances in our estimated annual effective tax rate from the 35% federal
statutory rate primarily result from the tax effects of estimated annual permanent differences, including (1) expenses that are not deductible because of Internal Revenue Service limitations, (2) the special deduction for domestic
production, and (3) state income taxes. Specific items affecting our income tax benefit (expense) for both the three months and six months ended June 30, 2009 included significant changes to our balance of unrecognized tax positions and
adjustments to deferred taxes for differences in certain expenses between our consolidated financial statements and tax.

In the second quarter of
2009, the IRS completed the field work related to its examination of certain of our federal income tax returns for 2000 through 2004 and issued revenue agent reports for all of these years. As a result of these second quarter events, we reduced the
balance of our net unrecognized tax positions related to certain deductions and tax credits by approximately $29 million which positively impacted our net income by approximately $24 million in the second quarter. We had approximately $47.2 million
of gross unrecognized tax benefits at December 31, 2008. At June 30, 2009, we had approximately $16.5 million of gross unrecognized tax benefits. If all of our unrecognized tax benefits are recognized in future periods, approximately $15.7
million will impact our effective tax rate.

For the second quarter of 2009, our current tax benefit was approximately negative 205% of pre-tax
income. This unusual rate is primarily the result of a significant increase in our estimated tax deductions associated with oil and gas drilling expenditures for 2009, together with the effects of temporary differences between the book and tax
recognition of income attributable to our oil and gas derivative positions.

Note 6Commitments and Contingencies

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

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 provide assurance that we will be able to
collect on these indemnities.



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##### Table of Contents

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, $42 million ($84 million undiscounted), is 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
$66 million). To secure its abandonment obligations, the purchaser of the properties is required to periodically deposit funds into an escrow account. At June 30, 2009, the escrow account had a balance of $12 million. The fair
value of our guarantee at June 30, 2009 was $0.7 million and is included in other long-term liabilities in our 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.

In the event we make a claim under our insurance policies, we will be subject to the credit risk of the insurers. During the first half of 2009, the volatility and
disruption in the financial and credit markets reached unprecedented levels, which may adversely affect the credit quality of our insurers and impact their ability to pay out claims.

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 July 7, 2008, we acquired from a subsidiary of Chesapeake Energy Corporation, or Chesapeake, a 20% interest in Chesapeakes
Haynesville Shale leasehold as of June 30, 2008 for approximately $1.65 billion in cash. In connection with the acquisition we also agreed, over a multi-year period, to fund 50% of Chesapeakes drilling and completion costs associated with
future Haynesville Shale wells, up to an additional $1.65 billion. As of June 30, 2009 approximately $1.4 billion of this commitment remains. On February 20, 2009, we and Chesapeake entered into certain amended agreements which, among
other matters, provides us with a one-time option, exercisable without further monetary obligation, between June 15, 2010 and June 30, 2010, to reduce our obligation to pay 50% of Chesapeakes drilling and completion costs by $800
million in exchange for an assignment to Chesapeake, effective December 31, 2010, of 50% of all of our interest in the Haynesville properties. On August 5, 2009, we entered into another amendment to our agreement in which we agreed to pay
$1.1 billion for the remaining commitments for future Haynesville Shale wells due to Chesapeake as of September 30, 2009, estimated at $1.25 billion (See Note 9Subsequent Event).

As of June 30, 2009, we had four participation agreements to drill wells in the Gulf of Mexico and we are committed to drill one remaining well offshore Vietnam under our Production Sharing Contract
with PetroVietnam. We have a remaining commitment of approximately $164.2 million for these projects. Additionally, we have a drilling rig commitment through December 31, 2009. The minimum commitment under this contract is approximately $4.5
million.



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##### Table of Contents

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. Plaintiffs filed a motion for final judgment on November 29, 2006 and the court granted such motion on January 11, 2007. Judgment on the $1
billion on 35 leases was filed January 12, 2007. The United States filed an appeal and Plaintiffs filed a cross-appeal concerning the Courts October 31, 2006 decision. The United States Court of Appeals for the Federal Circuit
affirmed on August 25, 2008 the trial courts judgment in all respects concluding that the lessees may recover $1 billion in lease bonuses paid. The United States filed combined petitions for rehearing and rehearing en banc in October
2008, but the United States Court of Appeals for the Federal Circuit denied the Governments combined petitions on December 5, 2008. On December 24, 2008, the United States Court of Appeals for the Federal Circuit agreed to stay the
mandate for 90 days pending consideration of the Governments possible filing of a petition for writ of certiorari and on March 13, 2009, the Court agreed to grant a 30 day extension of such deadline. No petition for writ was filed by the
deadline so all appeals have either been waived or exhausted. On April 10, 2009, Plaintiffs filed with the United States Court of Federal Claims a motion to enforce the $1 billion judgment. Oral arguments on such motion were heard on
May 6, 2009.

On May 11, 2009, the United States Government certified payment of the $1 billion judgment in full to all lessees of the 35
leases. In the second quarter, we received a net recovery of $87.3 million as our share of the $1 billion award.

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.

Note
7Stockholders Equity

During the second quarter, we sold to the public 13.8 million shares of our common stock priced at $18.70
per share and we received $250.9 million of net proceeds after deducting the underwriting discount and offering expenses. The net proceeds are being used for general corporate purposes, including future capital expenditures.

Note 8Consolidating Financial Statements

We
are the issuer of $600 million of 73/4% Senior Notes, $565 million of 10%
Senior Notes, $500 million of 7% Senior Notes and $400 million of 75/8% Senior Notes as of June 30, 2009, 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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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

JUNE 30, 2009

(in thousands of dollars)



|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|----------------------------------------------------------------------- |  | ------ | ---------- | - | --------------------- | - | ---------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | ---------- | - |  | - | ---------- | -
|                                                                        |  | Issuer |            |   | GuarantorSubsidiaries |   |            | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |           
|ASSETS                                                                  |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Current Assets                                                          |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Cash and cash equivalents                                               |  | $      | 455,090    |   |                       | $ | 12         |                           |  | $ | 743                      |   |  | $            |           |   |  | $ | 455,845    |  
|Accounts receivable and other current assets                            |  |        | 296,609    |   |                       |   | 88,736     |                           |  |   | 3,721                    |   |  |              | (19,241    | ) |  |   | 369,825    |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                                        |  |        | 751,699    |   |                       |   | 88,748     |                           |  |   | 4,464                    |   |  |              | (19,241    | ) |  |   | 825,670    |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Property and Equipment, at cost                                         |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Oil and natural gas properties-full cost method                         |  |        | 3,768,263  |   |                       |   | 6,605,249  |                           |  |   | 42,005                   |   |  |              |           |   |  |   | 10,415,517 |  
|Other property and equipment                                            |  |        | 48,100     |   |                       |   | 35,647     |                           |  |   | 36,603                   |   |  |              |           |   |  |   | 120,350    |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                                        |  |        | 3,816,363  |   |                       |   | 6,640,896  |                           |  |   | 78,608                   |   |  |              |           |   |  |   | 10,535,867 |  
|Less allowance for depreciation, depletion, amortization and impairment |  |        | (2,107,099 | ) |                       |   | (4,430,877 | )                         |  |   | (34                      | ) |  |              | 1,146,075  |   |  |   | (5,391,935 | )
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                                        |  |        | 1,709,264  |   |                       |   | 2,210,019  |                           |  |   | 78,574                   |   |  |              | 1,146,075  |   |  |   | 5,143,932  |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Investment in and Advances to Affiliates                                |  |        | 3,470,051  |   |                       |   | (521,497   | )                         |  |   | (84,032                  | ) |  |              | (2,864,522 | ) |  |   |           |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Other Assets                                                            |  |        | 19,957     |   |                       |   | 574,498    |                           |  |   |                         |   |  |              |           |   |  |   | 594,455    |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                                        |  | $      | 5,950,971  |   |                       | $ | 2,351,768  |                           |  | $ | (994                     | ) |  | $            | (1,737,688 | ) |  | $ | 6,564,057  |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                    |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Current Liabilities                                                     |  | $      | 397,912    |   |                       | $ | 279,520    |                           |  | $ | 6,030                    |   |  | $            | (19,241    | ) |  | $ | 664,221    |  
|Long-Term Debt                                                          |  |        | 2,024,129  |   |                       |   |           |                           |  |   |                         |   |  |              |           |   |  |   | 2,024,129  |  
|Other Long-Term Liabilities                                             |  |        | 150,920    |   |                       |   | 60,634     |                           |  |   |                         |   |  |              |           |   |  |   | 211,554    |  
|Deferred Income Taxes                                                   |  |        | 668,981    |   |                       |   | (189,269   | )                         |  |   | 2,064                    |   |  |              | 473,348    |   |  |   | 955,124    |  
|Stockholders Equity                                                    |  |        | 2,709,029  |   |                       |   | 2,200,883  |                           |  |   | (9,088                   | ) |  |              | (2,191,795 | ) |  |   | 2,709,029  |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                                        |  | $      | 5,950,971  |   |                       | $ | 2,351,768  |                           |  | $ | (994                     | ) |  | $            | (1,737,688 | ) |  | $ | 6,564,057  |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2008

(in thousands of dollars)



|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|----------------------------------------------------------------------- |  | ------ | ---------- | - | --------------------- | - | ---------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | ---------- | - |  | - | ---------- | -
|                                                                        |  | Issuer |            |   | GuarantorSubsidiaries |   |            | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |           
|ASSETS                                                                  |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Current Assets                                                          |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Cash and cash equivalents                                               |  | $      | 309,362    |   |                       | $ | 285        |                           |  | $ | 2,228                    |   |  | $            |           |   |  | $ | 311,875    |  
|Accounts receivable and other current assets                            |  |        | 1,045,947  |   |                       |   | 161,469    |                           |  |   | 1,765                    |   |  |              | (44,615    | ) |  |   | 1,164,566  |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                                        |  |        | 1,355,309  |   |                       |   | 161,754    |                           |  |   | 3,993                    |   |  |              | (44,615    | ) |  |   | 1,476,441  |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Property and Equipment, at cost                                         |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Oil and natural gas properties-full cost method                         |  |        | 3,465,656  |   |                       |   | 6,139,111  |                           |  |   | 15,442                   |   |  |              |           |   |  |   | 9,620,209  |  
|Other property and equipment                                            |  |        | 45,689     |   |                       |   | 35,048     |                           |  |   | 30,253                   |   |  |              |           |   |  |   | 110,990    |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                                        |  |        | 3,511,345  |   |                       |   | 6,174,159  |                           |  |   | 45,695                   |   |  |              |           |   |  |   | 9,731,199  |  
|Less allowance for depreciation, depletion, amortization and impairment |  |        | (2,011,763 | ) |                       |   | (3,481,169 | )                         |  |   | (24                      | ) |  |              | 275,153    |   |  |   | (5,217,803 | )
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                                        |  |        | 1,499,582  |   |                       |   | 2,692,990  |                           |  |   | 45,671                   |   |  |              | 275,153    |   |  |   | 4,513,396  |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Investment in and Advances to Affiliates                                |  |        | 3,130,150  |   |                       |   | (152,601   | )                         |  |   | (40,606                  | ) |  |              | (2,936,943 | ) |  |   |           |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Other Assets                                                            |  |        | 552,498    |   |                       |   | 569,580    |                           |  |   |                         |   |  |              |           |   |  |   | 1,122,078  |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                                        |  | $      | 6,537,539  |   |                       | $ | 3,271,723  |                           |  | $ | 9,058                    |   |  | $            | (2,706,405 | ) |  | $ | 7,111,915  |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                    |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Current Liabilities                                                     |  | $      | 758,476    |   |                       | $ | 278,375    |                           |  | $ | 1,409                    |   |  | $            | (44,615    | ) |  | $ | 993,645    |  
|Long-Term Debt                                                          |  |        | 2,805,000  |   |                       |   |           |                           |  |   |                         |   |  |              |           |   |  |   | 2,805,000  |  
|Other Long-Term Liabilities                                             |  |        | 132,621    |   |                       |   | 58,913     |                           |  |   |                         |   |  |              |           |   |  |   | 191,534    |  
|Deferred Income Taxes                                                   |  |        | 464,162    |   |                       |   | 174,991    |                           |  |   | 2,527                    |   |  |              | 102,776    |   |  |   | 744,456    |  
|Stockholders Equity                                                    |  |        | 2,377,280  |   |                       |   | 2,759,444  |                           |  |   | 5,122                    |   |  |              | (2,764,566 | ) |  |   | 2,377,280  |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                                        |  | $      | 6,537,539  |   |                       | $ | 3,271,723  |                           |  | $ | 9,058                    |   |  | $            | (2,706,405 | ) |  | $ | 7,111,915  |  
|                                                                        |  |        |            |   |                       |   |            |                           |  |   |                          |   |  |              |            |   |  |   |            |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED JUNE 30, 2009

(in thousands of dollars)



|                                                    |  |        |         |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|--------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | -------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                    |  | Issuer |         |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |         
|Revenues                                            |  |        |         |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Oil sales                                           |  | $      | 181,842 |   |                       | $ | 37,747   |                           |  | $ |                         |   |  | $            |         |   |  | $ | 219,589 |  
|Gas sales                                           |  |        | 13,044  |   |                       |   | 45,497   |                           |  |   |                         |   |  |              |         |   |  |   | 58,541  |  
|Other operating revenues                            |  |        | 239     |   |                       |   | 312      |                           |  |   |                         |   |  |              |         |   |  |   | 551     |  
|                                                    |  |        |         |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|                                                    |  |        | 195,125 |   |                       |   | 83,556   |                           |  |   |                         |   |  |              |         |   |  |   | 278,681 |  
|                                                    |  |        |         |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Costs and Expenses                                  |  |        |         |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Production costs                                    |  |        | 69,523  |   |                       |   | 36,289   |                           |  |   |                         |   |  |              |         |   |  |   | 105,812 |  
|General and administrative                          |  |        | 23,926  |   |                       |   | 13,456   |                           |  |   | 172                      |   |  |              |         |   |  |   | 37,554  |  
|Depreciation, depletion, amortization and accretion |  |        | 51,613  |   |                       |   | 44,442   |                           |  |   | 6                        |   |  |              | (1,683   | ) |  |   | 94,378  |  
|Impairment of oil and gas properties                |  |        |        |   |                       |   | 231,629  |                           |  |   |                         |   |  |              | (231,629 | ) |  |   |        |  
|Legal settlement recovery                           |  |        | (81,790 | ) |                       |   | (5,482   | )                         |  |   |                         |   |  |              |         |   |  |   | (87,272 | )
|Other operating expenses                            |  |        | 597     |   |                       |   | 902      |                           |  |   |                         |   |  |              |         |   |  |   | 1,499   |  
|                                                    |  |        |         |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|                                                    |  |        | 63,869  |   |                       |   | 321,236  |                           |  |   | 178                      |   |  |              | (233,312 | ) |  |   | 151,971 |  
|                                                    |  |        |         |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Income (Loss) from Operations                       |  |        | 131,256 |   |                       |   | (237,680 | )                         |  |   | (178                     | ) |  |              | 233,312  |   |  |   | 126,710 |  
|Other Income (Expense)                              |  |        |         |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Equity in earnings of subsidiaries                  |  |        | 77,737  |   |                       |   | (199     | )                         |  |   |                         |   |  |              | (77,538  | ) |  |   |        |  
|Interest expense                                    |  |        | (10,990 | ) |                       |   | (3,402   | )                         |  |   | (1,543                   | ) |  |              |         |   |  |   | (15,935 | )
|Debt extinguishment costs                           |  |        | (667    | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (667    | )
|Loss on mark-to-market derivative contracts         |  |        | (89,717 | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (89,717 | )
|Other income (expense)                              |  |        | 990     |   |                       |   | (70      | )                         |  |   | (21                      | ) |  |              |         |   |  |   | 899     |  
|                                                    |  |        |         |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Income (Loss) Before Income Taxes                   |  |        | 108,609 |   |                       |   | (241,351 | )                         |  |   | (1,742                   | ) |  |              | 155,774  |   |  |   | 21,290  |  
|Income tax (expense) benefit                        |  |        | (64,960 | ) |                       |   | 91,684   |                           |  |   | 579                      |   |  |              | (4,944   | ) |  |   | 22,359  |  
|                                                    |  |        |         |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Net Income (Loss)                                   |  | $      | 43,649  |   |                       | $ | (149,667 | )                         |  | $ | (1,163                   | ) |  | $            | 150,830  |   |  | $ | 43,649  |  
|                                                    |  |        |         |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |         |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED JUNE 30, 2008

(in thousands of dollars)



|                                                    |  |        |         |   |                       |   |         |                           |  |                          |     |  |              |         |   |  |   |          |  
|--------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------- | ------------------------- |  | ------------------------ | --- |  | ------------ | ------- | - |  | - | -------- | -
|                                                    |  | Issuer |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  | IntercompanyEliminations |     |  | Consolidated |        
|Revenues                                            |  |        |         |   |                       |   |         |                           |  |                          |     |  |              |         |   |  |   |          |  
|Oil sales                                           |  | $      | 400,971 |   |                       | $ | 144,796 |                           |  | $                        |    |  | $            |        |   |  | $ | 545,767  |  
|Gas sales                                           |  |        | 15,489  |   |                       |   | 166,845 |                           |  |                          |    |  |              |        |   |  |   | 182,334  |  
|Other operating revenues                            |  |        | 296     |   |                       |   | 4,306   |                           |  |                          |    |  |              |        |   |  |   | 4,602    |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |     |  |              |         |   |  |   |          |  
|                                                    |  |        | 416,756 |   |                       |   | 315,947 |                           |  |                          |    |  |              |        |   |  |   | 732,703  |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |     |  |              |         |   |  |   |          |  
|Costs and Expenses                                  |  |        |         |   |                       |   |         |                           |  |                          |     |  |              |         |   |  |   |          |  
|Production costs                                    |  |        | 107,528 |   |                       |   | 55,623  |                           |  |                          |    |  |              |        |   |  |   | 163,151  |  
|General and administrative                          |  |        | 28,704  |   |                       |   | 16,499  |                           |  |                          |    |  |              |        |   |  |   | 45,203   |  
|Depreciation, depletion, amortization and accretion |  |        | 54,023  |   |                       |   | 77,164  |                           |  |                          |    |  |              | 2,785   |   |  |   | 133,972  |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |     |  |              |         |   |  |   |          |  
|                                                    |  |        | 190,255 |   |                       |   | 149,286 |                           |  |                          |    |  |              | 2,785   |   |  |   | 342,326  |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |     |  |              |         |   |  |   |          |  
|Income from Operations                              |  |        | 226,501 |   |                       |   | 166,661 |                           |  |                          |    |  |              | (2,785  | ) |  |   | 390,377  |  
|Other Income (Expense)                              |  |        |         |   |                       |   |         |                           |  |                          |     |  |              |         |   |  |   |          |  
|Equity in earnings of subsidiaries                  |  |        | 94,323  |   |                       |   | 733     |                           |  |                          |    |  |              | (95,056 | ) |  |   |         |  
|Interest expense                                    |  |        | (15,914 | ) |                       |   | (8,136  | )                         |  |                          |    |  |              | 539     |   |  |   | (23,511  | )
|Loss on mark-to-market derivative contracts         |  |        | (23,991 | ) |                       |   | (27,436 | )                         |  |                          |    |  |              |        |   |  |   | (51,427  | )
|Other income                                        |  |        | 664     |   |                       |   | 827     |                           |  |                          | 734 |  |              | (539    | ) |  |   | 1,686    |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |     |  |              |         |   |  |   |          |  
|Income Before Income Taxes                          |  |        | 281,583 |   |                       |   | 132,649 |                           |  |                          | 734 |  |              | (97,841 | ) |  |   | 317,125  |  
|Income tax (expense) benefit                        |  |        | (78,665 | ) |                       |   | (36,507 | )                         |  |                          | 1   |  |              | 964     |   |  |   | (114,207 | )
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |     |  |              |         |   |  |   |          |  
|Net Income                                          |  | $      | 202,918 |   |                       | $ | 96,142  |                           |  | $                        | 735 |  | $            | (96,877 | ) |  | $ | 202,918  |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |     |  |              |         |   |  |   |          |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

SIX MONTHS ENDED JUNE 30, 2009

(in thousands of dollars)



|                                                    |  |        |         |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|--------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | --------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                    |  | Issuer |         |   | GuarantorSubsidiaries |   |           | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |         
|Revenues                                            |  |        |         |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Oil sales                                           |  | $      | 312,450 |   |                       | $ | 63,753    |                           |  | $ |                         |   |  | $            |         |   |  | $ | 376,203 |  
|Gas sales                                           |  |        | 30,738  |   |                       |   | 99,067    |                           |  |   |                         |   |  |              |         |   |  |   | 129,805 |  
|Other operating revenues                            |  |        | 560     |   |                       |   | 625       |                           |  |   |                         |   |  |              |         |   |  |   | 1,185   |  
|                                                    |  |        |         |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|                                                    |  |        | 343,748 |   |                       |   | 163,445   |                           |  |   |                         |   |  |              |         |   |  |   | 507,193 |  
|                                                    |  |        |         |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Costs and Expenses                                  |  |        |         |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Production costs                                    |  |        | 146,285 |   |                       |   | 75,178    |                           |  |   |                         |   |  |              |         |   |  |   | 221,463 |  
|General and administrative                          |  |        | 50,865  |   |                       |   | 23,433    |                           |  |   | 349                      |   |  |              |         |   |  |   | 74,647  |  
|Depreciation, depletion, amortization and accretion |  |        | 104,197 |   |                       |   | 84,882    |                           |  |   | 10                       |   |  |              | (3,066   | ) |  |   | 186,023 |  
|Impairment of oil and gas properties                |  |        |        |   |                       |   | 867,856   |                           |  |   |                         |   |  |              | (867,856 | ) |  |   |        |  
|Legal settlement recovery                           |  |        | (81,790 | ) |                       |   | (5,482    | )                         |  |   |                         |   |  |              |         |   |  |   | (87,272 | )
|Other operating expenses                            |  |        | 5,054   |   |                       |   | 902       |                           |  |   |                         |   |  |              |         |   |  |   | 5,956   |  
|                                                    |  |        |         |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|                                                    |  |        | 224,611 |   |                       |   | 1,046,769 |                           |  |   | 359                      |   |  |              | (870,922 | ) |  |   | 400,817 |  
|                                                    |  |        |         |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Income (Loss) from Operations                       |  |        | 119,137 |   |                       |   | (883,324  | )                         |  |   | (359                     | ) |  |              | 870,922  |   |  |   | 106,376 |  
|Other Income (Expense)                              |  |        |         |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Equity in earnings of subsidiaries                  |  |        | 7,468   |   |                       |   | (392      | )                         |  |   |                         |   |  |              | (7,076   | ) |  |   |        |  
|Interest expense                                    |  |        | (18,303 | ) |                       |   | (18,086   | )                         |  |   | (1,543                   | ) |  |              |         |   |  |   | (37,932 | )
|Debt extinguishment costs                           |  |        | (10,910 | ) |                       |   |          |                           |  |   |                         |   |  |              |         |   |  |   | (10,910 | )
|Loss on mark-to-market derivative contracts         |  |        | (1,578  | ) |                       |   |          |                           |  |   |                         |   |  |              |         |   |  |   | (1,578  | )
|Other income (expense)                              |  |        | 906     |   |                       |   | (681      | )                         |  |   | (33                      | ) |  |              |         |   |  |   | 192     |  
|                                                    |  |        |         |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Income (Loss) Before Income Taxes                   |  |        | 96,720  |   |                       |   | (902,483  | )                         |  |   | (1,935                   | ) |  |              | 863,846  |   |  |   | 56,148  |  
|Income tax (expense) benefit                        |  |        | (47,873 | ) |                       |   | 341,006   |                           |  |   | 579                      |   |  |              | (301,013 | ) |  |   | (7,301  | )
|                                                    |  |        |         |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |         |  
|Net Income (Loss)                                   |  | $      | 48,847  |   |                       | $ | (561,477  | )                         |  | $ | (1,356                   | ) |  | $            | 562,833  |   |  | $ | 48,847  |  
|                                                    |  |        |         |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |         |  



23



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

SIX MONTHS ENDED JUNE 30, 2008

(in thousands of dollars)



|                                                    |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|--------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | -------- | - |  | - | --------- | -
|                                                    |  | Issuer |          |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |         
|Revenues                                            |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Oil sales                                           |  | $      | 709,076  |   |                       | $ | 293,275 |                           |  | $ |                         |   |  | $            |         |   |  | $ | 1,002,351 |  
|Gas sales                                           |  |        | 21,161   |   |                       |   | 325,242 |                           |  |   |                         |   |  |              |         |   |  |   | 346,403   |  
|Other operating revenues                            |  |        | 939      |   |                       |   | 6,087   |                           |  |   |                         |   |  |              |         |   |  |   | 7,026     |  
|                                                    |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                    |  |        | 731,176  |   |                       |   | 624,604 |                           |  |   |                         |   |  |              |         |   |  |   | 1,355,780 |  
|                                                    |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Costs and Expenses                                  |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Production costs                                    |  |        | 191,307  |   |                       |   | 124,864 |                           |  |   |                         |   |  |              |         |   |  |   | 316,171   |  
|General and administrative                          |  |        | 52,063   |   |                       |   | 33,068  |                           |  |   |                         |   |  |              |         |   |  |   | 85,131    |  
|Depreciation, depletion, amortization and accretion |  |        | 103,483  |   |                       |   | 170,437 |                           |  |   |                         |   |  |              | 4,292    |   |  |   | 278,212   |  
|                                                    |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                    |  |        | 346,853  |   |                       |   | 328,369 |                           |  |   |                         |   |  |              | 4,292    |   |  |   | 679,514   |  
|                                                    |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Income from Operations                              |  |        | 384,323  |   |                       |   | 296,235 |                           |  |   |                         |   |  |              | (4,292   | ) |  |   | 676,266   |  
|Other Income (Expense)                              |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Equity in earnings of subsidiaries                  |  |        | 173,077  |   |                       |   | 655     |                           |  |   |                         |   |  |              | (173,732 | ) |  |   |          |  
|Interest expense                                    |  |        | (26,947  | ) |                       |   | (42,253 | )                         |  |   |                         |   |  |              | 15,080   |   |  |   | (54,120   | )
|Debt extinguishment costs                           |  |        | (10,263  | ) |                       |   |        |                           |  |   |                         |   |  |              |         |   |  |   | (10,263   | )
|Loss on mark-to-market derivative contracts         |  |        | (23,557  | ) |                       |   | (37,351 | )                         |  |   |                         |   |  |              |         |   |  |   | (60,908   | )
|Other income                                        |  |        | 15,562   |   |                       |   | 35,179  |                           |  |   | 658                      |   |  |              | (15,080  | ) |  |   | 36,319    |  
|                                                    |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Income Before Income Taxes                          |  |        | 512,195  |   |                       |   | 252,465 |                           |  |   | 658                      |   |  |              | (178,024 | ) |  |   | 587,294   |  
|Income tax expense                                  |  |        | (145,776 | ) |                       |   | (78,471 | )                         |  |   | (3                       | ) |  |              | 3,375    |   |  |   | (220,875  | )
|                                                    |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Net Income                                          |  | $      | 366,419  |   |                       | $ | 173,994 |                           |  | $ | 655                      |   |  | $            | (174,649 | ) |  | $ | 366,419   |  
|                                                    |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |          |   |  |   |           |  



24



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

SIX MONTHS ENDED JUNE 30, 2009

(in thousands of dollars)



|                                                               |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|-------------------------------------------------------------- |  | ------ | ---------- | - | --------------------- | - | -------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | -------- | - |  | - | ---------- | -
|                                                               |  | Issuer |            |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |         
|CASH FLOWS FROM OPERATING ACTIVITIES                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net income (loss)                                              |  | $      | 48,847     |   |                       | $ | (561,477 | )                         |  | $ | (1,356                   | ) |  | $            | 562,833  |   |  | $ | 48,847     |  
|Items not affecting cash flows from operating activities       |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Depreciation, depletion, amortization,accretion and impairment |  |        | 104,197    |   |                       |   | 952,738  |                           |  |   | 10                       |   |  |              | (870,922 | ) |  |   | 186,023    |  
|Equity in earnings of subsidiaries                             |  |        | (7,468     | ) |                       |   | 392      |                           |  |   |                         |   |  |              | 7,076    |   |  |   |           |  
|Deferred income tax benefit                                    |  |        | (32,932    | ) |                       |   | (341,821 | )                         |  |   | (579                     | ) |  |              | 370,572  |   |  |   | (4,760     | )
|Debt extinguishment costs                                      |  |        | 10,910     |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 10,910     |  
|Loss on mark-to-market derivative contracts                    |  |        | 1,578      |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 1,578      |  
|Noncash compensation                                           |  |        | 27,359     |   |                       |   | 5,207    |                           |  |   |                         |   |  |              |         |   |  |   | 32,566     |  
|Other noncash items                                            |  |        | 2,796      |   |                       |   | 46       |                           |  |   | 71                       |   |  |              |         |   |  |   | 2,913      |  
|Change in assets and liabilities from operating activities     |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Accounts receivable and other assets                           |  |        | (16,777    | ) |                       |   | 41,392   |                           |  |   | (1,948                   | ) |  |              |         |   |  |   | 22,667     |  
|Accounts payable and other liabilities                         |  |        | 4,619      |   |                       |   | (19,929  | )                         |  |   | 180                      |   |  |              |         |   |  |   | (15,130    | )
|Stock appreciation rights                                      |  |        | (305       | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (305       | )
|Income taxes receivable/payable and prepaid                    |  |        | (143,619   | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (143,619   | )
|                                                               |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net cash (used in) provided by operating activities            |  |        | (795       | ) |                       |   | 76,548   |                           |  |   | (3,622                   | ) |  |              | 69,559   |   |  |   | 141,690    |  
|                                                               |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|                                                               |  |        |            |   |                      
|CASH FLOWS FROM INVESTING ACTIVITIES                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Additions to oil and gas properties                            |  |        | (362,986   | ) |                       |   | (441,773 | )                         |  |   | (22,202                  | ) |  |              |         |   |  |   | (826,961   | )
|Derivative settlements                                         |  |        | 1,380,322  |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 1,380,322  |  
|Additions to other property and equipment                      |  |        | (2,411     | ) |                       |   | (600     | )                         |  |   | (6,349                   | ) |  |              |         |   |  |   | (9,360     | )
|                                                               |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net cash provided by (used in) investing activities            |  |        | 1,014,925  |   |                       |   | (442,373 | )                         |  |   | (28,551                  | ) |  |              |         |   |  |   | 544,001    |  
|                                                               |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|                                                               |  |        |            |   |                      
|CASH FLOWS FROM FINANCING ACTIVITIES                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Revolving credit facilities                                    |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Borrowings                                                     |  |        | 2,240,090  |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 2,240,090  |  
|Repayments                                                     |  |        | (3,545,090 | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (3,545,090 | )
|Proceeds from issuance of Senior Notes                         |  |        | 523,099    |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 523,099    |  
|Cost incurred in connection with financing arrangements        |  |        | (12,114    | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (12,114    | )
|Derivative settlements                                         |  |        | 1,392      |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 1,392      |  
|Issuance of common stock                                       |  |        | 250,874    |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 250,874    |  
|Investment in and advances to affiliates                       |  |        | (326,681   | ) |                       |   | 365,552  |                           |  |   | 30,688                   |   |  |              | (69,559  | ) |  |   |           |  
|Other                                                          |  |        | 28         |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 28         |  
|                                                               |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net cash (used in) provided by financing activities            |  |        | (868,402   | ) |                       |   | 365,552  |                           |  |   | 30,688                   |   |  |              | (69,559  | ) |  |   | (541,721   | )
|                                                               |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net increase (decrease) in cash and cash equivalents           |  |        | 145,728    |   |                       |   | (273     | )                         |  |   | (1,485                   | ) |  |              |         |   |  |   | 143,970    |  
|Cash and cash equivalents, beginning of period                 |  |        | 309,362    |   |                       |   | 285      |                           |  |   | 2,228                    |   |  |              |         |   |  |   | 311,875    |  
|                                                               |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Cash and cash equivalents, end of period                       |  | $      | 455,090    |   |                       | $ | 12       |                           |  | $ | 743                      |   |  | $            |         |   |  | $ | 455,845    |  
|                                                               |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  



25



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

SIX MONTHS ENDED JUNE 30, 2008

(in thousands of dollars)



|                                                                                            |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|------------------------------------------------------------------------------------------- |  | ------ | ---------- | - | --------------------- | - | -------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | -------- | - |  | - | ---------- | -
|                                                                                            |  | Issuer |            |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |         
|CASH FLOWS FROM OPERATING ACTIVITIES                                                        |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net income                                                                                  |  | $      | 366,419    |   |                       | $ | 173,994  |                           |  | $ | 655                      |   |  | $            | (174,649 | ) |  | $ | 366,419    |  
|Items not affecting cash flows from operating activities                                    |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Gain on sale of assets                                                                      |  |        |           |   |                       |   | (34,658  | )                         |  |   |                         |   |  |              |         |   |  |   | (34,658    | )
|Depreciation, depletion, amortizationand accretion                                          |  |        | 103,483    |   |                       |   | 170,437  |                           |  |   |                         |   |  |              | 4,292    |   |  |   | 278,212    |  
|Equity in earnings of subsidiaries                                                          |  |        | (173,077   | ) |                       |   | (655     | )                         |  |   |                         |   |  |              | 173,732  |   |  |   |           |  
|Deferred income tax expense                                                                 |  |        | 102,801    |   |                       |   | 19,758   |                           |  |   |                         |   |  |              | (3,937   | ) |  |   | 118,622    |  
|Debt extinguishment costs                                                                   |  |        | 10,263     |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 10,263     |  
|Loss on mark-to-market derivative contracts                                                 |  |        | 23,557     |   |                       |   | 37,351   |                           |  |   |                         |   |  |              |         |   |  |   | 60,908     |  
|Noncash compensation                                                                        |  |        | 25,495     |   |                       |   | 14,992   |                           |  |   | (36                      | ) |  |              |         |   |  |   | 40,451     |  
|Other noncash items                                                                         |  |        | 1,499      |   |                       |   | 1,711    |                           |  |   | (324                     | ) |  |              |         |   |  |   | 2,886      |  
|Change in assets and liabilities from operating activities                                  |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Accounts receivable and other assets                                                        |  |        | 11,474     |   |                       |   | (113,881 | )                         |  |   | 3,361                    |   |  |              |         |   |  |   | (99,046    | )
|Accounts payable and other liabilities                                                      |  |        | (26,545    | ) |                       |   | (49,366  | )                         |  |   | (936                     | ) |  |              |         |   |  |   | (76,847    | )
|Stock appreciation rights                                                                   |  |        | (58,357    | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (58,357    | )
|Income taxes receivable/payable                                                             |  |        | 509        |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 509        |  
|                                                                                            |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net cash provided by operating activities                                                   |  |        | 387,521    |   |                       |   | 219,683  |                           |  |   | 2,720                    |   |  |              | (562     | ) |  |   | 609,362    |  
|                                                                                            |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|                                                                                            |  |        |            |   |                      
|CASH FLOWS FROM INVESTING ACTIVITIES                                                        |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Additions to oil and gas properties                                                         |  |        | (165,483   | ) |                       |   | (270,576 | )                         |  |   | (5,064                   | ) |  |              |         |   |  |   | (441,123   | )
|Acquisition of oil and gas properties                                                       |  |        |           |   |                       |   | (406,137 | )                         |  |   |                         |   |  |              |         |   |  |   | (406,137   | )
|Proceeds from sales of oil and gas properties and related assets, net of costs and expenses |  |        | 1,717,781  |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 1,717,781  |  
|Derivative settlements                                                                      |  |        | (29,593    | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (29,593    | )
|Decrease in restricted cash                                                                 |  |        |           |   |                       |   | 59,092   |                           |  |   |                         |   |  |              |         |   |  |   | 59,092     |  
|Other                                                                                       |  |        | (20,200    | ) |                       |   | (676     | )                         |  |   | (7,796                   | ) |  |              |         |   |  |   | (28,672    | )
|                                                                                            |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net cash provided by (used in) investing activities                                         |  |        | 1,502,505  |   |                       |   | (618,297 | )                         |  |   | (12,860                  | ) |  |              |         |   |  |   | 871,348    |  
|                                                                                            |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|                                                                                            |  |        |            |   |                      
|CASH FLOWS FROM FINANCING ACTIVITIES                                                        |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Revolving credit facilities                                                                 |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Borrowings                                                                                  |  |        | 4,237,756  |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 4,237,756  |  
|Repayments                                                                                  |  |        | (5,831,756 | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (5,831,756 | )
|Proceeds from issuance of Senior Notes                                                      |  |        | 400,000    |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 400,000    |  
|Derivative settlements                                                                      |  |        | (13,088    | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (13,088    | )
|Purchase of treasury stock                                                                  |  |        | (304,192   | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (304,192   | )
|Investment in and advances to affiliates                                                    |  |        | (402,498   | ) |                       |   | 396,718  |                           |  |   | 5,218                    |   |  |              | 562      |   |  |   |           |  
|Other                                                                                       |  |        | 7,960      |   |                       |   | (342     | )                         |  |   |                         |   |  |              |         |   |  |   | 7,618      |  
|                                                                                            |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net cash (used in) provided by financing activities                                         |  |        | (1,905,818 | ) |                       |   | 396,376  |                           |  |   | 5,218                    |   |  |              | 562      |   |  |   | (1,503,662 | )
|                                                                                            |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|                                                                                            |  |        |            |   |                      
|Net decrease in cash and cash equivalents                                                   |  |        | (15,792    | ) |                       |   | (2,238   | )                         |  |   | (4,922                   | ) |  |              |         |   |  |   | (22,952    | )
|Cash and cash equivalents, beginning of period                                              |  |        | 15,897     |   |                       |   | 2,261    |                           |  |   | 7,288                    |   |  |              |         |   |  |   | 25,446     |  
|                                                                                            |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Cash and cash equivalents, end of period                                                    |  | $      | 105        |   |                       | $ | 23       |                           |  | $ | 2,366                    |   |  | $            |         |   |  | $ | 2,494      |  
|                                                                                            |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  



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Note 9  Subsequent Event

On August 6, 2009, we announced an amendment to the joint venture agreement with Chesapeake that accelerates the payment of our remaining commitment to fund 50% of Chesapeakes share of drilling and completion costs for future
Haynesville Shale wells, which we refer to as the Haynesville Carry. In an amendment to the Haynesville Shale participation agreement, we agree to pay $1.1 billion for the remaining Haynesville Carry balance due to Chesapeake as of
September 30, 2009, estimated at $1.25 billion. This payment represents an approximate 12% reduction in the total amount due. Additionally, Chesapeake has committed to drill at least 150 wells per year under the participation agreement for the
three year period starting October 1, 2009. Further, we have agreed to terminate our one-time option exercisable in June of 2010 to avoid paying the last $800 million of the Haynesville Carry in exchange for an assignment to Chesapeake of 50%
of our interest in our Haynesville acreage. Closing of the transaction is expected to occur September 29, 2009.



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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, 2008.

Company Overview

We are an independent oil and gas company primarily engaged in the activities of acquiring, developing, exploring and producing oil and gas properties in the
United States. Our core areas of operations are:



| |  |  | Onshore California;
| | - |  | -------------------



| |  |  | Offshore California;
| | - |  | --------------------



| |  |  | the Gulf of Mexico;
| | - |  | -------------------



| |  |  | the Gulf Coast Region;
| | - |  | ----------------------



| |  |  | the Mid-Continent Region; and
| | - |  | -----------------------------



| |  |  | the Rocky Mountains.
| | - |  | --------------------

We also have an interest in an exploration
prospect offshore Vietnam.

Our cash flows depend on many factors, including the price of oil and gas, the success of our acquisition and drilling
activities and the operational performance of our producing properties. We use derivative instruments to manage our commodity price risk. This practice may prevent us from receiving the full advantage of increases in oil and gas prices above the
maximum amount specified in the derivative agreements and subjects us to the credit risk of the counterparties to such agreements. Since all of our derivative contracts are accounted for under mark-to-market accounting, we expect continued
volatility in gains and losses on derivative contracts on our income statement as changes occur in the NYMEX price indices. The level of derivative activity depends on our view of market conditions, available derivative prices and our operating
strategy. See Item 3  Quantitative and Qualitative Disclosures About Market Risks.

Assets in our principal focus areas include mature
properties with long-lived reserves and significant development opportunities as well as newer properties with development and exploration potential. Our primary sources of liquidity are cash generated from our operations, our cash balances, our
senior revolving credit facility and periodic public offerings of debt and equity. At June 30, 2009, we had approximately $1.34 billion available for future secured borrowings under our senior revolving credit facility and $455.8 million
in cash and cash equivalents. We believe that we have sufficient liquidity through our forecasted cash flow from operations, cash balances, projected cash settlements from our derivative contracts and borrowing capacity under our senior revolving
credit facility to meet our short-term and long-term normal recurring operating needs, derivative obligations, debt service obligations, contingencies and anticipated capital expenditures.

Capital and Credit Markets

During the first half of 2009, the extreme
volatility and disruption in the capital and credit markets continued to exist. The volatility and disruption have created conditions that may adversely affect the financial condition of the lenders in our senior revolving credit facility, the
counterparties to our commodity price risk management agreements, our insurers and our oil and gas purchasers. See Liquidity and Capital Resources.



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Recent Developments

Haynesville
Shale Joint Venture

On August 6, 2009, we announced an amendment to the joint venture agreement with Chesapeake that accelerates the payment
of our remaining commitment to fund 50% of Chesapeakes share of drilling and completion costs for future Haynesville Shale wells, which we refer to as the Haynesville Carry. In an amendment to the Haynesville Shale participation agreement, we
agree to pay $1.1 billion for the remaining Haynesville Carry balance due to Chesapeake as of September 30, 2009, estimated at $1.25 billion. This payment represents an approximate 12% reduction in the total amount due. Additionally, Chesapeake
has committed to drill at least 150 wells per year under the participation agreement for the three year period starting October 1, 2009. Further, we have agreed to terminate our one-time option exercisable in June of 2010 to avoid paying the
last $800 million of the Haynesville Carry in exchange for an assignment to Chesapeake of 50% of our interest in our Haynesville acreage. Closing of the transaction is expected to occur September 29, 2009.

Derivatives

In the first quarter of 2009, we monetized our 2009 and
2010 crude oil put option contracts on 40,000 BOPD with weighted average strike prices of $106.16 per barrel and $111.49 per barrel, respectively. In addition, we terminated our crude oil swaps on 20,000 BOPD in 2009. As a result of this
monetization, we received approximately $1.1 billion in net proceeds, which we used to reduce the outstanding balance on our senior revolving credit facility and for other general corporate purposes.

Legal Settlement Recovery

On May 11, 2009, the United States
Government certified payment of the $1 billion judgment in full to all lessees of the 35 leases involved in the lawsuit Amber Resources Company et al. v. United States, Case No. 02-30c. In the second quarter, we received a net recovery of $87.3
million as our share of the $1 billion award.

General

We
follow the full cost method of accounting whereby all costs associated with property acquisition, exploration, 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 an impairment if our capitalized
costs exceed the allowed ceiling. During the fourth quarter of 2008, oil and gas prices declined significantly, and we recorded an impairment of our oil and gas properties related to our year-end ceiling test. 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 change in the near term. If oil and gas prices decline in the future, additional impairment of our oil and gas properties could
occur. Impairment charges required by these rules do not impact our cash flows from operating activities.

Our oil and gas production expenses
include salaries and benefits of personnel involved in production activities (including stock-based compensation), 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 purpose 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

In the first half of 2009, we reported net income of
$48.8 million, or $0.43 per diluted share, compared to net income of $366.4 million, or $3.27 per diluted share, in the first half of 2008. The decrease primarily reflects lower commodity prices.



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##### Table of Contents

Results of Operations

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



|                                                                            |  |                    |         |                  |   |         |  |      |         |  |   |        
|--------------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- | - | ------- |  | ---- | ------- |  | - | -------
|                                                                            |  | Three Months Ended |         | Six Months Ended
|                                                                            |  | June 30,           |         | June 30,        
|                                                                            |  | 2009               |         | 2008             |   | 2009    |  | 2008
|Sales Volumes                                                               |  |                    |         |                  |   |         |  |      |         |  |   |        
|Oil and liquids sales (MBbls)                                               |  |                    | 4,441   |                  |   | 5,019   |  |      | 8,886   |  |   | 10,265 
|Gas (MMcf)                                                                  |  |                    |         |                  |   |         |  |      |         |  |   |        
|Production                                                                  |  |                    | 17,972  |                  |   | 18,232  |  |      | 35,607  |  |   | 39,598 
|Used as fuel                                                                |  |                    | 584     |                  |   | 547     |  |      | 1,230   |  |   | 1,135  
|Sales                                                                       |  |                    | 17,388  |                  |   | 17,685  |  |      | 34,377  |  |   | 38,463 
|MBOE                                                                        |  |                    |         |                  |   |         |  |      |         |  |   |        
|Production                                                                  |  |                    | 7,435   |                  |   | 8,057   |  |      | 14,820  |  |   | 16,864 
|Sales                                                                       |  |                    | 7,338   |                  |   | 7,966   |  |      | 14,615  |  |   | 16,675 
|Daily Average Volumes                                                       |  |                    |         |                  |   |         |  |      |         |  |   |        
|Oil and liquids sales (Bbls)                                                |  |                    | 48,792  |                  |   | 55,153  |  |      | 49,092  |  |   | 56,399 
|Gas (Mcf)                                                                   |  |                    |         |                  |   |         |  |      |         |  |   |        
|Production                                                                  |  |                    | 197,500 |                  |   | 200,358 |  |      | 196,727 |  |   | 217,573
|Used as fuel                                                                |  |                    | 6,422   |                  |   | 6,015   |  |      | 6,797   |  |   | 6,236  
|Sales                                                                       |  |                    | 191,078 |                  |   | 194,343 |  |      | 189,930 |  |   | 211,337
|BOE                                                                         |  |                    |         |                  |   |         |  |      |         |  |   |        
|Production                                                                  |  |                    | 81,710  |                  |   | 88,546  |  |      | 81,880  |  |   | 92,662 
|Sales                                                                       |  |                    | 80,638  |                  |   | 87,543  |  |      | 80,747  |  |   | 91,622 
|Unit Economics (in dollars)                                                 |  |                    |         |                  |   |         |  |      |         |  |   |        
|Average NYMEX Prices                                                        |  |                    |         |                  |   |         |  |      |         |  |   |        
|Oil                                                                         |  | $                  | 59.79   |                  | $ | 123.80  |  | $    | 51.68   |  | $ | 111.12 
|Gas                                                                         |  |                    | 3.50    |                  |   | 10.90   |  |      | 4.17    |  |   | 9.50   
|Average Realized Sales Price Before                                         |  |                    |         |                  |   |         |  |      |         |  |   |        
|Derivative Transactions                                                     |  |                    |         |                  |   |         |  |      |         |  |   |        
|Oil (per Bbl)                                                               |  | $                  | 49.44   |                  | $ | 108.74  |  | $    | 42.33   |  | $ | 97.65  
|Gas (per Mcf)                                                               |  |                    | 3.37    |                  |   | 10.31   |  |      | 3.77    |  |   | 9.01   
|Per BOE                                                                     |  |                    | 37.90   |                  |   | 91.40   |  |      | 34.62   |  |   | 80.89  
|Costs and Expenses per BOE                                                  |  |                    |         |                  |   |         |  |      |         |  |   |        
|Production costs                                                            |  |                    |         |                  |   |         |  |      |         |  |   |        
|Lease operating expenses                                                    |  | $                  | 8.64    |                  | $ | 10.70   |  | $    | 9.19    |  | $ | 9.58   
|Steam gas costs                                                             |  |                    | 1.49    |                  |   | 5.10    |  |      | 1.81    |  |   | 4.36   
|Electricity                                                                 |  |                    | 1.69    |                  |   | 1.34    |  |      | 1.59    |  |   | 1.34   
|Production and ad valorem taxes                                             |  |                    | 1.43    |                  |   | 3.04    |  |      | 1.51    |  |   | 3.02   
|Gathering and transportation                                                |  |                    | 1.18    |                  |   | 0.31    |  |      | 1.05    |  |   | 0.66   
|Depreciation, depletion and amortization of oil and gas properties (DD&A) |  | $                  | 11.49   |                  | $ | 15.70   |  | $    | 11.49   |  | $ | 15.73  

Comparisons between the periods are affected by the February 2008 divestiture of 50% of our
working interest in the Piceance and Permian Basins, the San Juan Basin and Barnett Shale, the April 2008 acquisition of South Texas properties and the divestiture of the remainder of our interest in the Piceance and Permian Basins effective
December 1, 2008.



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



|                                         |  |                    |        |      |                  |         |      |  |      |           |  |   |         |  
|---------------------------------------- |  | ------------------ | ------ | ---- | ---------------- | ------- | ---- |  | ---- | --------- |  | - | ------- | -
|                                         |  | Three Months Ended |        |      | Six Months Ended |        
|                                         |  | June 30,           |        |      | June 30,         |        
|                                         |  | 2009               |        | 2008 |                  |         | 2009 |  | 2008 |          
|Mark-to-market derivative contracts      |  |                    |        |      |                  |         |      |  |      |           |  |   |         |  
|Oil sales                                |  |                    |        |      |                  |         |      |  |      |           |  |   |         |  
|Settlements                              |  | $                  | 2,716  |      | $                | (20,844 | )    |  | $    | 159,592   |  | $ | (43,108 | )
|Monetization of crude oil puts and swaps |  |                    |       |      |                  |        |      |  |      | 1,074,361 |  |   |        |  
|Gas sales                                |  |                    | 83,449 |      |                  |        |      |  |      | 147,761   |  |   | 427     |  
|                                         |  |                    |        |      |                  |         |      |  |      |           |  |   |         |  
|                                         |  | $                  | 86,165 |      | $                | (20,844 | )    |  | $    | 1,381,714 |  | $ | (42,681 | )
|                                         |  |                    |        |      |                  |         |      |  |      |           |  |   |         |  

Comparison of Three Months Ended June 30, 2009 to Three Months Ended June 30, 2008

Oil and gas revenues. Oil and gas revenues decreased $450.0 million, to $278.1 million for 2009 from $728.1 million for 2008 primarily due to
a decrease in realized prices of $53.50 per BOE and an 8% decrease in sales volumes.

Oil revenues decreased $326.2 million to
$219.6 million for 2009 from $545.8 million for 2008 reflecting lower average realized prices ($297.6 million) and lower sales volumes ($28.6 million). Our average realized price for oil decreased $59.30 to $49.44 per Bbl for 2009 from
$108.74 per Bbl for 2008. The decrease is primarily attributable to a decline in the NYMEX oil price, which averaged $59.79 per Bbl in 2009 versus $123.80 per Bbl in 2008. Oil sales volumes decreased 6.4 MBbls per day to 48.8 MBbls per day in 2009
from 55.2 MBbls per day in 2008, primarily reflecting the divestments in 2008 (5.9 MBbls per day), partially offset by increased production from our Flatrock and South Texas properties.

Gas revenues decreased $123.8 million to $58.5 million in 2009 from $182.3 million in 2008 due to a decrease in realized prices ($122.8 million) and
decreased sales volumes ($1.0 million). Our average realized price for gas was $3.37 per Mcf in 2009 compared to $10.31 per Mcf in 2008. Our realized price for gas decreased primarily due to a decrease in the NYMEX natural gas price,
which averaged $3.50 per MMBtu in 2009 versus $10.90 per MMBtu in 2008. Gas sales volumes decreased from 194.3 MMcf per day in 2008 to 191.1 MMcf per day in 2009, primarily reflecting the divestments in 2008 (47.1 MMcf per day),
partially offset by increased production from our Flatrock and Haynesville Shale properties.

Lease operating expenses. Lease operating
expenses decreased $21.8 million, to $63.4 million in 2009 from $85.2 million in 2008. Excluding costs associated with the properties sold in 2008, lease operating expenses decreased by $15.9 million, primarily reflecting the
implementation of our program to reduce expenses, as well as a decrease in stock-based compensation expense. On a per unit basis, lease operating expenses decreased to $8.64 per BOE in 2009 versus $10.70 per BOE in 2008 due primarily to the
implementation of our cost reduction program.

Steam gas costs. Steam gas costs decreased $29.7 million, to $10.9 million in
2009 from $40.6 million in 2008, primarily reflecting the lower cost of gas used in steam generation. In 2009, we burned approximately 3.7 billion cubic feet (Bcf) of natural gas at a cost of approximately $2.94 per MMBtu compared
to 4.2 Bcf at a cost of approximately $9.70 per MMBtu in 2008.

Electricity.Electricity increased $1.7 million, to $12.4 million in
2009 from $10.7 million in 2008, primarily reflecting an increase in usage. On a per unit basis, electricity was $1.69 per BOE in 2009 compared to $1.34 per BOE in 2008.

Production and ad valorem taxes. Production and ad valorem taxes decreased $13.7 million, to $10.5 million in 2009 from $24.2 million in 2008, primarily reflecting the divestments in
2008 and lower commodity prices.

Gathering and transportation expense.Gathering and transportation expenses increased $6.2 million, to $8.7
million in 2009 from $2.5 million in 2008, primarily reflecting an increase in production from our Haynesville Shale and Flatrock properties.



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General and administrative expense. G&A expense decreased $7.6 million, to $37.6 million in
2009 from $45.2 million in 2008. The decrease is primarily due to a decrease in stock-based compensation and the implementation of a cost reduction program.

Depreciation, depletion and amortization, or DD&A. DD&A expense decreased $39.9 million, to $90.8 million in 2009 from $130.7 million in 2008. The decrease is attributable to our oil and gas
depletion, primarily due to a lower per unit rate ($33.9 million) and decreased production ($7.1 million). Our oil and gas unit of production rate decreased to $11.49 per BOE in 2009 compared to $15.70 per BOE in 2008. The decrease primarily
reflects the 2008 year-end impairment of our oil and gas properties, which has reduced our DD&A rate in subsequent periods.

Legal Settlement
Recovery.In the second quarter, we received a net recovery of $87.3 million as our share of the $1 billion judgment for all lessees of the 35 leases involved in the lawsuit Amber Resources Company et al. v. United States, Case
No. 02-30c.

Interest expense. The following table reflects our interest expense and capitalized interest for the three
months ended June 30, 2009 and 2008 (in thousands):



|                       |  |                    |         |   |      |   |         |  
|---------------------- |  | ------------------ | ------- | - | ---- | - | ------- | -
|                       |  | Three Months Ended |        
|                       |  | June 30,           |        
|                       |  | 2009               |         |   | 2008 |  
|Interest expense       |  | $                  | 45,464  |   |      | $ | 35,561  |  
|Capitalized interest   |  |                    | (29,529 | ) |      |   | (12,050 | )
|                       |  |                    |         |   |      |   |         |  
|Total interest expense |  | $                  | 15,935  |   |      | $ | 23,511  |  
|                       |  |                    |         |   |      |   |         |  

Interest expense decreased due to an increase in capitalized interest of $17.5 million
offset by an increase in interest expense before capitalization of $9.9 million. The increase in interest expense before capitalization is attributable to a higher average interest rate associated with the 75/8% Senior Notes issued in May 2008 and the 10% Senior Notes issued in 2009. The increase in capitalized interest is attributable to higher unevaluated property balances associated with our Haynesville Shale properties and a higher average
interest rate.

Loss on mark-to-market derivative contracts. We do not currently use hedge accounting for our derivative instruments.
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 our making a payment to or receiving a payment from the counterparty.

We recognized an $89.7 million loss related to mark-to-market derivative contracts in the second quarter of 2009, which was primarily associated with a decrease in the fair value of our crude oil puts due to higher crude
oil prices. In the second quarter of 2008, we recognized a $51.4 million loss related to mark-to-market derivative contracts.

Income
taxes. During interim periods income tax expense is based on the estimated annual effective income tax rate plus any significant unusual or infrequently occurring items recorded in the period that the specific item occurs. As income before
income taxes changes in future quarters, our effective tax rate may increase or decrease. The variance in our estimated annual effective tax rate from the 35% federal statutory rate primarily results from the tax effects of estimated annual
permanent differences, including (1) expenses that are not deductible because of Internal Revenue Service limitations, (2) the special deduction for domestic production, and (3) state income taxes.

For the second quarter of 2009, our income tax benefit was approximately negative 105% of pre-tax income. The effective tax rate of negative 105% for the quarter
results primarily from changes in the relationship of 2009 estimated pre-tax income relative to estimated permanent differences together with specific items affecting income tax expense for the quarter which included a significant reduction in our
balance of unrecognized tax positions. For the second quarter of 2008, income tax expense was approximately 36% of pre-tax income.



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For the second quarter of 2009, our current tax benefit was approximately negative 205% of pre-tax income. This
unusual rate is primarily the result of a significant increase in our estimated tax deductions associated with oil and gas drilling expenditures for 2009 together with the effects of temporary differences between the book and tax recognition of
income attributable to our oil and gas derivative positions.

Comparison of Six Months Ended June 30, 2009 to Six Months Ended June 30, 2008

Oil and gas revenues. Oil and gas revenues decreased $842.7 million, to $506.0 million for 2009 from $1.3 billion for 2008
primarily due to a decrease in realized prices of $46.27 per BOE and a 12% decrease in volumes primarily associated with our 2008 property sales.

Oil revenues decreased $626.1 million to $376.2 million for 2009 from $1.0 billion for 2008 reflecting lower average realized prices ($567.7 million) and lower sales volumes ($58.4 million). Our average realized price for oil
decreased $55.32 to $42.33 per Bbl for 2009 from $97.65 per Bbl for 2008. The decrease is primarily attributable to a decrease in the NYMEX oil price, which averaged $51.68 per Bbl in 2009 versus $111.12 per Bbl in 2008. Oil sales volumes decreased
7.3 MBbls per day to 49.1 MBbls per day in 2009 from 56.4 MBbls per day in 2008, primarily reflecting the divestments in 2008 (8.0 MBbls per day), partially offset by increased production from our Flatrock and South Texas properties.

Gas revenues decreased $216.6 million to $129.8 million in 2009 from $346.4 million in 2008 due to a decrease in realized prices
($201.2 million) and decreased sales volumes ($15.4 million). Our average realized price for gas was $3.77 per Mcf in 2009 compared to $9.01 per Mcf in 2008. Our realized price for gas decreased primarily due to a decrease in the
NYMEX natural gas price, which averaged $4.17 per MMBtu in 2009 versus $9.50 per MMBtu in 2008. Gas sales volumes decreased from 211.3 MMcf per day in 2008 to 189.9 MMcf per day in 2009, primarily reflecting the divestments in
2008 (65.2 MMcf per day), partially offset by increased production from our Flatrock and Haynesville Shale properties.

Lease operating
expenses. Lease operating expenses decreased $25.5 million, to $134.3 million in 2009 from $159.8 million in 2008. Excluding costs associated with the properties sold in 2008, lease operating expenses decreased by $7.0 million due
to lower stock-based compensation and our cost reduction program. On a per unit basis, lease operating expenses decreased to $9.19 per BOE in 2009 versus $9.58 per BOE in 2008 due primarily to lower costs in 2009.

Steam gas costs. Steam gas costs decreased $46.3 million, to $26.5 million in 2009 from $72.8 million in 2008, primarily reflecting
lower cost of gas used in steam generation. In 2009, we burned approximately 7.6 Bcf of natural gas at a cost of approximately $3.49 per MMBtu compared to 8.4 Bcf at a cost of approximately $8.70 per MMBtu in 2008.

Production and ad valorem taxes. Production and ad valorem taxes decreased $28.3 million, to $22.1 million in 2009 from $50.4 million in
2008, primarily reflecting the divestments in 2008 and lower commodity prices.

Gathering and transportation expense.Gathering and
transportation expenses increased $4.3 million, to $15.3 million in 2009 from $11.0 million in 2008, primarily reflecting an increase in production from our Haynesville Shale and Flatrock properties.

General and administrative expense. G&A expense decreased $10.5 million, to $74.6 million in 2009 from $85.1 million in 2008. The
decrease is primarily due to a decrease in stock-based compensation and the implementation of a cost reduction program.

Depreciation, depletion
and amortization, or DD&A. DD&A expense decreased $92.7 million, to $178.9 million in 2009 from $271.6 million in 2008. The decrease is attributable to our oil and gas DD&A, primarily due to a lower per unit rate
($71.5 million) and decreased production ($23.5 million). Our oil and gas unit of production rate decreased to $11.49 per BOE in 2009 compared to $15.73 per BOE in 2008. The decrease primarily reflects the 2008 year-end impairment of our oil
and gas properties, which has reduced our depletion rate in subsequent periods.



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Legal Settlement Recovery.In the second quarter, we received a net recovery of $87.3 million as our share
of the $1 billion judgment for all lessees of the 35 leases involved in the lawsuit Amber Resources Company et al. v. United States, Case No. 02-30c.

Other Operating Expense. Other operating expense in 2009 consists primarily of a restocking fee related to a cancelled purchase order, a valuation adjustment for materials and supplies inventory and idle drilling
equipment costs resulting from unused contract commitments.

Gain on sale of assets.In February 2008, we completed the sale to a subsidiary
of Occidental Petroleum Corporation of 50% of the entity that held our investment in Collbran Valley Gas Gathering System and recorded a gain on the sale of $34.7 million.

Interest expense. The following table reflects our interest expense and capitalized interest for the six months ended June 30, 2009 and 2008 (in thousands):



|                       |  |                  |         |   |      |   |         |  
|---------------------- |  | ---------------- | ------- | - | ---- | - | ------- | -
|                       |  | Six Months Ended |        
|                       |  | June 30,         |        
|                       |  | 2009             |         |   | 2008 |  
|Interest expense       |  | $                | 87,165  |   |      | $ | 83,818  |  
|Capitalized interest   |  |                  | (49,233 | ) |      |   | (29,698 | )
|                       |  |                  |         |   |      |   |         |  
|Total interest expense |  | $                | 37,932  |   |      | $ | 54,120  |  
|                       |  |                  |         |   |      |   |         |  

Interest expense decreased due to an increase in capitalized interest of $19.5 million
offset by the increase in interest expense before capitalization of $3.4 million. The increase in interest expense before capitalization was attributable to higher interest rates associated with the 75/8% Senior Notes issued in May 2008 and the 10% Senior Notes issued in 2009. The increase in capitalized interest is attributable to higher unevaluated property balances associated with our Haynesville Shale properties and a higher average
interest rate.

Debt extinguishment costs.In connection with reductions of the commitments on our senior revolving credit facility, we
recorded $10.9 million and $10.3 million of debt extinguishment costs in the six months ended June 30, 2009 and 2008, respectively.

Loss on
mark-to-market derivative contracts. We do not currently use hedge accounting for our derivative instruments. 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 a payment to or receiving a
payment from the counterparty.

We recognized a $1.6 million loss related to mark-to-market derivative contracts in the six months ended
June 30, 2009, which was primarily associated with a decrease in the fair value of our crude oil puts due to higher crude oil prices, partially offset by higher fair value on our natural gas collars as a result of decreased gas prices. In the
six months ended June 30, 2008, we recognized a $60.9 million loss related to mark-to-market derivative contracts.

Income
taxes. For the six months ended June 30, 2009, our income tax expense was approximately 13% of pre-tax income. This effective tax rate of 13% for the six months results primarily from the relationship of 2009 estimated pre-tax income
relative to the estimated permanent differences together with specific items affecting income tax expense for the six months which included a significant reduction in our balance of unrecognized tax positions. For the six months ended June 30,
2008, income tax expense was approximately 38% of pre-tax income.



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Liquidity and Capital Resources

Liquidity is important to our operations. Our liquidity may be affected by declines in oil and gas prices, an inability to access the capital and credit markets and the success of our commodity price risk management activities, which may
subject us to the credit risk of the counterparties to such agreements. This situation may arise due to circumstances beyond our control, such as a general disruption of the financial markets and adverse economic conditions that cause substantial or
extended declines in oil and gas prices.

During the first half of 2009, the extreme volatility and disruption in the capital and credit markets
continued to exist. The volatility and disruption have created conditions that may adversely affect the financial condition of lenders in our senior revolving credit facility, the counterparties to our commodity price risk management agreements, our
insurers and our oil and natural gas purchasers. While these market conditions persist, our liquidity may be adversely affected by limitations on our ability to access the capital and credit markets.

Our primary sources of liquidity are cash generated from our operations, our cash balances, our borrowing capacity under our senior revolving credit facility and
periodic public offerings of debt and equity. At June 30, 2009, we had approximately $1.34 billion available for future secured borrowings under our senior revolving credit facility and $455.8 million in cash and cash equivalents. Under
the terms of the senior revolving credit facility, the borrowing base will be redetermined on an annual basis, with PXP and the lenders each having the right to one annual interim unscheduled redetermination. Declines in oil and gas prices from our
March 2009 redetermination may adversely affect our liquidity by lowering the amount of the borrowing base that the lenders are willing to extend.

The commitments of each lender to make loans to us are several and not joint under our senior revolving credit facility. Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to the
aggregate amount of such lenders commitments under the credit facility. The commitments are from a diverse syndicate of 22 lenders with no single lenders commitment representing more than 7% of the total commitments.

Our cash flows depend on many factors, including the price of oil and gas, the success of our acquisitions and drilling activities and the operational performance
of our producing properties. We use derivative instruments to manage our commodity price risk. This practice may prevent us from receiving the full advantage of increases in oil or gas prices above the maximum amount specified in the derivative
agreements. Further, we become subject to the credit risk of the counterparties to such agreements when the price of oil and natural gas decreases below the floor specified in the derivative agreement. We consider the credit quality of our
counterparties when we value our commodity derivatives (See Item 3  Quantitative and Qualitative Disclosures About Market Risk). The level of derivative activity depends on our view of market conditions, available derivative prices and
our operating strategy.

In the first half of 2009, we continued to strengthen our liquidity by monetizing derivatives and issuing new senior notes
and shares of our common stock (See Financing Activities).

In the first quarter of 2009, we monetized our 2009 and 2010 crude oil put option
contracts on 40,000 BOPD with weighted average strike prices of $106.16 per barrel and $111.49 per barrel, respectively. As a result of this monetization, we received approximately $1.1 billion in net proceeds, which we used to reduce the
outstanding balance on our senior revolving credit facility and for other general corporate purposes. In connection with this monetization, we also entered into crude oil put option contracts on 40,000 BOPD in 2010. These put options have a strike
price of $55 per barrel. Additionally, in separate transactions, we acquired natural gas three-way collars on 85,000 MMBtu per day for 2010. The monetization and reset arrangements accelerated cash receipts, while maintaining a hedge position that
helps protect against declines in oil and natural gas prices during 2009 and 2010 (See Item 3  Quantitative and Qualitative Disclosures About Market Risk).

In August 2009, we revised our 2009 capital budget to $1.4 billion from $1.05 billion. The increase reflects our participation in anticipated additional Haynesville Shale wells and additional acreage purchases offset by the
elimination of the Haynesville Carry in the fourth quarter combined with a slower than anticipated reduction in rig rates and service costs as well as additional Gulf of Mexico exploratory drilling. Our 2009 capital budget is focused on our major
development areas. Our resources will be primarily directed to the Haynesville Shale, the California long-life oil resource base, the Flatrock area development, delineation of the Friesian discovery, and high-impact Miocene and Paleogene
exploration projects in the Gulf of Mexico shelf and deep water. To maximize economic returns, we are reducing operating expenses in all of our field locations and are reducing general and administrative costs throughout 2009. We continue to
aggressively manage our inventory, our cost structure and our financial flexibility.



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We believe that we have sufficient liquidity through our forecasted cash flow from operations, cash balances,
projected settlements from our derivative contracts and borrowing capacity under our senior revolving credit facility to meet our short-term and long-term normal recurring operating needs, derivative obligations, debt service obligations,
contingencies and anticipated capital expenditures. Our senior revolving credit facility has no amounts outstanding, and the next maturity of our senior notes will occur on June 15, 2015.

Working Capital

At June 30, 2009, we had a working capital
surplus of approximately $161.4 million, primarily as a result of monetizing derivatives and issuing new Senior Notes and shares of common stock (see Financing Activities). As a result of the current volatility and disruption in the capital and
credit markets, we changed our cash management strategy to maintain larger cash and cash equivalents balances. Significant cash balances are invested in highly liquid money market mutual funds that consist of U.S. government securities. Our working
capital is affected by fluctuations in the fair value of our commodity derivative instruments and stock appreciation rights.

Financing Activities

On March 13, 2009, we entered into an amendment to our senior revolving credit facility. The amendment reduced the borrowing base and commitments from $2.7
billion and $2.3 billion, respectively, to $1.5 billion. This reduction gives consideration to our derivative monetization (See Liquidity and Capital Resources). Our borrowing base and commitments were further reduced to $1.34 billion in recognition
of the issuances of $565 million of 10% Senior Notes due 2016, which closed in March and April 2009 (10% Senior Notes).

In
addition, the amendment increased the cost of borrowings under the facility. Amounts borrowed under our senior revolving credit facility bear an interest rate, at our election, equal to either: (i) the Eurodollar rate, which is based on LIBOR,
plus an additional variable amount ranging from 2.00% to 2.75%; (ii) the greater of (1) the prime rate, as determined by JPMorgan Chase Bank, (2) the federal funds rate, plus 1/2of 1%, and (3) the adjusted LIBOR rate plus 1%; or (iii) the over-night federal
funds rate plus an additional variable amount ranging from 2.00% to 2.75% for swingline loans. The additional variable amount of interest payable on outstanding borrowings is based on (1) the utilization rate as a percentage of the total amount
of funds borrowed under our senior revolving credit facility to the conforming borrowing base and (2) our long-term debt ratings. Letter of credit fees under our senior revolving credit facility are based on the utilization rate and our
long-term debt rating and range from 2.0% to 2.75%. Commitment fees are 0.50% of the amount available for borrowing.

Our senior revolving
credit facility is secured by 100% of the shares of stock in certain of our domestic and 65% of certain foreign subsidiaries and mortgages covering at least 75% of the total present value of our domestic oil and gas properties. Our senior revolving
credit facility, as amended, contains negative covenants that limit our ability, as well as the ability of our restricted subsidiaries, among other things, to 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 take-or-pay or other prepayment 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.

In March 2009, we issued $365 million of 10% Senior Notes due 2016, which were
sold to the public at 92.373% of the face value to yield 11.625% to maturity. In April 2009, an additional $200 million of 10% Senior Notes due 2016 were sold to the public at 92.969% of the face value, plus interest accrued from March 6, 2009,
to yield 11.5% to maturity. The 10% Senior Notes were issued under one indenture. We received approximately $330 million and $181 million of net proceeds respectively, after deducting the underwriting discount, original issue discount and offering
expenses. The net proceeds were used to reduce indebtedness outstanding under our senior revolving credit facility and for general corporate purposes, including capital expenditures. We may redeem all or part of the 10% Senior Notes on or after
March 1, 2013 at specified redemption prices and prior to such date at a make-whole redemption price. In addition, prior to March 1, 2012 we may, at our option, redeem up to 35% of the 10% Senior Notes with the proceeds of
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 10% Senior Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date
of repurchase.



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During the second quarter, we sold to the public 13.8 million shares of our common stock priced at $18.70 per
share and we received $250.9 million of net proceeds after deducting the underwriting discount and offering expenses. The net proceeds are being used for general corporate purposes, including capital expenditures.

Cash Flows



|                            |  |                |        |   |      |   |          |  
|--------------------------- |  | -------------- | ------ | - | ---- | - | -------- | -
|                            |  | Six Months     |       
|                            |  | Ended June 30, |       
|                            |  | 2009           |        |   | 2008 |  
|                            |  | (in millions)  |       
|Cash provided by (used in): |  |                |        |   |      |   |          |  
|Operating activities        |  | $              | 141.7  |   |      | $ | 609.4    |  
|Investing activities        |  |                | 544.0  |   |      |   | 871.3    |  
|Financing activities        |  |                | (541.7 | ) |      |   | (1,503.7 | )

Net cash provided by operating activities was $141.7 million for the first half of 2009 compared to
$609.4 million for the first half of 2008. The decrease primarily reflects lower operating income as a result of lower commodity prices and income tax payments in 2009 related to 2008 taxable income, partially offset by reduced production costs
and the legal settlement recovery.

Net cash provided by investing activities of $544.0 million in the first half of 2009 primarily reflects
derivative settlements received of $1.4 billion, partially offset by additions to oil and gas properties of $827.0 million. During the first six months of 2009, our capital expenditures were approximately $802.4 million, including capitalized
interest and capitalized G&A. Additions to oil and gas properties reported in our consolidated statement of cash flows of $827.0 million differ from our capital expenditures due to the timing of payments. Net cash provided by investing
activities was $871.3 million for the first six months of 2008, primarily reflecting net proceeds from property sales of $1.7 billion and a reduction in restricted cash of $59.1 million, offset by additions to oil and gas properties of $847.3
million, derivative settlements of $29.6 million, and additions to other property and equipment of $27.4 million.

Net cash used
in financing activities of $541.7 million in 2009 primarily reflects the $1.3 billion net reduction in borrowings under our senior revolving credit facility; offset by net proceeds of $511.0 million from the offering of 10% Senior Notes and the
$250.9 million of proceeds from our common stock offering. Net cash used in financing activities of $1.5 billion in 2008 primarily reflects the $1.6 billion net reduction in borrowings under our senior revolving credit facility and $304.2
million for treasury stock purchases, partially offset by $400 million from the issuance of the 75/8% Senior Notes.

Critical Accounting Policies and Factors that May Affect Future Results

On January 1, 2009, we adopted the provisions of SFAS
157 for nonfinancial assets and liabilities such as asset retirement obligations, goodwill and other property and equipment, which we disclose at fair value in the financial statements on a nonrecurring basis.

For assets and liabilities that are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition (for example, impaired assets),
SFAS 157 requires us to disclose information that enables users of our financial statements to assess the inputs used to develop those measurements. As none of our assets and liabilities within the scope of this statement are impaired at the end of
the second quarter and no other fair value measurements were required to be recognized on a nonrecurring basis, no additional disclosures are provided at June 30, 2009.



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Impairment of oil and gas properties. Under the SECs full cost accounting rules for oil and gas
activities, we review the carrying value of our proved oil and gas properties each quarter. Under these rules, capitalized costs of oil and gas properties (net of accumulated depreciation, depletion, amortization and impairment and related deferred
income taxes) may not exceed a ceiling equal to:



| |  |  | the present value discounted at 10% of estimated future net cash flows from proved oil and gas reserves, net of estimated future income taxes; plus
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the lower of cost or fair value of unproved properties not included in the costs being amortized (net of related tax effects).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------

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. Such prices
are utilized except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including derivative contracts that qualify and are designated for hedge accounting treatment. None of our
derivative contracts were designated as hedges during 2008 or 2009. The rules require an impairment if our capitalized costs exceed this ceiling, even if prices declined for only a short period of time.

During the fourth quarter of 2008, oil and gas prices declined significantly and we recorded an impairment of our oil and gas properties related to our year-end
ceiling test. At June 30, 2009 and March 31, 2009, the ceiling with respect to our oil and gas properties exceeded the net capitalized costs of those properties by approximately 28% and 4%, respectively, and we did not record an
impairment. 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 change in the near term. If oil and gas prices decline in the future, additional
impairments of our oil and gas properties could occur. Impairments required by these rules do not directly impact our cash flows from operating activities.

Goodwill. In a purchase transaction, goodwill represents the excess of the purchase price plus the liabilities assumed, including deferred income taxes recorded in connection with the transaction, over the fair value of the net
assets acquired. At June 30, 2009, goodwill totaled $535.3 million and represented approximately 8% of our total assets.

We account for
goodwill in accordance with SFAS No. 142. Goodwill is not amortized; instead it is tested at least annually for impairment at a level of reporting referred to as a reporting unit. Impairment occurs when the carrying amount of goodwill exceeds
its implied fair value. A two-step impairment test is used to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any. The first step of the goodwill impairment test compares the fair value
of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired, thus the second step of the impairment test is
unnecessary.

The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the
reporting units goodwill with the carrying amount of that goodwill. If the carrying amount of that reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that
excess. The loss recognized cannot exceed the carrying amount of goodwill.

As discussed above, we follow the full cost method of accounting for oil
and gas activities and all of our producing properties are located in the United States. We have determined that for the purpose of performing an impairment test in accordance with SFAS 142, we have one reporting unit. SFAS 142 states that quoted
market prices in active markets are the best evidence of fair value and should be used as the basis for the fair value measurement, if available. Accordingly, we use the quoted market price of our common stock as a starting point in determining the
fair value of our reporting unit.

We perform our goodwill impairment test annually as of December 31. We also perform interim impairment tests
if events occur or circumstances change that would indicate the fair value of our reporting unit may be below its carrying amount. Due to the adverse market conditions that continued to have a pervasive impact on the U.S. business climate in the
first quarter of 2009, we performed an interim goodwill impairment test as of March 31, 2009.



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In determining the fair value of our reporting unit in the first step of the goodwill impairment test, we applied a
control premium to the quoted market price of our common stock, and we concluded that our goodwill was not impaired as of that date. We determined the control premium through reference to control premiums in merger and acquisition transactions for
our industry and other comparable industries. If the price of our common stock declines, we could have an impairment of our goodwill in future periods.

An impairment of goodwill could significantly reduce earnings during the period in which the impairment occurs and would result in a corresponding reduction to goodwill and stockholders equity.

Based on the accounting policies that we have in place, certain factors may impact our future financial results. Critical accounting policies related to oil and
gas reserves, future development and abandonment costs, DD&A, commodity pricing and risk management activities, fair value and stock-based compensation are discussed in our Annual Report on Form 10-K for the year ended December 31, 2008.

Recent Accounting Pronouncements

In December 2008, the
SEC issued a final rule, Modernization of Oil and Gas Reporting, which is effective January 1, 2010 for reporting 2009 oil and gas reserve information. The new disclosure requirements permit the use of new technologies to determine proved
reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserve volumes. The new disclosure also requires companies to include nontraditional resources such as oil sands, shale, coalbeds or other
nonrenewable natural resources in reserves if they are intended to be upgraded to synthetic oil and gas. Currently the SEC requires that reserve volumes are determined using prices on the last day of the reporting period; however, the new disclosure
requirements provide for reporting oil and gas reserves using an average price based upon the prior twelve-month period rather than year-end prices. The twelve-month average price will also be used for purposes of calculating future net cash flows
from proved oil and gas reserves for the SEC full cost ceiling limitations, and the results will not be subject to a single day pricing mechanism. Although the FASB currently requires the price on the last day of the reporting period to be used for
accounting purposes, the FASB has added it to their agenda to conform with the SEC. The new requirements also will allow companies to disclose their probable and possible reserves to investors and will require companies to report the independence
and qualifications of their reserve preparer or auditor. We will adopt the provisions of the release as of December 31, 2009 for our 2009 Annual Report on Form 10-K. We are currently evaluating the impact of the release.

In April 2009, the FASB issued FSP FAS 157-4 Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly and FSP FAS 107-1 and APB 28-1 Interim Disclosures about Fair Value of Financial Instruments. These FSPs are effective for interim reporting periods ending after June 15,
2009, with early adoption permitted; however, early adoption requires that the FSPs are adopted concurrently.

We early adopted these FSPs effective
January 1, 2009, and the FSPs did not have a material impact on our consolidated financial position, results of operations or cash flows:



| |  |  | FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, when the volume and level of
activity for the asset or liability have significantly decreased as well as guidance for identifying circumstances that indicate a transaction is not orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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In May 2009, the FASB issued SFAS No. 165, Subsequent Events,which establishes principles and
requirements for subsequent events. This statement defines the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the
financial statements, and the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. SFAS 165 also sets forth the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim or annual periods ending after June 15, 2009. The adoption of SFAS 165 did not have an impact on our consolidated financial position, results
of operations or cash flows.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). The
amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to
reassess who should consolidate a variable-interest entity. This statement is effective for fiscal years beginning after November 15, 2009, and for interim periods within that first annual reporting period. We are currently evaluating the
impact of the standard.

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:



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



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



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



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



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



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



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



| |  |  | the availability (or lack thereof) of capital to fund our business strategy and/or operations;
| | - |  | ----------------------------------------------------------------------------------------------



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



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



| |  |  | the ability and willingness of our current or potential counterparties to fulfill their obligations to us or to enter into transactions with us in the future; 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, 2008 for additional discussions of risks and uncertainties.

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 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.

See Note 3  Derivative Instruments and Note 4  Fair Value Measurement of Assets and Liabilities to the consolidated financial statements for a discussion of our derivative activities and fair value measurements.

As of June 30, 2009, we had the following outstanding commodity derivative contracts, all of which settle monthly, and none of which were designated as
hedging instruments:



|                                |  |                      |  |               |  |                                |  |                   |  |          
|------------------------------- |  | -------------------- |  | ------------- |  | ------------------------------ |  | ----------------- |  | ---------
|                                |  | Instrument           |  | Daily         |  | Average                        |  | Average Deferred  |  |          
|Period                          |  | Type                 |  | Volumes       |  | Price (1)                      |  | Premium           |  | Index    
|Sales of Crude Oil Production   |  |                      |  |              
|2009                            |  |                      |  |               |  |                                |  |                   |  |          
|July-Dec                        |  | Put options          |  | 32,500 Bbls   |  | $55.00 Strike price            |  | $3.38 per Bbl     |  | WTI      
|                                |  |                      |  |               | 
|2010                            |  |                      |  |               |  |                                |  |                   |  |          
|Jan-Dec                         |  | Put options          |  | 40,000 Bbls   |  | $55.00 Strike price            |  | $5.00 per Bbl (2) |  | WTI      
|                                |  |                     
|Sales of Natural Gas Production |  |                      |  |              
|2009                            |  |                      |  |               |  |                                |  |                   |  |          
|July-Dec                        |  | Collars              |  | 150,000 MMBtu |  | $10.00 Floor - $20.00Ceiling   |  | $0.346 per MMBtu  |  | Henry Hub
|2010                            |  |                      |  |               |  |                                |  |                   |  |          
|Jan-Dec                         |  | Three-way collars(3) |  | 85,000 MMBtu  |  | $6.12 Floor with a $4.64 Limit |  | $0.034 per MMBtu  |  | Henry Hub
|                                |  |                      |  |               |  | $8.00 Ceiling                  |  |                   |  |          



|(1) | The average strike prices do not reflect the cost to purchase the put options or collars.
|--- | -----------------------------------------------------------------------------------------

|(2) | In addition to the deferred premium, a premium averaging $3.86 per barrel was paid from the proceeds of our first quarter 2009 derivative monetization upon entering into
these derivative contracts.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | If NYMEX is less than the $6.12 per MMBtu floor, we receive the difference between NYMEX and the
$6.12 per MMBtu floor up to a maximum of $1.48 per MMBtu. We pay the difference between NYMEX and $8.00 per MMBtu if NYMEX is greater than the $8.00 ceiling.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

The fair value of outstanding crude oil and natural gas commodity derivative instruments at June 30, 2009
and the change in fair value that would be expected from a 10% price increase/decrease is shown below (in millions):



|                      |  |                 |               |               |   |               |   |  |   |   
|--------------------- |  | --------------- | ------------- | ------------- | - | ------------- | - |  | - | --
|                      |  | Fair ValueAsset |               | Effect of 10%
|                      |  |                 | PriceIncrease |               |   | PriceDecrease
|Crude oil put options |  | $               | 42            |               | $ | (16           | ) |  | $ | 25
|Natural gas collars   |  |                 | 163           |               |   | (23           | ) |  |   | 20
|                      |  |                 |               |               |   |               |   |  |   |   
|                      |  | $               | 205           |               | $ | (39           | ) |  | $ | 45
|                      |  |                 |               |               |   |               |   |  |   |   

We estimate the fair value of our derivatives using an option-pricing model, which uses various factors,
including NYMEX price quotations, volatilities, interest rates and contract terms. We adjust the valuations from the model for credit quality, using the counterpartys credit quality for asset balances and our credit quality for liability
balances. For asset balances, we use the credit default swap value for counterparties, when available or the spread between the risk-free interest rate and the yield on the counterpartys publicly-traded debt for similar maturities. We consider
the impact of netting and offset provisions in the agreements on counterparty credit risk, including whether the position with the counterparty is a net asset or net liability. We determine whether the market for our derivative instruments is active
or inactive based on transaction volume for such instruments. We value the instruments using similar instruments and by extrapolating data between data points for the thinly traded instruments.

None of our 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.

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

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 June 30, 2009 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 June 30, 2009 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 1A  Risk Factors

There has been no material change to
our risk factors set forth in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008 except as set forth below.

Proposed federal legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.

Legislation has been proposed in the U.S. Congress to amend the Safe Drinking Water Act to eliminate an existing exemption for hydraulic fracturing activities.
Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into rock formation to stimulate natural gas production. We find that the use of hydraulic fracturing is necessary to produce commercial quantities of natural
gas and oil from many reservoirs, especially shale formations such as the Haynesville Shale. If adopted, this legislation could establish an additional level of regulation and permitting at the federal level. This additional regulation and
permitting could result in additional burdens such as operational delays or increased operating costs and make it more difficult to perform hydraulic fracturing.

ITEM 4  Submission of Matters to a Vote of Security Holders

The following items were presented for approval to
stockholders of record on March 23, 2009 at the Companys 2009 annual meeting of stockholders, held on May 7, 2009 in Houston, Texas:



|     |  |                                                                                                                                                                                      |  |            |  |         |  |                     
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------- |  | ------- |  | --------------------
|     |  |                                                                                                                                                                                      |  | For        |  | Against |  | Abstainedor Withheld
|(i)  |  | Election of Directors                                                                                                                                                                |  |            |  |         |  |                     
|     |  |                                                                                                                                                                                      |  |           
|     |  | James C. Flores                                                                                                                                                                      |  | 94,334,708 |  |        |  | 3,017,111           
|     |  | Isaac Arnold, Jr.                                                                                                                                                                    |  | 96,512,666 |  |        |  | 839,153             
|     |  | Alan R. Buckwalter, III                                                                                                                                                              |  | 96,578,940 |  |        |  | 772,879             
|     |  | Jerry L. Dees                                                                                                                                                                        |  | 67,287,743 |  |        |  | 30,064,076          
|     |  | Tom H. Delimitros                                                                                                                                                                    |  | 71,739,795 |  |        |  | 25,612,024          
|     |  | Thomas A. Fry, III                                                                                                                                                                   |  | 96,589,456 |  |        |  | 762,363             
|     |  | Robert L. Gerry, III                                                                                                                                                                 |  | 95,915,589 |  |        |  | 1,436,230           
|     |  | Charles G. Groat                                                                                                                                                                     |  | 96,583,395 |  |        |  | 768,424             
|     |  | John H. Lollar                                                                                                                                                                       |  | 68,550,118 |  |        |  | 28,801,701          
|     |  |                                                                                                                                                                                      |  |           
|(ii) |  | Ratification of PricewaterhouseCoopers LLP, independent certified public accountants, as auditors of the Companys financial statements for the fiscal year ending December 31, 2009 |  | 97,154,501 |  | 117,563 |  | 79,754              

Of the 107,590,547 shares of common stock issued and outstanding on March 23, 2009, the record date for
the Companys 2009 annual meeting of stockholders, 97,351,819 were present, either in person or by proxy.



43



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##### Table of Contents

ITEM 6  Exhibits



|            |  |                                                                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                   
|            | 
|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.
|            | 
|101.INS**   |  | XBRL Instance Document                                                                                                                        
|            | 
|101.SCH**   |  | XBRL Taxonomy Extension Schema Document                                                                                                       
|            | 
|101.CAL**   |  | XBRL Taxonomy Extension Calculation Linkbase Document                                                                                         
|            | 
|101.LAB**   |  | XBRL Taxonomy Extension Label Linkbase Document                                                                                               
|            | 
|101.PRE**   |  | XBRL Taxonomy Extension Presentation Linkbase Document                                                                                        
|            | 
|101.DEF**   |  | XBRL Taxonomy Extension Definition Linkbase Document                                                                                          



|* | Filed herewith
|- | --------------

|** | To be furnished by amendment to this report.
|-- | --------------------------------------------

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



44



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##### Table of Contents

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: August 6, 2009 |  |  |  | By:                                     |  | /s/ Winston M. Talbert                                                                               
|                     |  |  |  |                                         |  | Winston M. Talbert Executive Vice President and Chief Financial
Officer (Principal Financial Officer)



45



---

##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                   
|            | 
|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.
|            | 
|101.INS**   |  | XBRL Instance Document                                                                                                                        
|            | 
|101.SCH**   |  | XBRL Taxonomy Extension Schema Document                                                                                                       
|            | 
|101.CAL**   |  | XBRL Taxonomy Extension Calculation Linkbase Document                                                                                         
|            | 
|101.LAB**   |  | XBRL Taxonomy Extension Label Linkbase Document                                                                                               
|            | 
|101.PRE**   |  | XBRL Taxonomy Extension Presentation Linkbase Document                                                                                        
|            | 
|101.DEF**   |  | XBRL Taxonomy Extension Definition Linkbase Document                                                                                          



|* | Filed herewith
|- | --------------

|** | To be furnished by amendment to this report.
|-- | --------------------------------------------



46