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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



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FORM 10-Q



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

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2004



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)



(832) 239-6000

(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.    Yesx    No   ̈



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



40.4 million shares of Common Stock, $0.01 par value, issued and outstanding at April 30, 2004.



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PLAINS EXPLORATION & PRODUCTION COMPANY



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                     |  |   
|---------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                        |  |   
|                                                                                                     | 
|Item 1.  Unaudited Financial Statements:                                                             |  |   
|                                                                                                     | 
|Consolidated Balance SheetsMarch 31, 2004 and December 31, 2003                                      |  | 1 
|Consolidated Statements of IncomeFor the three ended March 31, 2004 and 2003                         |  | 2 
|Consolidated Statements of Cash FlowsFor the three ended March 31, 2004 and 2003                     |  | 3 
|Consolidated Statements of Comprehensive IncomeFor the three ended March 31, 2004 and 2003           |  | 4 
|Consolidated Statement of Changes in Stockholders EquityFor the three ended March 31, 2004 and 2003 |  | 5 
|Notes to Consolidated Financial Statements                                                           |  | 6 
|                                                                                                     | 
|Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations       |  | 19
|                                                                                                     | 
|Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                  |  | 27
|                                                                                                     | 
|Item 4.  Controls and Procedures                                                                     |  | 29
|                                                                                                     | 
|PART II. OTHER INFORMATION                                                                           |  | 30



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PLAINS EXPLORATION & PRODUCTION COMPANY



CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands of dollars)

|                                                            |  |                |           |   |                   |   |           |  
|----------------------------------------------------------- |  | -------------- | --------- | - | ----------------- | - | --------- | -
|                                                            |  | March 31, 2004 |           |   | December 31, 2003 |  
|ASSETS                                                      |  |                |           |   |                   |   |           |  
|Current Assets                                              |  |                |           |   |                   |   |           |  
|Cash and cash equivalents                                   |  | $              | 1,985     |   |                   | $ | 1,377     |  
|Accounts receivablePlains All American Pipeline, L.P.      |  |                | 25,665    |   |                   |   | 25,344    |  
|Other accounts receivable                                   |  |                | 27,976    |   |                   |   | 25,267    |  
|Inventories                                                 |  |                | 4,359     |   |                   |   | 5,318     |  
|Other current assets                                        |  |                | 2,108     |   |                   |   | 3,019     |  
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  |                | 62,093    |   |                   |   | 60,325    |  
|                                                            |  |                |           |   |                   |   |           |  
|Property and Equipment, at cost                             |  |                |           |   |                   |   |           |  
|Oil and natural gas propertiesfull cost method             |  |                |           |   |                   |   |           |  
|Subject to amortization                                     |  |                | 1,088,287 |   |                   |   | 1,074,302 |  
|Not subject to amortization                                 |  |                | 57,980    |   |                   |   | 63,658    |  
|Other property and equipment                                |  |                | 4,960     |   |                   |   | 4,939     |  
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  |                | 1,151,227 |   |                   |   | 1,142,899 |  
|Less allowance for depreciation, depletion and amortization |  |                | (201,179  | ) |                   |   | (186,004  | )
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  |                | 950,048   |   |                   |   | 956,895   |  
|                                                            |  |                |           |   |                   |   |           |  
|Goodwill                                                    |  |                | 145,046   |   |                   |   | 147,251   |  
|                                                            |  |                |           |   |                   |   |           |  
|Other Assets                                                |  |                | 19,497    |   |                   |   | 19,641    |  
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  | $              | 1,176,684 |   |                   | $ | 1,184,112 |  
|                                                            |  |                |           |   |                   |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |                |           |   |                   |   |           |  
|Current Liabilities                                         |  |                |           |   |                   |   |           |  
|Accounts payable                                            |  | $              | 34,877    |   |                   | $ | 41,736    |  
|Commodity hedging contracts                                 |  |                | 75,609    |   |                   |   | 55,123    |  
|Royalties payable                                           |  |                | 16,879    |   |                   |   | 19,080    |  
|Stock appreciation rights                                   |  |                | 21,025    |   |                   |   | 16,049    |  
|Interest payable                                            |  |                | 6,296     |   |                   |   | 622       |  
|Other current liabilities                                   |  |                | 19,491    |   |                   |   | 22,476    |  
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  |                | 174,177   |   |                   |   | 155,086   |  
|                                                            |  |                |           |   |                   |   |           |  
|Long-Term Debt                                              |  |                |           |   |                   |   |           |  
|8.75% Senior Subordinated Notes                             |  |                | 276,862   |   |                   |   | 276,906   |  
|Revolving credit facility                                   |  |                | 191,000   |   |                   |   | 211,000   |  
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  |                | 467,862   |   |                   |   | 487,906   |  
|                                                            |  |                |           |   |                   |   |           |  
|Asset Retirement Obligation                                 |  |                | 30,447    |   |                   |   | 33,235    |  
|                                                            |  |                |           |   |                   |   |           |  
|Other Long-Term Liabilities                                 |  |                | 58,162    |   |                   |   | 32,194    |  
|                                                            |  |                |           |   |                   |   |           |  
|Deferred Income Taxes                                       |  |                | 108,938   |   |                   |   | 121,435   |  
|                                                            |  |                |           |   |                   |   |           |  
|Commitments and Contingencies (Note 6)                      |  |                |           |   |                   |   |           |  
|Stockholders Equity                                        |  |                |           |   |                   |   |           |  
|Common stock                                                |  |                | 403       |   |                   |   | 403       |  
|Additional paid-in capital                                  |  |                | 324,563   |   |                   |   | 322,856   |  
|Retained earnings                                           |  |                | 81,964    |   |                   |   | 71,566    |  
|Accumulated other comprehensive income                      |  |                | (69,519   | ) |                   |   | (40,439   | )
|Treasury stock                                              |  |                | (313      | ) |                   |   | (130      | )
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  |                | 337,098   |   |                   |   | 354,256   |  
|                                                            |  |                |           |   |                   |   |           |  
|                                                            |  | $              | 1,176,684 |   |                   | $ | 1,184,112 |  
|                                                            |  |                |           |   |                   |   |           |  



See notes to consolidated
financial statements.



1



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PLAINS EXPLORATION & PRODUCTION COMPANY



CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)



|                                                                      |  |                              |         |   |      |   |         |  
|--------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                      |  | Three Months Ended March 31, |        
|                                                                      |  | 2004                         |         |   | 2003 |  
|Revenues                                                              |  |                              |         |   |      |   |         |  
|Oil sales to Plains All American Pipeline, L.P.                       |  | $                            | 64,267  |   |      | $ | 64,738  |  
|Other oil sales                                                       |  |                              | 4,037   |   |      |   |        |  
|Oil hedging                                                           |  |                              | (19,033 | ) |      |   | (17,311 | )
|Gas sales                                                             |  |                              | 42,386  |   |      |   | 4,104   |  
|Gas hedging                                                           |  |                              | 1,068   |   |      |   |        |  
|Other operating revenues                                              |  |                              | 236     |   |      |   | 207     |  
|                                                                      |  |                              |         |   |      |   |         |  
|                                                                      |  |                              | 92,961  |   |      |   | 51,738  |  
|                                                                      |  |                              |         |   |      |   |         |  
|Costs and Expenses                                                    |  |                              |         |   |      |   |         |  
|Lease operating expenses                                              |  |                              | 25,680  |   |      |   | 19,978  |  
|Production and ad valorem taxes                                       |  |                              | 3,973   |   |      |   | 1,035   |  
|Gathering and transportation expenses                                 |  |                              | 1,196   |   |      |   |        |  
|General and administrative                                            |  |                              |         |   |      |   |         |  
|G&A excluding stock appreciation rights                               |  |                              | 9,531   |   |      |   | 4,439   |  
|Stock appreciation rights                                             |  |                              | 10,561  |   |      |   | (1,363  | )
|Depreciation, depletion, amortization and accretion                   |  |                              | 16,567  |   |      |   | 8,305   |  
|                                                                      |  |                              |         |   |      |   |         |  
|                                                                      |  |                              | 67,508  |   |      |   | 32,394  |  
|                                                                      |  |                              |         |   |      |   |         |  
|Income from Operations                                                |  |                              | 25,453  |   |      |   | 19,344  |  
|Other Income (Expense)                                                |  |                              |         |   |      |   |         |  
|Gain (loss) on derivatives                                            |  |                              | (1,565  | ) |      |   |        |  
|Interest expense                                                      |  |                              | (6,930  | ) |      |   | (4,856  | )
|Interest and other income (expense)                                   |  |                              | 262     |   |      |   | 33      |  
|                                                                      |  |                              |         |   |      |   |         |  
|Income Before Income Taxes and Cumulative Effect of Accounting Change |  |                              | 17,220  |   |      |   | 14,521  |  
|Income tax expense                                                    |  |                              |         |   |      |   |         |  
|Current                                                               |  |                              | (188    | ) |      |   | (1,181  | )
|Deferred                                                              |  |                              | (6,634  | ) |      |   | (4,737  | )
|                                                                      |  |                              |         |   |      |   |         |  
|Income Before Cumulative Effect of Accounting Change                  |  |                              | 10,398  |   |      |   | 8,603   |  
|Cumulative effect of accounting change, net of tax                    |  |                              |        |   |      |   | 12,324  |  
|                                                                      |  |                              |         |   |      |   |         |  
|Net Income                                                            |  | $                            | 10,398  |   |      | $ | 20,927  |  
|                                                                      |  |                              |         |   |      |   |         |  
|Earnings Per Share (in dollars)                                       |  |                              |         |   |      |   |         |  
|Basic                                                                 |  |                              |         |   |      |   |         |  
|Income before cumulative effect of accounting change                  |  | $                            | 0.26    |   |      | $ | 0.36    |  
|Cumulative effect of accounting change                                |  |                              |        |   |      |   | 0.51    |  
|                                                                      |  |                              |         |   |      |   |         |  
|                                                                      |  | $                            | 0.26    |   |      | $ | 0.87    |  
|                                                                      |  |                              |         |   |      |   |         |  
|Diluted                                                               |  |                              |         |   |      |   |         |  
|Income before cumulative effect of accounting change                  |  | $                            | 0.26    |   |      | $ | 0.35    |  
|Cumulative effect of accounting change                                |  |                              |        |   |      |   | 0.51    |  
|                                                                      |  |                              |         |   |      |   |         |  
|                                                                      |  | $                            | 0.26    |   |      | $ | 0.86    |  
|                                                                      |  |                              |         |   |      |   |         |  
|Weighted Average Shares Outstanding                                   |  |                              |         |   |      |   |         |  
|Basic                                                                 |  |                              | 40,247  |   |      |   | 24,015  |  
|Diluted                                                               |  |                              | 40,488  |   |      |   | 24,225  |  



See notes to consolidated
financial statements.



2



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PLAINS EXPLORATION & PRODUCTION COMPANY



CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands of dollars)



|                                                           |  |                              |         |   |      |   |         |  
|---------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                           |  | Three Months Ended March 31, |        
|                                                           |  | 2004                         |         |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |                              |         |   |      |   |         |  
|Net income                                                 |  | $                            | 10,398  |   |      | $ | 20,927  |  
|Items not affecting cash flows from operating activities   |  |                              |         |   |      |   |         |  
|Depreciation, depletion, amortization and accretion        |  |                              | 16,567  |   |      |   | 8,305   |  
|Deferred income taxes                                      |  |                              | 6,634   |   |      |   | 4,737   |  
|Cumulative effect of adoption of accounting change         |  |                              |        |   |      |   | (12,324 | )
|Stock appreciation rights and noncash compensation         |  |                              | 13,071  |   |      |   | (1,632  | )
|Loss on derivatives                                        |  |                              | 557     |   |      |   |        |  
|Other noncash items                                        |  |                              | (44     | ) |      |   | 59      |  
|Change in assets and liabilities from operating activities |  |                              |         |   |      |   |         |  
|Accounts receivable and other assets                       |  |                              | (1,300  | ) |      |   | (451    | )
|Accounts payable and other liabilities                     |  |                              | (15,501 | ) |      |   | (1,594  | )
|                                                           |  |                              |         |   |      |   |         |  
|Net cash provided by operating activities                  |  |                              | 30,382  |   |      |   | 18,027  |  
|                                                           |  |                              |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |                              |         |   |      |   |         |  
|Additions to oil and gas properties                        |  |                              | (32,105 | ) |      |   | (12,768 | )
|Proceeds from sale of oil and gas properties               |  |                              | 22,732  |   |      |   |        |  
|Other                                                      |  |                              | (218    | ) |      |   | (2,372  | )
|                                                           |  |                              |         |   |      |   |         |  
|Net cash used in investing activities                      |  |                              | (9,591  | ) |      |   | (15,140 | )
|                                                           |  |                              |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |                              |         |   |      |   |         |  
|Revolving credit facility                                  |  |                              |         |   |      |   |         |  
|Borrowings                                                 |  |                              | 68,600  |   |      |   | 63,200  |  
|Repayments                                                 |  |                              | (88,600 | ) |      |   | (66,500 | )
|Other                                                      |  |                              | (183    | ) |      |   | 387     |  
|                                                           |  |                              |         |   |      |   |         |  
|Net cash used in financing activities                      |  |                              | (20,183 | ) |      |   | (2,913  | )
|                                                           |  |                              |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents       |  |                              | 608     |   |      |   | (26     | )
|Cash and cash equivalents, beginning of period             |  |                              | 1,377   |   |      |   | 1,028   |  
|                                                           |  |                              |         |   |      |   |         |  
|Cash and cash equivalents, end of period                   |  | $                            | 1,985   |   |      | $ | 1,002   |  
|                                                           |  |                              |         |   |      |   |         |  





See notes to consolidated financial statements.



3



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PLAINS EXPLORATION & PRODUCTION COMPANY



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands of dollars)



|                                                  |  |                              |         |   |      |   |         |  
|------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                  |  | Three Months Ended March 31, |        
|                                                  |  | 2004                         |         |   | 2003 |  
|Net Income                                        |  | $                            | 10,398  |   |      | $ | 20,927  |  
|                                                  |  |                              |         |   |      |   |         |  
|Other Comprehensive Income (Loss)                 |  |                              |         |   |      |   |         |  
|Commodity hedging contracts, net of tax           |  |                              |         |   |      |   |         |  
|Change in fair value                              |  |                              | (39,882 | ) |      |   | (12,891 | )
|Reclassification adjustment for settled contracts |  |                              | 10,778  |   |      |   | 10,257  |  
|Other, net of tax                                 |  |                              | 24      |   |      |   | 6       |  
|                                                  |  |                              |         |   |      |   |         |  
|                                                  |  |                              | (29,080 | ) |      |   | (2,628  | )
|                                                  |  |                              |         |   |      |   |         |  
|Comprehensive Income (Loss)                       |  | $                            | (18,682 | ) |      | $ | 18,299  |  
|                                                  |  |                              |         |   |      |   |         |  









See notes
to consolidated financial statements.



4



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PLAINS EXPLORATION & PRODUCTION COMPANY



CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (Unaudited)

(share and dollar amounts in thousands)



|                            |  |              |  |                            |     |  |                   |         |                                        |  |   |                |  |   |         |   |  |     |   |  |   |      |   |  |   |         |  
|--------------------------- |  | ------------ |  | -------------------------- | --- |  | ----------------- | ------- | -------------------------------------- |  | - | -------------- |  | - | ------- | - |  | --- | - |  | - | ---- | - |  | - | ------- | -
|                            |  | Common Stock |  | Additional Paid-in Capital |     |  | Retained Earnings |         | Accumulated Other Comprehensive Income |  |   | Treasury Stock |  |   | Total   |  
|                            |  | Shares       |  | Amount                     |     |  |                   |         | Shares                                 |  |   | Amount         |  |  
|Balance, December 31, 2003  |  | 40,316       |  | $                          | 403 |  | $                 | 322,856 |                                        |  | $ | 71,566         |  | $ | (40,439 | ) |  | (17 | ) |  | $ | (130 | ) |  | $ | 354,256 |  
|Net income                  |  |             |  |                            |    |  |                   |        |                                        |  |   | 10,398         |  |   |        |   |  |    |   |  |   |     |   |  |   | 10,398  |  
|Other comprehensive income  |  |             |  |                            |    |  |                   |        |                                        |  |   |               |  |   | (29,080 | ) |  |    |   |  |   |     |   |  |   | (29,080 | )
|Restricted stock awards     |  | 139          |  |                            |    |  |                   | 1,722   |                                        |  |   |               |  |   |        |   |  |    |   |  |   |     |   |  |   | 1,722   |  
|Additions to treasury stock |  |             |  |                            |    |  |                   |        |                                        |  |   |               |  |   |        |   |  | (11 | ) |  |   | (183 | ) |  |   | (183    | )
|Other                       |  |             |  |                            |    |  |                   | (15     | )                                      |  |   |               |  |   |        |   |  |    |   |  |   |     |   |  |   | (15     | )
|                            |  |              |  |                            |     |  |                   |         |                                        |  |   |                |  |   |         |   |  |     |   |  |   |      |   |  |   |         |  
|Balance, March 31, 2004     |  | 40,455       |  | $                          | 403 |  | $                 | 324,563 |                                        |  | $ | 81,964         |  | $ | (69,519 | ) |  | (28 | ) |  | $ | (313 | ) |  | $ | 337,098 |  
|                            |  |              |  |                            |     |  |                   |         |                                        |  |   |                |  |   |         |   |  |     |   |  |   |      |   |  |   |         |  







See notes to consolidated financial statements.



5



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PLAINS EXPLORATION & PRODUCTION COMPANY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note
1Organization and Significant Accounting Policies



Organization



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



These consolidated financial statements and related notes present our consolidated financial position as of March 31, 2004 and December 31, 2003, the results of our
operations and our comprehensive income for the three months ended March 31, 2004 and 2003, our cash flows for the three months ended March 31, 2004 and 2003 and the changes in our stockholders equity for the three months ended March 31, 2004.
All adjustments, consisting only of normal recurring adjustments, that in the opinion of management were necessary for a fair statement of the results for the interim periods, have been reflected. All significant intercompany transactions have been
eliminated. Certain reclassifications have been made to prior year statements to conform to the current year presentation. The results for the three months ended March 31, 2004, are not necessarily indicative of the final results to be expected for
the full year.



These financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United
States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003.



Accounting Policies



Asset Retirement Obligations.    Effective January 1, 2003, we adopted SFAS 143 which requires entities to
record the fair value of a liability for a legal obligation to retire an asset in the period in which the liability is incurred. A legal obligation is a liability that a party is required to settle as a result of an existing or enacted law, statute,
ordinance or contract. When the liability is initially recorded, the entity is required to capitalize the retirement cost of the related long-lived asset. Each period the liability is accreted to its then present value, and the capitalized cost is
depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, the difference is reflected in oil and gas properties. In prior periods we included estimated future costs of
abandonment and dismantlement in our full cost amortization base and these costs were amortized as a component of our depletion expense.



At January 1, 2003, the present value of our future asset retirement obligation for oil and gas properties and equipment was $26.5 million. The cumulative effect of
our adoption of SFAS 143 and the change in accounting principle resulted in an increase in net income during the first quarter of 2003 of $12.3 million (reflecting a $30.8 million decrease in accumulated depreciation, depletion and amortization,
partially offset by $10.6 million in accretion expense, and $7.9 million in income taxes). We recorded a liability of $26.5 million and an asset of $15.9 million in connection with the adoption of SFAS 143. Adopting SFAS No. 143 did not impact our
cash flows.



6



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The following table illustrates the changes in our asset retirement obligation during the periods (in thousands):



|                                                |  |                              |        |     |      |   |       
|----------------------------------------------- |  | ---------------------------- | ------ | --- | ---- | - | ------
|                                                |  | Three Months Ended March 31,
|                                                |  | 2004                         |        |     | 2003
|Asset retirement obligationbeginning of period |  | $                            | 33,735 |     |      | $ | 26,540
|Liabilities incurred                            |  |                              | 81     |     |      |   |      
|Accretion expense                               |  |                              | 727    |     |      |   | 582   
|Asset retirement cost of properties sold        |  |                              | (3,585 | )   |      |   |      
|                                                |  |                              |        |     |      |   |       
|Asset retirement obligationend of period       |  | $                            | 30,958 | (1) |      | $ | 27,122
|                                                |  |                              |        |     |      |   |       

---

|(1) |  | $511 included in current liabilities.
|--- |  | -------------------------------------



Goodwill.    As a result of the sale of our Illinois properties, goodwill was decreased by $2.4 million which was considered in the loss
on disposition recognized as an adjustment to oil and gas properties subject to amortization.



Stock-based Employee Compensation.    Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation (SFAS 123) established financial accounting and reporting
standards for stock-based employee compensation. SFAS 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument. SFAS 123 also allows an entity to continue to measure compensation cost for those
instruments using the intrinsic value-based method of accounting prescribed by Accounting Principles Bulletin No. 25 Accounting for Stock Issued to Employees (APB 25). We have elected to follow APB 25 and related interpretations in
accounting for our stock-based employee compensation. The compensation expense recorded under APB 25 for our stock appreciation rights and restricted stock awards is the same as that determined under SFAS 123.



Earnings Per Share.    For the three months ended March 31,
2004 and 2003 the weighted average shares outstanding for computing basic earning per share were 40.2 million and 24.0 million, respectively, and the weighted average shares outstanding for computing diluted earning per share were 40.5 million and
24.2 million, respectively. The weighted average shares outstanding for computing diluted earnings per share include the effect of unvested restricted stock and restricted stock units. In computing earnings per share, no adjustments were made to
reported net income.



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



|                       |  |                |       |                   |   |      
|---------------------- |  | -------------- | ----- | ----------------- | - | -----
|                       |  | March 31, 2004 |       | December 31, 2003
|Materials and supplies |  | $              | 3,656 |                   | $ | 4,455
|Oil                    |  |                | 703   |                   |   | 863  
|                       |  |                |       |                   |   |      
|                       |  | $              | 4,359 |                   | $ | 5,318
|                       |  |                |       |                   |   |      



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



7



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Recent Accounting Pronouncements.    In 2003, the SEC inquired of the FASB regarding the
application of certain provisions of SFAS No. 141, Business Combinations,(SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets,(SFAS No. 142) to oil and gas companies. SFAS Nos. 141 and 142
became effective for transactions subsequent to June 30, 2001. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method and that acquired intangible assets be disaggregated and
reported separately from goodwill. Specifically, the SECs inquiry was based on whether costs of contract-based drilling and mineral use rights (mineral rights) should be recorded and disclosed as intangible assets under the
guidance in SFAS Nos. 141 and 142. The current practice for us and the industry is to present oil and gas related assets, including mineral rights, as property and equipment (tangible assets) on the balance sheet. Subsequent to June 30, 2001, we
entered into a business combination and the majority of the purchase price was allocated to oil and gas properties.



An Emerging Issues Task Force Working Group (EITF) was created to research the accounting and disclosure treatment of mineral rights for oil and gas
companies. As a result, the EITF added Issue No. 04-2, Whether Mineral Rights are Tangible or Intangible Assets and Related Issues, and Issue No. 03-S, Application of FASB Statement No. 142, Goodwill and Other Intangible Assets, to
Oil and Gas Companies. The FASB recently issued FASB Staff Position 141-1 and 142-1 (the FSP) that clarifies that mineral rights are tangible assets and have further amended FAS 141 and FAS 142 accordingly. The EITF has not
reached a consensus on Issue No. 03-S and any further guidance will be applied to the first reporting period beginning after the date that such issue is finalized.



Note 2Proposed Merger with Nuevo Energy Company



On February 12, 2004 we announced that we had entered into a definitive agreement to acquire Nuevo Energy Company, or Nuevo, in a stock for stock transaction
valued at approximately $1.0 billion, based on our March 31, 2004 closing stock price of $18.64 per share. Under the terms of the definitive agreement, Nuevo stockholders will receive 1.765 shares of our common stock for each share of Nuevo common
stock. If completed, we will issue up to 38.8 million common shares and options to Nuevo shareholders and assume $203 million of net debt (as of March 31, 2004) and $115 million of Trust Convertible Preferred Securities.



The transaction is expected to qualify as a tax free reorganization under Section
368(a) and is expected to be tax free to our stockholders and tax free for the stock portion of the consideration received by Nuevo stockholders. The Boards of directors of both companies have approved the merger agreement and each has recommended
it to their respective stockholders for approval. The transaction will remain subject to stockholder approval from both companies and other customary conditions. Post closing, it is anticipated that our stockholders will own approximately 52% of the
combined company and Nuevo stockholders will own approximately 48% of the combined company.



The transaction is expected to close in the second quarter of 2004. We will account for the transaction as a purchase of Nuevo under purchase accounting rules and we will continue to use the full cost method of accounting for
our oil and gas properties.



Note 3Derivative Instruments and Hedging Activities



We actively manage our exposure to commodity price fluctuations by
hedging portions of our oil and gas production through the use of derivative instruments. The derivative instruments currently consist of oil and gas swap and option contracts entered into with financial institutions. We do not enter into derivative
instruments for speculative trading purposes. Derivative instruments utilized to manage commodity price risk are accounted for in accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, as amended.
Under SFAS 133, all derivative instruments are



8



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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 are recognized
currently in our earnings as other income (expense). If a derivative is designated as a cash flow hedge and qualifies for hedge accounting, the unrealized gain or loss on the derivative is deferred in accumulated Other Comprehensive Income
(OCI), a component of Stockholders Equity until the sale of the hedged oil and gas production. Realized gains and losses on derivative instruments that are designated as a hedge and qualify for hedge accounting are included in oil
and gas revenues in the period the hedged volumes are sold.



To qualify
for hedge accounting, the relationship between the hedging instrument and the hedged item must be highly effective in achieving the offset of changes in cash flows attributable to the hedged risk both at the inception of the contract and on an
ongoing basis. Hedge accounting is discontinued prospectively when a hedge instrument becomes ineffective. Gains and losses deferred in OCI related to cash flow hedges for which hedge accounting has been discontinued remain unchanged until the
related product has been delivered. If it is probable that a hedged forecasted transaction will not occur, deferred gains or losses on the hedging instrument are recognized in earnings immediately.



We formally document all relationships between hedging instruments and hedged items, as
well as our risk management objectives and strategy for undertaking the hedge. Hedge effectiveness is measured on a quarterly basis. This process includes specific identification of the hedging instrument and the hedged item, the nature of the risk
being hedged and the manner in which the hedging instruments effectiveness will be assessed. At the inception of the hedge and on an ongoing basis, we assess whether the derivatives used in hedging transactions are highly effective in
offsetting changes in cash flows of hedged items.



During the first three
months of 2004 and 2003, deferred losses of $17.8 million and $17.3 million, respectively, were reclassified from OCI and charged to income as a reduction of oil and gas revenues. As of March 31, 2004, $66.4 million ($40.1 million, net of tax) of
deferred net losses on derivative instruments recorded in OCI are expected to be reclassified to earnings during the next twelve-month period. During the first three months of 2004 we recognized expenses of $1.6 million from derivatives that do not
qualify for hedge accounting and $0.1 million for ineffectiveness of derivatives that qualify for hedge accounting.



At March 31, 2004, we had the following open commodity derivative positions:



|                               |  |                      |  |        |  |       
|------------------------------ |  | -------------------- |  | ------ |  | ------
|                               |  | Bbls / MMBtu Per Day
|                               |  | 2004                 |  | 2005   |  | 2006  
|Crude Oil Swaps                |  |                      |  |        |  |       
|Average price $23.89 per Bbl   |  | 18,500               |  |       |  |      
|Average price $24.79 per Bbl   |  |                     |  | 17,500 |  |      
|Average price $25.28 per Bbl   |  |                     |  |       |  | 15,000
|                               |  |                      | 
|Natural Gas Swaps              |  |                      |  |        |  |       
|Average price $4.45 per MMBtu  |  | 20,000               |  |       |  |      
|                               |  |                      | 
|Natural Gas Costless Collars   |  |                      |  |        |  |       
|Floor price of $4.00 per MMBtu |  | 20,000               |  |       |  |      
|Cap price of $5.15 per MMBtu   |  |                      |  |        |  |       
|Floor price of $4.75 per MMBtu |  | 10,000               |  |       |  |      
|Cap price of $5.67 per MMBtu   |  |                      |  |        |  |       



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



9



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We utilize interest rate swaps to manage the interest rate exposure on our long-term debt. We currently have an
interest rate swap agreement that expires in October 2004 that fixes the interest rate on $7.5 million of borrowings under our credit facility at 3.9% plus the LIBOR margin set forth in the credit facility (1.5% at March 31, 2004).



Note 4Long-Term Debt



At March 31, 2004 long-term debt consisted of:



|                                                                               |  |         |     |           |   |        
|------------------------------------------------------------------------------ |  | ------- | --- | --------- | - | -------
|                                                                               |  | Current |     | Long-Term
|Revolving credit facility                                                      |  | $       |    |           | $ | 191,000
|8.75% senior subordinated notes, including unamortized premium of $1.9 million |  |         |    |           |   | 276,862
|Other                                                                          |  |         | 511 |           |   |       
|                                                                               |  |         |     |           |   |        
|                                                                               |  | $       | 511 |           | $ | 467,862
|                                                                               |  |         |     |           |   |        



At March 31, 2004 we had $191.0
million outstanding under our $500.0 million senior revolving credit facility. The credit facility provides for a borrowing base of $400.0 million that will be redetermined on a semi-annual basis, with us and the lenders each having the right to one
annual interim unscheduled redetermination, and adjusted based on the Companys oil and gas properties, reserves, other indebtedness and other relevant factors. Additionally, the credit facility contains a $50.0 million sub-limit on letters of
credit. Borrowings under the credit facility are secured by 100% of the shares of stock of our domestic restricted subsidiaries and mortgages covering 80% of the total present value of our domestic oil and gas properties. The credit facility matures
in April 2006. At March 31, 2004, we were in compliance with the covenants contained in our credit facility and could have borrowed the full amount available under the credit facility.



At March 31, 2004, we had $275.0 million principal amount of 8.75% notes outstanding. The 8.75% notes are our unsecured general
obligations, are subordinated in right of payment to all of our existing and future senior indebtedness and are jointly and severally guaranteed on a full, unconditional basis by all of our existing and future domestic restricted subsidiaries. The
8.75% notes are not redeemable until July 1, 2007. On or after that date they are redeemable, at our option, at 104.375% of the principal amount for the twelve-month period ending June 30, 2008, at 102.917% of the principal amount for the
twelve-month period ending June 30, 2009, at 101.458% of the principal amount for the twelve-month period ending June 30, 2010 and at 100% of the principal amount thereafter. In each case, accrued interest is payable to the date of redemption. In
the event of a change of control, as defined in the indenture, we will be required to make an offer to repurchase the notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of the repurchase.



Note 5Related Party Transactions



Our Chief Executive Officer is Chairman and director and certain of our officers are
officers of Plains Resources Inc. (Plains Resources). We have entered into certain agreements with Plains Resources, including a master separation agreement; an intellectual property agreement; the Plains Exploration & Production
transition services agreement that expires June 16, 2004; the Plains Resources transition services agreement that expires June 8, 2004; and a technical services agreement that expires in July 2005. For the three months ended March 31, 2004 and 2003
we billed Plains Resources $0.3 million and $0.1 million, respectively, for services provided by us under these agreements and for the three months ended March 31, 2003 Plains Resources billed us $38,000 for services they provided to us under these
agreements. In addition, for the three months ended March 31, 2004 we billed Plains Resources $0.2 million for administrative costs associated with certain special projects performed on their behalf.



10



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We charter private aircraft from Gulf Coast Aviation Inc. (Gulf Coast), a corporation that from
time-to-time leases aircraft owned by our Chief Executive Officer. In the first three months of 2004 and 2003, we paid Gulf Coast $0.2 million and $0.3 million, respectively, in connection with charter services in which our Chief Executive
Officers aircraft were used. The charter services were arranged through arms-length dealings and the rates were market-based.



Plains All American Pipeline, L.P. (PAA), a publicly-traded master limited partnership, is an affiliate of Plains Resources. PAA is the
marketer/purchaser for a significant portion of our oil production, including the royalty share of production. The marketing agreement provides that PAA will purchase for resale at market prices certain of our oil production for which PAA charges a
fee of $0.20 per barrel. During the three months ended March 31, 2004 and 2003, the following amounts were recorded with respect to such transactions (in thousands of dollars).



|                               |  |                              |        |      |   |       
|------------------------------ |  | ---------------------------- | ------ | ---- | - | ------
|                               |  | Three Months Ended March 31,
|                               |  | 2004                         |        | 2003
|Sales of oil to PAA            |  |                              |        |      |   |       
|PXPs share                    |  | $                            | 64,267 |      | $ | 64,738
|Royalty owners share          |  |                              | 14,135 |      |   | 12,360
|                               |  |                              |        |      |   |       
|                               |  | $                            | 78,402 |      | $ | 77,098
|                               |  |                              |        |      |   |       
|Charges for PAA marketing fees |  | $                            | 395    |      | $ | 424   
|                               |  |                              |        |      |   |       



Note 6Commitments and Contingencies



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



Note 7Supplemental Cash Flow Information



Cash payments for interest and taxes were (in thousands of dollars):



|                           |  |                              |       |      |   |      
|-------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                           |  | Three Months Ended March 31,
|                           |  | 2004                         |       | 2003
|Cash payments for interest |  | $                            | 2,482 |      | $ | 9,468
|                           |  |                              |       |      |   |      
|Cash payments for taxes    |  | $                            |      |      | $ | 599  
|                           |  |                              |       |      |   |      



Note 8Property Divestments



In the first quarter of 2004 we completed the sale of our interests
in certain non-core producing properties in New Mexico, Texas, Mississippi, Louisiana and Illinois for aggregate proceeds of approximately $25.6 million. Production from these properties averaged approximately 2,600 barrels per day in the fourth
quarter of 2003.



Our oil and gas interests in the Illinois Basin fell
outside of our core areas of operation and as a result did not compete well for capital with the properties within our core areas. The Illinois properties also carried with them high operating costs. These factors led to the sale of our Illinois
properties



11



---

through an extensive auction process. The sale was completed through a stock purchase agreement with standard terms, including typical purchase price adjustments,
representations and warranties, and assumption of liabilities by the purchaser for an adjusted purchase price of $14.2 million. The reserves attributable to our Illinois properties were not material in relation to our total reserves. As a result, we
do not expect the sale of these properties to have a significant impact on future operations or our stockholders.



Note 9Consolidating Financial Statements



We and Plains E&P Company are the co-issuers of the 8.75% notes discussed in Note 4. The 8.75% notes are jointly and severally guaranteed on a full and
unconditional basis by our wholly owned subsidiaries (referred to as Guarantor Subsidiaries).



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



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



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



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



| |  |  | the Company on a consolidated basis.
| | - |  | ------------------------------------



Plains E&P Company has no material assets or operations; accordingly, Plains E&P Company has been omitted from the Issuer financial information.



12



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PLAINS EXPLORATION & PRODUCTION COMPANY



CONDENSED CONSOLIDATING BALANCE SHEET

MARCH 31, 2004

(in thousands)



|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|----------------------------------------------------------- |  | ------ | --------- | - | ---------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | - | --------- | -
|                                                            |  | Issuer |           |   | Guarantor Subsidiaries |   |         | Intercompany Eliminations |  |   | Consolidated |  
|ASSETS                                                      |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Current Assets                                              |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Cash and cash equivalents                                   |  | $      | 1,984     |   |                        | $ | 1       |                           |  | $ |             |   |  | $ | 1,985     |  
|Accounts receivable and other current assets                |  |        | 26,909    |   |                        |   | 28,840  |                           |  |   |             |   |  |   | 55,749    |  
|Inventories                                                 |  |        | 3,517     |   |                        |   | 842     |                           |  |   |             |   |  |   | 4,359     |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 32,410    |   |                        |   | 29,683  |                           |  |   |             |   |  |   | 62,093    |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Property and Equipment, at cost                             |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Oil and natural gas propertiesfull cost method             |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Subject to amortization                                     |  |        | 697,416   |   |                        |   | 390,871 |                           |  |   |             |   |  |   | 1,088,287 |  
|Not subject to amortization                                 |  |        | 18,173    |   |                        |   | 39,807  |                           |  |   |             |   |  |   | 57,980    |  
|Other property and equipment                                |  |        | 4,496     |   |                        |   | 464     |                           |  |   |             |   |  |   | 4,960     |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 720,085   |   |                        |   | 431,142 |                           |  |   |             |   |  |   | 1,151,227 |  
|Less allowance for depreciation, depletion and amortization |  |        | (145,820  | ) |                        |   | (55,359 | )                         |  |   |             |   |  |   | (201,179  | )
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 574,265   |   |                        |   | 375,783 |                           |  |   |             |   |  |   | 950,048   |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Investment in and Advances to Subsidiaries                  |  |        | 468,891   |   |                        |   |        |                           |  |   | (468,891     | ) |  |   |          |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Goodwill                                                    |  |        |          |   |                        |   | 145,046 |                           |  |   |             |   |  |   | 145,046   |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Other Assets                                                |  |        | 20,051    |   |                        |   | (554    | )                         |  |   |             |   |  |   | 19,497    |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|                                                            |  | $      | 1,095,617 |   |                        | $ | 549,958 |                           |  | $ | (468,891     | ) |  | $ | 1,176,684 |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Current Liabilities                                         |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Accounts payable and other current liabilities              |  | $      | 75,531    |   |                        | $ | 22,526  |                           |  | $ |             |   |  | $ | 98,057    |  
|Commodity hedging contracts                                 |  |        | 40,374    |   |                        |   | 35,235  |                           |  |   |             |   |  |   | 75,609    |  
|Current maturities on long-term debt                        |  |        | 511       |   |                        |   |        |                           |  |   |             |   |  |   | 511       |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 116,416   |   |                        |   | 57,761  |                           |  |   |             |   |  |   | 174,177   |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Long-Term Debt                                              |  |        | 467,862   |   |                        |   |        |                           |  |   |             |   |  |   | 467,862   |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Other Long-Term Liabilities                                 |  |        | 54,410    |   |                        |   | 34,199  |                           |  |   |             |   |  |   | 88,609    |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Payable to Parent                                           |  |        |          |   |                        |   | 420,293 |                           |  |   | (420,293     | ) |  |   |          |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Deferred Income Taxes                                       |  |        | 119,831   |   |                        |   | (10,893 | )                         |  |   |             |   |  |   | 108,938   |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Stockholders Equity                                        |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|Stockholders equity                                        |  |        | 406,617   |   |                        |   | 76,944  |                           |  |   | (76,944      | ) |  |   | 406,617   |  
|Accumulated other comprehensive income                      |  |        | (69,519   | ) |                        |   | (28,346 | )                         |  |   | 28,346       |   |  |   | (69,519   | )
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 337,098   |   |                        |   | 48,598  |                           |  |   | (48,598      | ) |  |   | 337,098   |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  
|                                                            |  | $      | 1,095,617 |   |                        | $ | 549,958 |                           |  | $ | (468,891     | ) |  | $ | 1,176,684 |  
|                                                            |  |        |           |   |                        |   |         |                           |  |   |              |   |  |   |           |  



13



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PLAINS EXPLORATION & PRODUCTION COMPANY



CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2003

(in thousands)



|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|----------------------------------------------------------- |  | ------ | --------- | - | ---------------------- | - | -------- | ------------------------- |  | - | ------------ | - |  | - | --------- | -
|                                                            |  | Issuer |           |   | Guarantor Subsidiaries |   |          | Intercompany Eliminations |  |   | Consolidated |  
|ASSETS                                                      |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Current Assets                                              |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Cash and cash equivalents                                   |  | $      | 403       |   |                        | $ | 974      |                           |  | $ |             |   |  | $ | 1,377     |  
|Accounts receivable and other current assets                |  |        | 32,018    |   |                        |   | 21,612   |                           |  |   |             |   |  |   | 53,630    |  
|Inventories                                                 |  |        | 3,800     |   |                        |   | 1,518    |                           |  |   |             |   |  |   | 5,318     |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 36,221    |   |                        |   | 24,104   |                           |  |   |             |   |  |   | 60,325    |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Property and Equipment, at cost                             |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Oil and natural gas propertiesfull cost method             |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Subject to amortization                                     |  |        | 570,639   |   |                        |   | 503,663  |                           |  |   |             |   |  |   | 1,074,302 |  
|Not subject to amortization                                 |  |        | 21,370    |   |                        |   | 42,288   |                           |  |   |             |   |  |   | 63,658    |  
|Other property and equipment                                |  |        | 4,330     |   |                        |   | 609      |                           |  |   |             |   |  |   | 4,939     |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 596,339   |   |                        |   | 546,560  |                           |  |   |             |   |  |   | 1,142,899 |  
|Less allowance for depreciation, depletion and amortization |  |        | (64,470   | ) |                        |   | (121,534 | )                         |  |   |             |   |  |   | (186,004  | )
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 531,869   |   |                        |   | 425,026  |                           |  |   |             |   |  |   | 956,895   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Investment in and Advances to Subsidiaries                  |  |        | 531,142   |   |                        |   |          |                           |  |   | (531,142     | ) |  |   |          |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Other Assets                                                |  |        | 20,292    |   |                        |   | 146,600  |                           |  |   |             |   |  |   | 166,892   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  | $      | 1,119,524 |   |                        | $ | 595,730  |                           |  | $ | (531,142     | ) |  | $ | 1,184,112 |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Current Liabilities                                         |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Accounts payable and other current liabilities              |  | $      | 76,540    |   |                        | $ | 22,912   |                           |  | $ |             |   |  | $ | 99,452    |  
|Commodity hedging contracts                                 |  |        | 29,782    |   |                        |   | 25,341   |                           |  |   |             |   |  |   | 55,123    |  
|Current maturities on long-term debt                        |  |        | 511       |   |                        |   |         |                           |  |   |             |   |  |   | 511       |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 106,833   |   |                        |   | 48,253   |                           |  |   |             |   |  |   | 155,086   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Long-Term Debt                                              |  |        | 487,906   |   |                        |   |         |                           |  |   |             |   |  |   | 487,906   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Other Long-Term Liabilities                                 |  |        | 43,317    |   |                        |   | 22,112   |                           |  |   |             |   |  |   | 65,429    |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Payable to Parent                                           |  |        |          |   |                        |   | 511,783  |                           |  |   | (511,783     | ) |  |   |          |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Deferred Income Taxes                                       |  |        | 127,212   |   |                        |   | (5,777   | )                         |  |   |             |   |  |   | 121,435   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Stockholders Equity                                        |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Stockholders equity                                        |  |        | 394,695   |   |                        |   | 30,292   |                           |  |   | (30,292      | ) |  |   | 394,695   |  
|Accumulated other comprehensive income                      |  |        | (40,439   | ) |                        |   | (10,933  | )                         |  |   | 10,933       |   |  |   | (40,439   | )
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 354,256   |   |                        |   | 19,359   |                           |  |   | (19,359      | ) |  |   | 354,256   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  | $      | 1,119,524 |   |                        | $ | 595,730  |                           |  | $ | (531,142     | ) |  | $ | 1,184,112 |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  



14



---

PLAINS EXPLORATION & PRODUCTION COMPANY



CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED MARCH 31, 2004

(in thousands)



|                                                       |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|------------------------------------------------------ |  | ------ | ------ | - | ---------------------- | - | ------ | ------------------------- |  | - | ------------ | - |  | - | ------ | -
|                                                       |  | Parent |        |   | Guarantor Subsidiaries |   |        | Intercompany Eliminations |  |   | Consolidated |  
|Revenues                                               |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Oil                                                    |  | $      | 31,414 |   |                        | $ | 17,857 |                           |  | $ |             |   |  | $ | 49,271 |  
|Gas                                                    |  |        | 4,215  |   |                        |   | 39,239 |                           |  |   |             |   |  |   | 43,454 |  
|Other operating revenues                               |  |        |       |   |                        |   | 236    |                           |  |   |             |   |  |   | 236    |  
|                                                       |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|                                                       |  |        | 35,629 |   |                        |   | 57,332 |                           |  |   |             |   |  |   | 92,961 |  
|                                                       |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Costs and Expenses                                     |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Production expenses                                    |  |        | 14,404 |   |                        |   | 16,445 |                           |  |   |             |   |  |   | 30,849 |  
|General and administrative                             |  |        | 18,988 |   |                        |   | 1,104  |                           |  |   |             |   |  |   | 20,092 |  
|Depreciation, depletion and amortization and accretion |  |        | 2,679  |   |                        |   | 13,888 |                           |  |   |             |   |  |   | 16,567 |  
|                                                       |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|                                                       |  |        | 36,071 |   |                        |   | 31,437 |                           |  |   |             |   |  |   | 67,508 |  
|                                                       |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Income from Operations                                 |  |        | (442   | ) |                        |   | 25,895 |                           |  |   |             |   |  |   | 25,453 |  
|Other Income (Expense)                                 |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Equity in earnings of subsidiaries                     |  |        | 10,927 |   |                        |   |       |                           |  |   | (10,927      | ) |  |   |       |  
|Interest expense                                       |  |        | (488   | ) |                        |   | (6,442 | )                         |  |   |             |   |  |   | (6,930 | )
|Interest and other income (expense)                    |  |        | 262    |   |                        |   | (1,565 | )                         |  |   |             |   |  |   | (1,303 | )
|                                                       |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Income Before Income Taxes                             |  |        | 10,259 |   |                        |   | 17,888 |                           |  |   | (10,927      | ) |  |   | 17,220 |  
|Income tax expense                                     |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Current                                                |  |        |       |   |                        |   | (188   | )                         |  |   |             |   |  |   | (188   | )
|Deferred                                               |  |        | 139    |   |                        |   | (6,773 | )                         |  |   |             |   |  |   | (6,634 | )
|                                                       |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Net Income                                             |  | $      | 10,398 |   |                        | $ | 10,927 |                           |  | $ | (10,927      | ) |  | $ | 10,398 |  
|                                                       |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  



15



---

PLAINS EXPLORATION & PRODUCTION COMPANY



CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED MARCH 31, 2003

(in thousands)



|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|--------------------------------------------------------------------- |  | ------ | ------ | - | ---------------------- | - | ------ | ------------------------- |  | - | ------------ | - |  | - | ------ | -
|                                                                      |  | Parent |        |   | Guarantor Subsidiaries |   |        | Intercompany Eliminations |  |   | Consolidated |  
|Revenues                                                              |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Oil                                                                   |  | $      | 32,222 |   |                        | $ | 15,205 |                           |  | $ |             |   |  | $ | 47,427 |  
|Gas                                                                   |  |        | 4,104  |   |                        |   |       |                           |  |   |             |   |  |   | 4,104  |  
|Other operating revenues                                              |  |        |       |   |                        |   | 207    |                           |  |   |             |   |  |   | 207    |  
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|                                                                      |  |        | 36,326 |   |                        |   | 15,412 |                           |  |   |             |   |  |   | 51,738 |  
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Costs and Expenses                                                    |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Production expenses                                                   |  |        | 12,679 |   |                        |   | 8,334  |                           |  |   |             |   |  |   | 21,013 |  
|General and administrative                                            |  |        | 2,635  |   |                        |   | 441    |                           |  |   |             |   |  |   | 3,076  |  
|Depreciation, depletion and amortization and accretion                |  |        | 6,164  |   |                        |   | 2,141  |                           |  |   |             |   |  |   | 8,305  |  
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|                                                                      |  |        | 21,478 |   |                        |   | 10,916 |                           |  |   |             |   |  |   | 32,394 |  
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Income from Operations                                                |  |        | 14,848 |   |                        |   | 4,496  |                           |  |   |             |   |  |   | 19,344 |  
|Other Income (Expense)                                                |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Equity in earnings of subsidiaries                                    |  |        | 2,296  |   |                        |   |       |                           |  |   | (2,296       | ) |  |   |       |  
|Interest expense                                                      |  |        | (3,169 | ) |                        |   | (1,687 | )                         |  |   |             |   |  |   | (4,856 | )
|Interest and other income (expense)                                   |  |        | 24     |   |                        |   | 9      |                           |  |   |             |   |  |   | 33     |  
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Income Before Income Taxes and Cumulative Effect of Accounting Change |  |        | 13,999 |   |                        |   | 2,818  |                           |  |   | (2,296       | ) |  |   | 14,521 |  
|Income tax expense                                                    |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Current                                                               |  |        | 226    |   |                        |   | (1,407 | )                         |  |   |             |   |  |   | (1,181 | )
|Deferred                                                              |  |        | (4,977 | ) |                        |   | 240    |                           |  |   |             |   |  |   | (4,737 | )
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Income Before Cumulative Effect of Accounting Change                  |  |        | 9,248  |   |                        |   | 1,651  |                           |  |   | (2,296       | ) |  |   | 8,603  |  
|Cumulative effect of accounting change, net of tax                    |  |        | 11,679 |   |                        |   | 645    |                           |  |   |             |   |  |   | 12,324 |  
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  
|Net Income                                                            |  | $      | 20,927 |   |                        | $ | 2,296  |                           |  | $ | (2,296       | ) |  | $ | 20,927 |  
|                                                                      |  |        |        |   |                        |   |        |                           |  |   |              |   |  |   |        |  



16



---

PLAINS EXPLORATION & PRODUCTION COMPANY



CONSOLIDATING STATEMENTS OF CASH FLOWS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2004

(in thousands of dollars)



|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|---------------------------------------------------------- |  | ------ | ------- | - | ---------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | - | ------- | -
|                                                           |  | Issuer |         |   | Guarantor Subsidiaries |   |         | Intercompany Eliminations |  |   | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Net income                                                 |  | $      | 10,398  |   |                        | $ | 10,927  |                           |  | $ | (10,927      | ) |  | $ | 10,398  |  
|Items not affecting cash flows from operating activities   |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Depreciation, depletion, amortization and accretion        |  |        | 2,679   |   |                        |   | 13,888  |                           |  |   |             |   |  |   | 16,567  |  
|Equity in earnings of subsidiaries                         |  |        | (10,927 | ) |                        |   |        |                           |  |   | 10,927       |   |  |   |        |  
|Deferred income taxes                                      |  |        | (139    | ) |                        |   | 6,773   |                           |  |   |             |   |  |   | 6,634   |  
|Stock appreciation rights and noncash compensation         |  |        | 13,071  |   |                        |   |        |                           |  |   |             |   |  |   | 13,071  |  
|Other noncash items                                        |  |        | (44     | ) |                        |   | 557     |                           |  |   |             |   |  |   | 513     |  
|Change in assets and liabilities from operating activities |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Accounts receivable and other assets                       |  |        | 6,341   |   |                        |   | (7,641  | )                         |  |   |             |   |  |   | (1,300  | )
|Accounts payable and other liabilities                     |  |        | (9,731  | ) |                        |   | (5,770  | )                         |  |   |             |   |  |   | (15,501 | )
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Net cash provided by operating activities                  |  |        | 11,648  |   |                        |   | 18,734  |                           |  |   |             |   |  |   | 30,382  |  
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Additions to oil and gas properties                        |  |        | (15,096 | ) |                        |   | (17,009 | )                         |  |   |             |   |  |   | (32,105 | )
|Proceeds from sale of oil and gas properties               |  |        | 12,226  |   |                        |   | 10,506  |                           |  |   |             |   |  |   | 22,732  |  
|Other                                                      |  |        | (166    | ) |                        |   | (52     | )                         |  |   |             |   |  |   | (218    | )
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Net cash used in investing activities                      |  |        | (3,036  | ) |                        |   | (6,555  | )                         |  |   |             |   |  |   | (9,591  | )
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Revolving credit facility                                  |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Borrowings                                                 |  |        | 68,600  |   |                        |   |        |                           |  |   |             |   |  |   | 68,600  |  
|Repayments                                                 |  |        | (88,600 | ) |                        |   |        |                           |  |   |             |   |  |   | (88,600 | )
|Change in payable to Parent                                |  |        | 13,152  |   |                        |   | (13,152 | )                         |  |   |             |   |  |   |        |  
|Other                                                      |  |        | (183    | ) |                        |   |        |                           |  |   |             |   |  |   | (183    | )
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Net cash provided by (used in) financing activities        |  |        | (7,031  | ) |                        |   | (13,152 | )                         |  |   |             |   |  |   | (20,183 | )
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents       |  |        | 1,581   |   |                        |   | (973    | )                         |  |   |             |   |  |   | 608     |  
|Cash and cash equivalents, beginning of period             |  |        | 403     |   |                        |   | 974     |                           |  |   |             |   |  |   | 1,377   |  
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  
|Cash and cash equivalents, end of period                   |  | $      | 1,984   |   |                        | $ | 1       |                           |  | $ |             |   |  | $ | 1,985   |  
|                                                           |  |        |         |   |                        |   |         |                           |  |   |              |   |  |   |         |  



17



---

PLAINS EXPLORATION & PRODUCTION COMPANY



CONSOLIDATING STATEMENTS OF CASH FLOWS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2003

(in thousands of dollars)



|                                                           |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|---------------------------------------------------------- |  | ------ | ------- | - | ---------------------- | - | ------ | ------------------------- |  | - | ------------ | - |  | - | ------- | -
|                                                           |  | Issuer |         |   | Guarantor Subsidiaries |   |        | Intercompany Eliminations |  |   | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|Net income                                                 |  | $      | 20,927  |   |                        | $ | 2,296  |                           |  | $ | (2,296       | ) |  | $ | 20,927  |  
|Items not affecting cash flows from operating activities   |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|Depreciation, depletion, amortization and accretion        |  |        | 6,164   |   |                        |   | 2,141  |                           |  |   |             |   |  |   | 8,305   |  
|Equity in earnings of subsidiaries                         |  |        | (2,296  | ) |                        |   |       |                           |  |   | 2,296        |   |  |   |        |  
|Deferred income taxes                                      |  |        | 4,977   |   |                        |   | (240   | )                         |  |   |             |   |  |   | 4,737   |  
|Cumulative effect of adoption of accounting change         |  |        | (11,679 | ) |                        |   | (645   | )                         |  |   |              |   |  |   | (12,324 | )
|Stock appreciation rights and noncash compensation         |  |        | (1,632  | ) |                        |   |       |                           |  |   |             |   |  |   | (1,632  | )
|Other noncash items                                        |  |        | 59      |   |                        |   |       |                           |  |   |             |   |  |   | 59      |  
|Change in assets and liabilities from operating activities |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|Accounts receivable and other assets                       |  |        | (359    | ) |                        |   | (92    | )                         |  |   |             |   |  |   | (451    | )
|Accounts payable and other liabilities                     |  |        | (573    | ) |                        |   | (1,021 | )                         |  |   |             |   |  |   | (1,594  | )
|                                                           |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|Net cash provided by operating activities                  |  |        | 15,588  |   |                        |   | 2,439  |                           |  |   |             |   |  |   | 18,027  |  
|                                                           |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|Additions to oil and gas properties                        |  |        | (10,306 | ) |                        |   | (2,462 | )                         |  |   |             |   |  |   | (12,768 | )
|Other                                                      |  |        | (2,372  | ) |                        |   |       |                           |  |   |             |   |  |   | (2,372  | )
|                                                           |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|Net cash used in investing activities                      |  |        | (12,678 | ) |                        |   | (2,462 | )                         |  |   |             |   |  |   | (15,140 | )
|                                                           |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|Revolving credit facility                                  |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|Borrowings                                                 |  |        | 63,200  |   |                        |   |       |                           |  |   |             |   |  |   | 63,200  |  
|Repayments                                                 |  |        | (66,500 | ) |                        |   |       |                           |  |   |             |   |  |   | (66,500 | )
|Other                                                      |  |        | 387     |   |                        |   |       |                           |  |   |             |   |  |   | 387     |  
|                                                           |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|Net cash provided by (used in) financing activities        |  |        | (2,913  | ) |                        |   |       |                           |  |   |             |   |  |   | (2,913  | )
|                                                           |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents       |  |        | (3      | ) |                        |   | (23    | )                         |  |   |             |   |  |   | (26     | )
|Cash and cash equivalents, beginning of period             |  |        | 1,004   |   |                        |   | 24     |                           |  |   |             |   |  |   | 1,028   |  
|                                                           |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  
|Cash and cash equivalents, end of period                   |  | $      | 1,001   |   |                        | $ | 1      |                           |  | $ |             |   |  | $ | 1,002   |  
|                                                           |  |        |         |   |                        |   |        |                           |  |   |              |   |  |   |         |  



18



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Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations



The following information should be read in connection with the information contained in the consolidated financial statements and notes thereto included
elsewhere in this report.



Overview



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



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



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



| |  |  | the Gulf Coast Basin onshore and offshore Louisiana; and
| | - |  | --------------------------------------------------------



| |  |  | the East Texas Basin in east Texas and north Louisiana.
| | - |  | -------------------------------------------------------



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



We reported net income of $10.4
million, or $0.26 per diluted share for the first quarter of 2004 compared to net income of $20.9 million, or $0.86 per diluted share for the first quarter of 2003. Net income for the first quarter of 2004 includes the effect of the properties from
our acquisition of 3TEC Energy Corporation, or 3TEC, which are included in our results effective June 1, 2003. Net income for the first quarter of 2003 includes a non-cash, after-tax $12.3 million credit related to the adoption of Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations.



First quarter income before the cumulative effect of accounting change increased to $10.4 million in 2004 from $8.6 million in 2003. The improvement is primarily
attributable to higher oil and gas sales as a result of increased sales volumes due to the 3TEC properties and increased oil and gas prices. These increases were partially offset by expenses related to stock appreciation rights and higher operating
expenses due to the properties acquired from 3TEC.



Our primary sources
of liquidity are cash generated from our operations and our revolving credit facility. At March 31, 2004 we had approximately $203.5 million of availability under our revolving credit facility. During 2004, we expect to make aggregate capital
expenditures of approximately $163-$177 million on our existing asset base. We believe that we have sufficient liquidity through our cash from operations and borrowing capacity under our revolving credit facility to meet our short-term and long-term
normal recurring operating needs, debt service obligations, contingencies and anticipated capital expenditures.



Our cash flows depend on many factors, including the price of oil and gas, the success of our acquisition and drilling activities and the operational performance of
our producing properties. We hedge to limit our commodity price exposure. Based on our daily average production for the first quarter of 2004, utilizing a combination of swaps and collars, we have hedged approximately 77%, 73% and 62% of our oil
production for the years 2004, 2005 and 2006, respectively, and approximately 61% of our 2004 gas production. Our hedging activities mitigate our exposure to price declines and allow us the flexibility to continue to execute our capital plan even if
prices decline during the period our hedges are in place. In addition, the majority of our capital expenditures are discretionary and could be curtailed if our cash flows declined from expected levels.



19



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Completion of our proposed acquisition of Nuevo Energy Company, or Nuevo, will have a significant impact on our
company. We will have a large proved reserve base that will be over 70% proved developed, a significantly improved balance sheet and an attractive growth profile. The combined company is expected to generate significant cash flow that will be
available for debt reduction and future growth opportunities.



Proposed Acquisition of
Nuevo



On February 12, 2004 we announced that we had entered into a
definitive agreement to acquire Nuevo in a stock for stock transaction valued at approximately $1.0 billion, based on our March 31, 2004 closing stock price of $18.64 per share. Under the terms of the definitive agreement, Nuevo stockholders will
receive 1.765 shares of our common stock for each share of Nuevo common stock. If completed, we will issue approximately 38.8 million common shares and options to Nuevo shareholders and assume $203 million of net debt (as of March 31, 2004) and $115
million of Trust Convertible Preferred Securities.



The transaction is
expected to qualify as a tax free reorganization under Section 368(a) and is expected to be tax free to our stockholders and tax free for the stock portion of the consideration received by Nuevo stockholders. The Boards of directors of both
companies have approved the merger agreement and each has recommended it to their respective stockholders for approval. The transaction is subject to stockholder approval from both companies and other customary conditions. Post closing, it is
anticipated that PXP stockholders will own approximately 52% of the combined company and Nuevo stockholders will own approximately 48% of the combined company.



The transaction is expected to close in the second quarter of 2004. We will account for the transaction as a purchase of Nuevo under purchase accounting rules
and we will continue to use the full cost method of accounting for our oil and gas properties.



General



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



To manage our exposure to commodity price risk, we use various derivative instruments to hedge our exposure to oil and gas sales price
fluctuations. Our hedging arrangements provide us protection on the hedged volumes if these prices decline below the prices at which these hedges are set.



20



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However, if prices increase, ceiling prices in our hedges may cause us to receive less revenues on the hedged volumes than we would receive in the absence of hedges.
Gains and losses from hedging transactions are recognized as revenues when the associated production is sold. Changes in the fair value and settlement gains and losses of derivative instruments that do not qualify for hedge accounting are recognized
in other income (expense).



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



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



Results 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 barrel
of oil equivalent (BOE) basis:



|                                        |  |                              |        |   |      |   |        |  
|--------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                        |  | Three Months Ended March 31, |       
|                                        |  | 2004                         |        |   | 2003 |  
|Sales Volumes                           |  |                              |        |   |      |   |        |  
|Oil and liquids (MBbls)                 |  |                              | 2,195  |   |      |   | 2,181  |  
|Gas (MMcf)                              |  |                              | 7,404  |   |      |   | 729    |  
|MBOE                                    |  |                              | 3,429  |   |      |   | 2,303  |  
|Daily Average Sales Volumes             |  |                              |        |   |      |   |        |  
|Oil and liquids (Bbls)                  |  |                              | 24,121 |   |      |   | 24,237 |  
|Gas (Mcf)                               |  |                              | 81,363 |   |      |   | 8,099  |  
|BOE                                     |  |                              | 37,681 |   |      |   | 25,587 |  
|Unit Economics (in dollars)             |  |                              |        |   |      |   |        |  
|Average Oil Realized Price ($/Bbl)      |  |                              |        |   |      |   |        |  
|Average NYMEX                           |  | $                            | 35.16  |   |      | $ | 33.80  |  
|Hedging revenue (expense)               |  |                              | (8.68  | ) |      |   | (7.94  | )
|Differential                            |  |                              | (4.02  | ) |      |   | (4.11  | )
|                                        |  |                              |        |   |      |   |        |  
|Net realized                            |  | $                            | 22.46  |   |      | $ | 21.75  |  
|                                        |  |                              |        |   |      |   |        |  
|Average Gas Realized Price ($/Mcf)      |  |                              |        |   |      |   |        |  
|Average NYMEX                           |  | $                            | 5.72   |   |      | $ | 5.69   |  
|Hedging revenue (cost)                  |  |                              | 0.14   |   |      |   |       |  
|Differential                            |  |                              | 0.01   |   |      |   | (0.06  | )
|                                        |  |                              |        |   |      |   |        |  
|Net realized                            |  | $                            | 5.87   |   |      | $ | 5.63   |  
|                                        |  |                              |        |   |      |   |        |  
|Average Realized Price per BOE          |  | $                            | 27.05  |   |      | $ | 22.38  |  
|Costs and Expenses per BOE              |  |                              |        |   |      |   |        |  
|Lease operating expenses                |  |                              | 7.49   |   |      |   | 8.67   |  
|Production and ad valorem taxes         |  |                              | 1.16   |   |      |   | 0.45   |  
|Gathering and transportation            |  |                              | 0.35   |   |      |   |       |  
|G&A                                     |  |                              |        |   |      |   |        |  
|G&A excluding stock appreciation rights |  |                              | 2.78   |   |      |   | 1.93   |  
|Stock appreciation rights               |  |                              | 3.08   |   |      |   | (0.59  | )
|DD&A per BOE (oil and gas properties)   |  |                              | 4.39   |   |      |   | 3.18   |  



21



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Comparison of Three Months Ended March 31, 2004 to Three Months Ended March 31, 2003



Oil and gas revenues.    Oil and gas revenues increased
80%, or $41.2 million, to $92.7 million for 2004 from $51.5 million for 2003. The increase is due to increased production volumes attributable to the properties acquired from 3TEC and higher realized prices. Our average realized price per BOE
increased 21% to $27.05 primarily due to the increase in natural gas production attributable to the properties acquired from 3TEC.



Oil revenues increased 4%, or $1.9 million, to $49.3 million for 2004 from $47.4 million for 2003, primarily reflecting higher realized prices. Our average realized
price for oil increased 3%, or $0.71, to $22.46 per Bbl for 2004 from $21.75 per Bbl for 2003. The increase is primarily attributable to an improvement in the NYMEX oil price, which averaged $35.16 per Bbl in 2004 versus $33.80 per Bbl in 2003.
Hedging had the effect of decreasing our average price per Bbl by $8.68 in 2004 compared to $7.94 per Bbl in 2003.



Gas revenues increased $39.4 million, to $43.5 million for 2004 from $4.1 million for 2003. A 6.7 Bcf increase in production volumes to 7.4 Bcf increased revenues
by $39.2 million and higher realized prices increased revenues by $0.2 million. The properties acquired from 3TEC accounted for 6.1 Bcf of 2004 production.



Our average realized price for gas increased 4%, or $0.24, to $5.87 per Mcf for 2004 from $5.63 per Mcf for 2003. The increase is attributable to an improvement in
the NYMEX gas price, which averaged $5.72 per Mcf in 2004 versus $5.69 in 2003, the effects of hedging and an improvement in our average location and quality differential. In 2004 hedging revenues increased our average price per Mcf by $0.14. Our
average location and quality differential improved by $0.07 per Mcf compared to 2003.



Lease operating expenses.    Lease operating expenses increased 29%, or $5.7 million, to $25.7 million for 2004 from $20.0 million for 2003, primarily due to the properties acquired from 3TEC. The
properties acquired from 3TEC accounted for $5.3 million of 2004 production expenses. On a per unit basis, production expenses decreased to $7.49 per BOE in 2004 versus $8.67 per BOE in 2003 due to the properties acquired from 3TEC that have lower
per unit operating expenses than our other properties.



Production and
ad valorem taxes.    Production and ad valorem taxes increased $3.0 million, to $4.0 million for 2004 from $1.0 million for 2003 due to the properties acquired from 3TEC. Production and ad valorem taxes for 2004 include $2.7
million attributable to the properties acquired from 3TEC.



Gathering
and transportation expenses.    Gathering and transportation expenses, which totaled $1.2 million in 2004, represent costs incurred to deliver oil and gas produced from certain of the properties acquired from 3TEC to the
sales point.



General and administrative
expense.    G&A, expense, excluding amounts attributable to stock appreciation rights, or SARs, increased 115%, or $5.1 million, to $9.5 million for 2004 from $4.4 million for 2003. G&A expense for 2004 includes $2.7
million related to the separation of employment of a former executive of the Company in March 2004. The remainder of the increase is primarily a result of increased costs resulting from the 3TEC acquisition.



G&A expense for 2004 includes a non-cash charge of $10.6 million related to
outstanding SARs. Accounting for SARs requires that we record an expense or credit to the income statement depending on whether, during the period, our stock price either rose or fell, respectively. Accordingly, since our stock price at March 31,
2004 was $18.64 as compared to $15.39 on December 31, 2003 we recorded



22



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an expense. Cash payments for SARs exercised were $4.3 million and $0.5 million for the three months ended March 31, 2004 and 2003, respectively. G&A expense for
2003 includes a non-cash benefit of $1.4 million related to outstanding SARs.



G&A expense does not include amounts capitalized as part of our acquisition, exploration and development activities. We capitalized $3.4 million and $2.0 million of G&A expense in the first quarter of 2004 and 2003, respectively.



Depreciation, depletion, amortization and accretion, or
DD&A.    DD&A expense increased 100%, or $8.3 million, to $16.6 million for 2004 from $8.3 million for 2004. Approximately $7.7 million of the increase was attributable to our oil and gas DD&A due to a higher per
unit rate and higher production. Our oil and gas unit of production rate increased to $4.39 per BOE in 2004 compared to $3.18 per BOE in 2003. The increase primarily reflects the effect of the 3TEC acquisition. The remaining increase is attributable
to amortization of debt issue costs and accretion expense.



Gain
(loss) on derivatives.    Gain (loss) on derivatives in the first quarter of 2004 includes $1.0 million of cash settlements and $0.6 million for the decrease in fair value of derivative instruments that do not qualify for
hedge accounting.



Interest
expense.    Interest expense increased 41%, or $2.0 million, to $6.9 million for 2004 from $4.9 million for 2002 due to higher outstanding debt as a result of the 3TEC acquisition. Interest expense does not include interest
capitalized on oil and gas properties not subject to amortization. We capitalized approximately $0.9 million and $0.3 million of interest in 2004 and 2003, respectively.



Income tax expense.    Income tax expense increased to $6.8 million for 2004 from $5.9 million for 2003 due
to higher pre-tax income. Our overall effective tax rate decreased to 40% in 2004 from 41% in 2003. Our currently payable effective tax rate was 1% for 2004 as compared to 8% for 2003. The decreased currently payable effective rate in 2004 primarily
reflects the tax loss on the sale of our Illinois properties.



Cumulative effect.    The cumulative effect of accounting change recognized for the first quarter of 2003 was for the adoption of Statement of Financial Accounting Standards No. 143 Accounting for Asset
Retirement Obligations, as amended.



Liquidity and Capital Resources



Our primary sources of liquidity are cash generated from our
operations and our revolving credit facility. At March 31, 2004 we had approximately $203.5 million of availability under our revolving credit facility. We believe that we have sufficient liquidity through our cash from operations and borrowing
capacity under our revolving credit facility to meet our short-term and long-term normal recurring operating needs, debt service obligations, contingencies and anticipated capital expenditures.



Our cash flows depend on many factors, including the price of oil and gas and the
success of our acquisition and drilling activities. We actively manage our exposure to commodity price fluctuations by hedging portions of our production and thereby mitigate our exposure to price declines. This allows us the flexibility to continue
to execute our capital plan even if prices decline during the period our hedges are in place. In addition, the majority of our capital expenditures are discretionary and could be curtailed if our cash flows declined from expected levels.



Financing Activities



At March 31, 2004 we had a working capital deficit of approximately $112.1 million. Approximately $75.6 million of the working capital
deficit is attributable to the fair value of our hedges. In accordance



23



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with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, the fair value of all derivative instruments is recorded on the balance
sheet. Gains and losses on hedging instruments are included in oil and gas revenues in the period that the related volumes are delivered. The hedge agreements provide for monthly settlement based on the differential between the agreement price and
actual NYMEX oil and gas prices. Cash received for sale of physical production will be based on actual market prices and will generally offset any gains or losses on the hedge instruments. In addition, $21.0. million of the working capital deficit
is attributable to the in-the-money value of stock appreciation rights that were deemed vested at March 31, 2004. The remaining working capital deficit will be financed through cash flow and borrowings under our credit facility.



As of March 31, 2004 we had $191.0 million in borrowings and $5.5 million in letters of
credit outstanding under our revolving credit facility. The credit facility has a borrowing base of $400.0 million that will be reviewed every six months, with the lenders and us each having the right to one annual interim unscheduled
redetermination, and adjusted based on our oil and gas properties, reserves, other indebtedness and other relevant factors, and matures in April 2006. The credit facility contains a $50.0 million sub-limit on letters of credit. To secure borrowings,
we pledged 100% of the shares of stock of our domestic subsidiaries and gave mortgages covering 80% of the total present value of our domestic oil and gas properties. Our domestic subsidiaries unconditionally guarantee payment of borrowings under
the credit facility.



At March 31, 2004 we had $275.0 million principal
amount of 8.75% senior subordinated notes outstanding. The 8.75% senior subordinated notes are our unsecured general obligations, are subordinated in right of payment to all of our existing and future senior indebtedness and are jointly and
severally guaranteed on a full, unconditional basis by all of our existing and future domestic restricted subsidiaries. The indenture governing the notes contains covenants that limit our ability, as well as the ability of our subsidiaries, among
other things, to incur additional indebtedness, make certain investments, make restricted payments, sell assets, enter into agreements containing dividends and other payment restrictions affecting subsidiaries, enter into transactions with
affiliates, create liens, merge, consolidate and transfer assets and enter into different lines of business. In the event of a change of control, as defined in the indenture, we will be required to make an offer to repurchase the notes at 101% of
the principal amount thereof, plus accrued and unpaid interest to the date of the repurchase. The indenture governing the 8.75% senior subordinated notes permitted the spin-off and the spin-off did not, in itself, constitute a change of control for
purposes of the indenture. The 3TEC acquisition did not constitute a change of control for purposes of the indenture.



Cash Flows



|                            |  |                              |       |   |      |   |       |  
|--------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                            |  | Three Months Ended March 31, |      
|                            |  | 2004                         |       |   | 2003 |  
|                            |  | (in millions)                |      
|Cash provided by (used in): |  |                              |       |   |      |   |       |  
|Operating activities        |  | $                            | 30.4  |   |      | $ | 18.0  |  
|Investing activities        |  |                              | (9.6  | ) |      |   | (15.1 | )
|Financing activities        |  |                              | (20.2 | ) |      |   | (2.9  | )



Net cash provided by operating
activities was $30.4 million and $18.0 million for the first quarter of 2004 and 2003, respectively. The increase primarily reflects increased sales volumes as a result of the 3TEC acquisition, partially offset by higher G&A costs.



Net cash used in investing activities was $9.6 million in the first quarter of 2004
and $15.1 million in the first quarter of 2003. Costs incurred in connection with our oil and gas acquisition, development and exploration activities totaled $32.1 million in 2004 compared to $12.8 million in 2003.



24



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In the first quarter of 2004 we completed the sale of our interests in certain non-core producing properties in New
Mexico, Texas, Mississippi, Louisiana and Illinois for aggregate proceeds of approximately $25.6 million. Production from these properties averaged approximately 2,600 barrels per day in the fourth quarter of 2003.



Our oil and gas interests in the Illinois Basin fell outside of our core areas of
operation and as a result did not compete well for capital with the properties within our core areas. The Illinois properties also carried with them high operating costs. These factors led to the sale of our Illinois properties through an extensive
auction process. The sale was completed through a stock purchase agreement with standard terms, including typical purchase price adjustments, representations and warranties, and assumption of liabilities by the purchaser for an adjusted purchase
price of $14.2 million. The reserves attributable to our Illinois properties were not material in relation to our total reserves. As a result, we do not expect the sale of these properties to have a significant impact on future operations or our
stockholders.



Net cash used in financing activities in the first quarter
of 2004 and 2003 was $20.2 million and $2.9 million, respectively, primarily reflecting a decrease in amounts outstanding under our revolving credit facility.



Capital Requirements



We have made and will continue to make substantial capital expenditures for the acquisition, exploitation, development, exploration and production of oil and gas.
During 2004, we expect to make aggregate capital expenditures of approximately $163-$177 million on our existing asset base. Capital expenditures for the Nuevo properties are expected to be $65-$70 million pursuant to Nuevos 2004 capital plan.
Based on the foregoing, total pro forma capital expenditures for the combined asset base are estimated to be $228-$247 million for 2004, assuming the merger had closed on January 1, 2004. Subsequent to the closing of the Nuevo acquisition, we may
reallocate capital between the two asset bases to optimize 2004 spending. We expect that 2004 capital expenditures will be funded with cash flow from our operations and our revolving credit facility.



We will incur cash expenditures upon the exercise of SARs, but our common shares
outstanding will not increase. At March 31, 2004 we had approximately 3.5 million SARs outstanding of which 1.9 million were vested. If all of the vested SARs were exercised, based on $18.64, the price of our common stock as of March 31, 2004, we
would pay $18.2 million to holders of the SARs. In the first quarter of 2004 we made cash payments of $4.3 million for SARs that were exercised during that period.



Critical Accounting Policies and Factors that May Affect Future Results



Based on the accounting policies that we have in place, certain factors may impact our future financial results. Significant
accounting policies related to commodity pricing and risk management activities, write-downs under full cost ceiling test rules, oil and gas reserves, stock appreciation rights and goodwill are discussed in our Annual Report on Form 10-K for the
year ended December 31, 2003.



Recent Accounting Pronouncements



In 2003, the SEC inquired of the FASB regarding the application of certain provisions
of SFAS No. 141, Business Combinations,(SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets,(SFAS No. 142) to oil and gas companies. SFAS Nos. 141 and 142 became effective for transactions
subsequent to June 30, 2001. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method and that acquired intangible



25



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assets be disaggregated and reported separately from goodwill. Specifically, the SECs inquiry was based on whether costs of contract-based drilling and mineral
use rights (mineral rights) should be recorded and disclosed as intangible assets under the guidance in SFAS Nos. 141 and 142. The current practice for us and the industry is to present oil and gas related assets, including mineral
rights, as property and equipment (tangible assets) on the balance sheet. Subsequent to June 30, 2001, we entered into a business combination and the majority of the purchase price was allocated to oil and gas properties.



An Emerging Issues Task Force Working Group (EITF) was created to research
the accounting and disclosure treatment of mineral rights for oil and gas companies. As a result, the EITF added Issue No. 04-2, Whether Mineral Rights are Tangible or Intangible Assets and Related Issues, and Issue No. 03-S,
Application of FASB Statement No. 142, Goodwill and Other Intangible Assets, to Oil and Gas Companies. The FASB recently issued FASB Staff Position 141-1 and 142-1 (the FSP) which clarifies that mineral rights are tangible
assets and have further amended FAS 141 and FAS 142 accordingly. The EITF has not reached a consensus on Issue No. 03-S and any further guidance will be applied to the first reporting period beginning after the date that such issue is finalized.



Statement Regarding Forward-Looking Statements



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



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



| |  |  | unexpected difficulties in integrating our operations with those of Nuevo after the proposed acquisition;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | the consequences of our officers and employees providing services to both us and Plains Resources and not being required to spend any specified percentage or amount of time on our business;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | impact of oil and gas price fluctuations;
| | - |  | -----------------------------------------



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



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



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



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



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



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



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



26



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All forward-looking statements in this report are made as of the date hereof, and you should not place undue
certainty on these statements without also considering the risks and uncertainties associated with these statements and our business that are discussed in this report. Moreover, although we believe the expectations reflected in the forward-looking
statements are based upon reasonable assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material. Except as required by applicable securities laws, we do not intend to update these
forward-looking statements and information. See Items 1 & 2.Business and PropertiesRisk Factors in our Annual Report on Form 10-K for the year ended December 31, 2003 and Managements Discussion and Analysis of
Financial Condition and Results of OperationsCritical Accounting Policies and Factors That May Affect Future Results in this report for additional discussions of risks and uncertainties.



Item 3Qualitative and Quantitative Disclosures About Market Risks



We actively manage our exposure to commodity price fluctuations by hedging significant portions of our oil and gas production through the use of derivative
instruments. The derivative instruments currently consist of oil and gas swap and option contracts entered into with financial institutions. We do not enter into derivative instruments for speculative trading purposes. Derivative instruments
utilized to manage commodity price risk are accounted for in accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, as amended. Under SFAS 133, 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 are recognized currently in our earnings as other income (expense). If a derivative is designated as a cash flow hedge and
qualifies for hedge accounting, the unrealized gain or loss on the derivative is deferred in accumulated Other Comprehensive Income (OCI), a component of Stockholders Equity until the sale of the hedged oil and gas production.
Realized gains and losses on derivative instruments that are designated as a hedge and qualify for hedge accounting are included in oil and gas revenues in the period the hedged volumes are sold.



To qualify for hedge accounting, the relationship between the hedging instrument and
the hedged item must be highly effective in achieving the offset of changes in cash flows attributable to the hedged risk both at the inception of the contract and on an ongoing basis. Hedge accounting is discontinued prospectively when a hedge
instrument becomes ineffective. Gains and losses deferred in OCI related to cash flow hedges for which hedge accounting has been discontinued remain unchanged until the related product has been delivered. If it is probable that a hedged forecasted
transaction will not occur, deferred gains or losses on the hedging instrument are recognized in earnings immediately.



We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives and strategy for undertaking the
hedge. Hedge effectiveness is measured on a quarterly basis. This process includes specific identification of the hedging instrument and the hedged item, the nature of the risk being hedged and the manner in which the hedging instruments
effectiveness will be assessed. At the inception of the hedge and on an ongoing basis, we assess whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.



During the first three months of 2004 and 2003, deferred losses of $17.8 million and
$17.3 million, respectively, were reclassified from OCI and charged to income as a reduction of oil and gas revenues. As of March 31, 2004, $66.4 million ($40.1 million, net of tax) of deferred net losses on derivative instruments recorded in OCI
are expected to be reclassified to earnings during the next twelve-month period. During the first three months of 2004 we recognized expenses of $1.6 million from derivatives that do not qualify for hedge accounting and $0.1 million for
ineffectiveness of derivatives that qualify for hedge accounting.



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At March 31, 2004, we had the following open commodity derivative positions:



|                               |  |                      |  |        |  |       
|------------------------------ |  | -------------------- |  | ------ |  | ------
|                               |  | Bbls / MMBtu Per Day
|                               |  | 2004                 |  | 2005   |  | 2006  
|Crude Oil Swaps                |  |                      |  |        |  |       
|Average price $23.89 per Bbl   |  | 18,500               |  |       |  |      
|Average price $24.79 per Bbl   |  |                     |  | 17,500 |  |      
|Average price $25.28 per Bbl   |  |                     |  |       |  | 15,000
|                               |  |                      | 
|Natural Gas Swaps              |  |                      |  |        |  |       
|Average price $4.45 per MMBtu  |  | 20,000               |  |       |  |      
|                               |  |                      | 
|Natural Gas Costless Collars   |  |                      |  |        |  |       
|Floor price of $4.00 per MMBtu |  | 20,000               |  |       |  |      
|Cap price of $5.15 per MMBtu   |  |                      |  |        |  |       
|Floor price of $4.75 per MMBtu |  | 10,000               |  |       |  |      
|Cap price of $5.67 per MMBtu   |  |                      |  |        |  |       



Assuming our production volumes
for the first quarter 2004 are held constant in subsequent periods, we have hedged approximately 77%, 73% and 62% of our oil production for the years 2004, 2005 and 2006, respectively, and approximately 61% of our 2004 gas production. Location and
quality differentials attributable to our properties are not included in the foregoing prices. Because of the quality and location of our production, these adjustments will affect our net realized prices.



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



|                            |  |            |        |      |                              |   |            |  |   |                              |   |  |   |     
|--------------------------- |  | ---------- | ------ | ---- | ---------------------------- | - | ---------- |  | - | ---------------------------- | - |  | - | ----
|                            |  | March 31, 
|                            |  | 2004       |        | 2003
|                            |  | Fair Value |        |      | Effect of 10% Price Decrease |   | Fair Value |  |   | Effect of 10% Price Decrease
|Swaps and options contracts |  | $          | (124.0 | )    |                              | $ | 58.3       |  | $ | (25.9                        | ) |  | $ | 34.2



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



The contract counterparties for our derivative commodity contracts are all major financial institutions with Standard & Poors ratings of A or better. Six
of the financial institutions are participating lenders in our revolving credit facility, with one counterparty holding contracts that represent approximately 39% of the fair value of all open positions as of March 31, 2004.



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



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Interest rate risk.    Our credit facility is sensitive to market fluctuations in
interest rates. We use interest rate swaps to hedge underlying debt obligations. These instruments hedge specific debt issuances and qualify for hedge accounting. The interest rate differential is reflected as an adjustment to interest expense over
the life of the instruments. We have entered into an interest rate swap for an aggregate notional principal amount of $7.5 million that fixes the interest rate on that amount of borrowing under our credit facility at 3.9% plus the LIBOR margin set
forth in our credit facility. The swap expires in October 2004.



Item 4Controls and Procedures



Under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), we evaluated the
effectiveness of our disclosure controls and procedures (as defined under Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures as of March 31, 2004 are effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms.



During our first fiscal quarter ended March 31, 2004, there was no significant change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal
control over financial reporting.



29



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PART II. OTHER INFORMATION



Item 1Legal
Proceedings



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



Item 2Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities



Issuer Purchases of Equity Securities



|                             |  |                               |  |                           |       |                                                                          |   |                                                                                                    |  
|---------------------------- |  | ----------------------------- |  | ------------------------- | ----- | ------------------------------------------------------------------------ | - | -------------------------------------------------------------------------------------------------- | -
|Period                       |  | TotalNumber ofSharesPurchased |  | AveragePricePaid perShare |       | TotalNumber ofSharesPurchasedas Part ofPubliclyAnnouncedPlans orPrograms |   | MaximumNumber (orApproximateDollar Value)of Sharesthat May YetBePurchasedUnder thePlans orPrograms
|March 1 to March 31, 2004(1) |  | 10,580                        |  | $                         | 17.31 |                                                                          |  |                                                                                                    | 

---

|(1) |  | These shares were repurchased from the holders of restricted stock at the time the restrictions lapsed in accordance with the Companys 2002 Stock Incentive Plan, as amended, in order to
pay the withholding taxes of the holder.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 6Exhibits
and Reports on Form 8-K



(a) Exhibits



|      |  |                                                                                                                                                                                                                                                                                          
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1   |  | Agreement and Plan of Merger, dated February 12, 2004, by and among Plains Exploration & Production Company, PXP California Inc. and Nuevo Energy Company (incorporated by reference to Exhibit 2.1
to the Companys Form 8-K filed on February 12, 2004).                               
|      | 
|2.2   |  | Amendment No. 1 to Agreement and Plan of Merger, dated April 9, 2004, by and among Plains Exploration & Production Company, PXP California Inc. and Nuevo Energy Company (incorporated by reference
to Exhibit 2.2 to the Companys Amendment No. 1 to Form S-4 filed on April 12, 2004).
|      | 
|31.1* |  | Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                          
|      | 
|31.2* |  | Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                          
|      | 
|32.1* |  | Chief Executive Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                            
|      | 
|32.2* |  | Chief Financial Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                            

---

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



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(b) Reports on Form 8-K



| |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 
| |  | A Current Report on Form 8-K was filed on January 20, 2004 with respect to unaudited pro forma consolidated statements of income for the nine months ended September 30, 2003 and the year ended December
31, 2002 reflecting, among other things, the acquisition of 3TEC Energy Corporation.                                                                                     
| | 
| |  | A Current Report on Form 8-K was filed on February 12, 2004 with respect to a press release dated February 12, 2004 announcing a definitive agreement to acquire Nuevo Energy Company. The report also
included estimates of certain operating and financial results for the three months ended March 31, 2004 and the year ended December 31, 2004.                               
| | 
| |  | A Current Report on Form 8-K/A was filed on February 18, 2004 to correct certain inaccuracies in the estimates of certain operating and financial results for the three months ended March 31, 2004 and
the year ended December 31, 2004 included in the Form 8-K filed on February 12, 2004.                                                                                      
| | 
| |  | A Current Report on Form 8-K was filed on March 10, 2004 with respect to a press release dated March 10, 2004 reporting 2003 earnings and year-end oil and gas reserve information.                                                                                                                                                                                                
| | 
| |  | A Current Report on Form 8-K was filed on March 17, 2004 with respect to an unaudited pro forma consolidated statement of income for the year ended December 31, 2003 and an unaudited pro forma balance
sheet at December 31, 2003 that reflected the acquisition of Nuevo Energy Company. The report also included the consolidated financial statements of Nuevo Energy Company.
| | 
| |  | A Current Report on Form 8-K was filed on March 30, 2004 with respect to a presentation to be made on March 31, 2004 at the Howard Weil Energy Conference in New Orleans, LA.                                                                                                                                                                                                      
| | 
| |  | A Current Report on Form 8-K was filed on March 31, 2004 with respect to a presentation made on March 31, 2004 at the Howard Weil Energy Conference in New Orleans, LA.                                                                                                                                                                                                            



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



31



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SIGNATURES



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



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



32