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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

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

Commission file number: 001-31470

PLAINS
EXPLORATION & PRODUCTION COMPANY

(Exact name of registrant as specified in its charter)



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

700 Milam Street, Suite 3100

Houston, Texas 77002

(Address of principal executive offices)

(Zip Code)

(713) 579-6000

(Registrants telephone number, including area code)

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

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

Large accelerated filer x        Accelerated filer   ̈        Non-accelerated filer   ̈

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

76.7 million shares of Common Stock, $0.01 par value, issued and outstanding at October 31, 2006.



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                                |  |   
|------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                                                   |  |   
|                                                                                                                                | 
|ITEM 1. Unaudited Condensed Consolidated Financial Statements:                                                                  |  |   
|                                                                                                                                | 
|Condensed Consolidated Balance SheetsSeptember 30, 2006 and December 31, 2005                                                   |  | 1 
|                                                                                                                                | 
|Condensed Consolidated Statements of IncomeFor the three months and nine months ended September 30, 2006 and 2005               |  | 2 
|                                                                                                                                | 
|Condensed Consolidated Statements of Cash FlowsFor the nine months ended September 30, 2006 and 2005                            |  | 3 
|                                                                                                                                | 
|Condensed Consolidated Statements of Comprehensive IncomeFor the three months and nine months ended September 30, 2006 and 2005 |  | 4 
|                                                                                                                                | 
|Condensed Consolidated Statement of Stockholders EquityFor the nine months ended September 30, 2006                            |  | 5 
|                                                                                                                                | 
|Notes to Condensed Consolidated Financial Statements                                                                            |  | 6 
|                                                                                                                                | 
|ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                   |  | 27
|                                                                                                                                | 
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risks                                                             |  | 40
|                                                                                                                                | 
|ITEM 4. Controls and Procedures                                                                                                 |  | 41
|                                                                                                                                | 
|PART II. OTHER INFORMATION                                                                                                      |  | 42



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands of dollars)



|                                                            |  |                   |           |   |                  |   |           |  
|----------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                            |  | September 30,2006 |           |   | December 31,2005 |  
|ASSETS                                                      |  |                   |           |   |                  |   |           |  
|Current Assets                                              |  |                   |           |   |                  |   |           |  
|Cash and cash equivalents                                   |  | $                 | 542,249   |   |                  | $ | 1,552     |  
|Accounts receivable                                         |  |                   | 132,290   |   |                  |   | 148,691   |  
|Inventories                                                 |  |                   | 12,591    |   |                  |   | 10,325    |  
|Deferred income taxes                                       |  |                   | 284,763   |   |                  |   | 128,816   |  
|Assets held for sale                                        |  |                   | 56,101    |   |                  |   | -         |  
|Other current assets                                        |  |                   | 10,137    |   |                  |   | 3,948     |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 1,038,131 |   |                  |   | 293,332   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Property and Equipment, at cost                             |  |                   |           |   |                  |   |           |  
|Oil and natural gas properties - full cost method           |  |                   |           |   |                  |   |           |  
|Subject to amortization                                     |  |                   | 2,491,035 |   |                  |   | 2,604,892 |  
|Not subject to amortization                                 |  |                   | 113,444   |   |                  |   | 112,204   |  
|Other property and equipment                                |  |                   | 20,474    |   |                  |   | 16,282    |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 2,624,953 |   |                  |   | 2,733,378 |  
|Less allowance for depreciation, depletion and amortization |  |                   | (647,093  | ) |                  |   | (498,075  | )
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 1,977,860 |   |                  |   | 2,235,303 |  
|                                                            |  |                   |           |   |                  |   |           |  
|Goodwill                                                    |  |                   | 158,620   |   |                  |   | 173,858   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Other Assets                                                |  |                   | 42,205    |   |                  |   | 39,449    |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  | $                 | 3,216,816 |   |                  | $ | 2,741,942 |  
|                                                            |  |                   |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |                   |           |   |                  |   |           |  
|Current Liabilities                                         |  |                   |           |   |                  |   |           |  
|Accounts payable                                            |  | $                 | 151,813   |   |                  | $ | 122,996   |  
|Commodity derivative contracts                              |  |                   | 337,683   |   |                  |   | 85,596    |  
|Royalties and revenues payable                              |  |                   | 44,813    |   |                  |   | 43,279    |  
|Stock appreciation rights                                   |  |                   | 57,290    |   |                  |   | 55,170    |  
|Interest payable                                            |  |                   | 11,572    |   |                  |   | 13,000    |  
|Income taxes payable                                        |  |                   | 49,395    |   |                  |   | -         |  
|Other current liabilities                                   |  |                   | 36,023    |   |                  |   | 43,957    |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 688,589   |   |                  |   | 363,998   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Long-Term Debt                                              |  |                   |           |   |                  |   |           |  
|Revolving credit facility                                   |  |                   | -         |   |                  |   | 272,000   |  
|8.75% Senior Subordinated Notes                             |  |                   | 276,388   |   |                  |   | 276,538   |  
|7.125% Senior Notes                                         |  |                   | 248,915   |   |                  |   | 248,837   |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 525,303   |   |                  |   | 797,375   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Other Long-Term Liabilities                                 |  |                   |           |   |                  |   |           |  
|Asset retirement obligation                                 |  |                   | 138,789   |   |                  |   | 155,865   |  
|Commodity derivative contracts                              |  |                   | 405,913   |   |                  |   | 440,543   |  
|Other                                                       |  |                   | 7,256     |   |                  |   | 7,014     |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 551,958   |   |                  |   | 603,422   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Deferred Income Taxes                                       |  |                   | 519,414   |   |                  |   | 258,810   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Commitments and Contingencies (Note 6)                      |  |                   |           |   |                  |   |           |  
|Stockholders Equity                                        |  |                   |           |   |                  |   |           |  
|Common stock                                                |  |                   | 791       |   |                  |   | 784       |  
|Additional paid-in capital                                  |  |                   | 983,079   |   |                  |   | 940,988   |  
|Retained earnings (deficit)                                 |  |                   | 80,250    |   |                  |   | (133,664  | )
|Accumulated other comprehensive income                      |  |                   | (22,169   | ) |                  |   | (89,566   | )
|Treasury stock, at cost                                     |  |                   | (110,399  | ) |                  |   | (205      | )
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 931,552   |   |                  |   | 718,337   |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  | $                 | 3,216,816 |   |                  | $ | 2,741,942 |  
|                                                            |  |                   |           |   |                  |   |           |  

See notes to consolidated financial statements.



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)



|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|---------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ------------------------------- | - | -------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                             |  | Three Months Ended September 30, |          |   | Nine Months Ended September 30, |  
|                                                                             |  | 2006                             |          |   | 2005                            |   |          | 2006 |  |   | 2005     |  
|Revenues                                                                     |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Oil sales                                                                    |  | $                                | 290,389  |   |                                 | $ | 243,461  |      |  | $ | 828,473  |   |  | $ | 630,109  |  
|Oil hedging                                                                  |  |                                  | (36,545  | ) |                                 |   | (25,714  | )    |  |   | (109,632 | ) |  |   | (114,977 | )
|Gas sales                                                                    |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Sales related to buy/sell contracts                                          |  |                                  | -        |   |                                 |   | 8,609    |      |  |   | -        |   |  |   | 24,693   |  
|Other                                                                        |  |                                  | 26,724   |   |                                 |   | 36,616   |      |  |   | 89,879   |   |  |   | 128,890  |  
|Gas hedging                                                                  |  |                                  | -        |   |                                 |   | (994     | )    |  |   | -        |   |  |   | (975     | )
|Other operating revenues                                                     |  |                                  | 339      |   |                                 |   | 641      |      |  |   | 2,192    |   |  |   | 2,262    |  
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|                                                                             |  |                                  | 280,907  |   |                                 |   | 262,619  |      |  |   | 810,912  |   |  |   | 670,002  |  
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Costs and Expenses                                                           |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Production costs                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Lease operating expenses                                                     |  |                                  | 50,355   |   |                                 |   | 36,284   |      |  |   | 137,258  |   |  |   | 105,489  |  
|Steam gas costs                                                              |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Costs related to buy/sell contracts                                          |  |                                  | -        |   |                                 |   | 9,039    |      |  |   | -        |   |  |   | 25,876   |  
|Other                                                                        |  |                                  | 15,707   |   |                                 |   | 8,893    |      |  |   | 41,327   |   |  |   | 25,141   |  
|Electricity                                                                  |  |                                  | 9,991    |   |                                 |   | 8,917    |      |  |   | 28,777   |   |  |   | 23,678   |  
|Production and ad valorem taxes                                              |  |                                  | 6,991    |   |                                 |   | 5,111    |      |  |   | 19,795   |   |  |   | 18,414   |  
|Gathering and transportation expenses                                        |  |                                  | 2,291    |   |                                 |   | 2,467    |      |  |   | 5,947    |   |  |   | 8,416    |  
|General and administrative                                                   |  |                                  | 31,493   |   |                                 |   | 52,764   |      |  |   | 92,530   |   |  |   | 108,634  |  
|Depreciation, depletion and amortization                                     |  |                                  | 50,844   |   |                                 |   | 40,626   |      |  |   | 151,528  |   |  |   | 129,964  |  
|Accretion                                                                    |  |                                  | 2,564    |   |                                 |   | 1,926    |      |  |   | 7,506    |   |  |   | 5,605    |  
|Gain on sale of oil and gas properties                                       |  |                                  | (345,480 | ) |                                 |   | -        |      |  |   | (345,480 | ) |  |   | -        |  
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|                                                                             |  |                                  | (175,244 | ) |                                 |   | 166,027  |      |  |   | 139,188  |   |  |   | 451,217  |  
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Income from Operations                                                       |  |                                  | 456,151  |   |                                 |   | 96,592   |      |  |   | 671,724  |   |  |   | 218,785  |  
|Other Income (Expense)                                                       |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Interest expense                                                             |  |                                  | (22,178  | ) |                                 |   | (14,478  | )    |  |   | (57,182  | ) |  |   | (40,039  | )
|Gain (loss) on mark-to-market derivative contracts                           |  |                                  | 12,340   |   |                                 |   | (141,646 | )    |  |   | (299,902 | ) |  |   | (629,569 | )
|Gain on termination of merger agreement                                      |  |                                  | -        |   |                                 |   | -        |      |  |   | 37,902   |   |  |   | -        |  
|Interest and other income (expense)                                          |  |                                  | 500      |   |                                 |   | (392     | )    |  |   | 2,120    |   |  |   | (220     | )
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Income (Loss) Before Income Taxes and Cumulative Effect of Accounting Change |  |                                  | 446,813  |   |                                 |   | (59,924  | )    |  |   | 354,662  |   |  |   | (451,043 | )
|Income tax (expense) benefit                                                 |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Current                                                                      |  |                                  | (47,490  | ) |                                 |   | 757      |      |  |   | (56,247  | ) |  |   | (573     | )
|Deferred                                                                     |  |                                  | (126,630 | ) |                                 |   | 27,318   |      |  |   | (82,319  | ) |  |   | 166,819  |  
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Income (Loss) Before Cumulative Effect of Accounting Change                  |  |                                  | 272,693  |   |                                 |   | (31,849  | )    |  |   | 216,096  |   |  |   | (284,797 | )
|Cumulative effect of accounting change, net of tax benefit                   |  |                                  | -        |   |                                 |   | -        |      |  |   | (2,182   | ) |  |   | -        |  
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Net Income (Loss)                                                            |  | $                                | 272,693  |   |                                 | $ | (31,849  | )    |  | $ | 213,914  |   |  | $ | (284,797 | )
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Earnings (Loss) Per Share                                                    |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Basic                                                                        |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Income (loss) before cumulative effect of accounting change                  |  | $                                | 3.56     |   |                                 | $ | (0.41    | )    |  | $ | 2.77     |   |  | $ | (3.67    | )
|Cumulative effect of accounting change                                       |  |                                  | -        |   |                                 |   | -        |      |  |   | (0.03    | ) |  |   | -        |  
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Net income (loss)                                                            |  | $                                | 3.56     |   |                                 | $ | (0.41    | )    |  | $ | 2.74     |   |  | $ | (3.67    | )
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Diluted                                                                      |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Income (loss) before cumulative effect of accounting change                  |  | $                                | 3.50     |   |                                 | $ | (0.41    | )    |  | $ | 2.74     |   |  | $ | (3.67    | )
|Cumulative effect of accounting change                                       |  |                                  | -        |   |                                 |   | -        |      |  |   | (0.03    | ) |  |   | -        |  
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Net income (loss)                                                            |  | $                                | 3.50     |   |                                 | $ | (0.41    | )    |  | $ | 2.71     |   |  | $ | (3.67    | )
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Weighted Average Shares Outstanding                                          |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Basic                                                                        |  |                                  | 76,622   |   |                                 |   | 78,053   |      |  |   | 77,911   |   |  |   | 77,531   |  
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Diluted                                                                      |  |                                  | 77,802   |   |                                 |   | 78,053   |      |  |   | 78,802   |   |  |   | 77,531   |  
|                                                                             |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  

See notes to consolidated financial statements.



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands of dollars)



|                                                                        |  |                                |            |   |      |   |           |  
|----------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---- | - | --------- | -
|                                                                        |  | Nine Months EndedSeptember 30, |           
|                                                                        |  | 2006                           |            |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                    |  |                                |            |   |      |   |           |  
|Net income (loss)                                                       |  | $                              | 213,914    |   |      | $ | (284,797  | )
|Items not affecting cash flows from operating activities                |  |                                |            |   |      |   |           |  
|Gain on sale of oil and gas properties                                  |  |                                | (345,480   | ) |      |   | -         |  
|Depreciation, depletion, amortization and accretion                     |  |                                | 159,034    |   |      |   | 135,569   |  
|Deferred income taxes                                                   |  |                                | 82,319     |   |      |   | (166,819  | )
|Cumulative effect of adoption of accounting change                      |  |                                | 2,182      |   |      |   | -         |  
|Commodity derivative contracts                                          |  |                                |            |   |      |   |           |  
|Loss on derivatives                                                     |  |                                | 333,976    |   |      |   | 358,838   |  
|Reclassify derivative settlements                                       |  |                                | 96,773     |   |      |   | 364,932   |  
|Noncash compensation                                                    |  |                                | 32,594     |   |      |   | 59,807    |  
|Other noncash items                                                     |  |                                | (64        | ) |      |   | (69       | )
|Change in assets and liabilities from operating activities              |  |                                |            |   |      |   |           |  
|Accounts receivable and other assets                                    |  |                                | 5,960      |   |      |   | (10,606   | )
|Accounts payable and other liabilities                                  |  |                                | 60,159     |   |      |   | (33,332   | )
|Commodity derivative contracts                                          |  |                                | (21,215    | ) |      |   | (135,348  | )
|                                                                        |  |                                |            |   |      |   |           |  
|Net cash provided by operating activities                               |  |                                | 620,152    |   |      |   | 288,175   |  
|                                                                        |  |                                |            |   |      |   |           |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                    |  |                                |            |   |      |   |           |  
|Additions to oil and gas properties                                     |  |                                | (456,796   | ) |      |   | (393,378  | )
|Proceeds from sales of oil and gas properties, net ofcosts and expenses |  |                                | 850,427    |   |      |   | 343,096   |  
|Derivative settlements                                                  |  |                                | (68,194    | ) |      |   | -         |  
|Other                                                                   |  |                                | (7,467     | ) |      |   | (3,523    | )
|                                                                        |  |                                |            |   |      |   |           |  
|Net cash provided by (used in) investing activities                     |  |                                | 317,970    |   |      |   | (53,805   | )
|                                                                        |  |                                |            |   |      |   |           |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                    |  |                                |            |   |      |   |           |  
|Revolving credit facilities                                             |  |                                |            |   |      |   |           |  
|Borrowings                                                              |  |                                | 1,182,700  |   |      |   | 1,092,700 |  
|Repayments                                                              |  |                                | (1,454,700 | ) |      |   | (964,200  | )
|Derivative settlements                                                  |  |                                | (28,579    | ) |      |   | (364,932  | )
|Treasury stock purchases                                                |  |                                | (100,817   | ) |      |   | -         |  
|Excess tax benefit from stock-based compensation                        |  |                                | 3,294      |   |      |   | -         |  
|Other                                                                   |  |                                | 677        |   |      |   | 1,823     |  
|                                                                        |  |                                |            |   |      |   |           |  
|Net cash used in financing activities                                   |  |                                | (397,425   | ) |      |   | (234,609  | )
|                                                                        |  |                                |            |   |      |   |           |  
|Net increase (decrease) in cash and cash equivalents                    |  |                                | 540,697    |   |      |   | (239      | )
|Cash and cash equivalents, beginning of period                          |  |                                | 1,552      |   |      |   | 1,545     |  
|                                                                        |  |                                |            |   |      |   |           |  
|Cash and cash equivalents, end of period                                |  | $                              | 542,249    |   |      | $ | 1,306     |  
|                                                                        |  |                                |            |   |      |   |           |  

See notes to consolidated financial statements.



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##### Table of Contents

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands of dollars)



|                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |          |  
|---------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                                     |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                     |  | 2006                            |         |   | 2005                           |   |         | 2006 |  |   | 2005    |  
|Net Income (Loss)                                    |  | $                               | 272,693 |   |                                | $ | (31,849 | )    |  | $ | 213,914 |   |  | $ | (284,797 | )
|                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |          |  
|Other Comprehensive Income (Loss)                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |          |  
|Commodity hedging contracts                          |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |          |  
|Change in fair value                                 |  |                                 | -       |   |                                |   | 1,795   |      |  |   | -       |   |  |   | (81,519  | )
|Reclassification adjustment for settled contracts    |  |                                 | -       |   |                                |   | 5       |      |  |   | -       |   |  |   | 33,099   |  
|Reclassification adjustment for terminated contracts |  |                                 | 36,545  |   |                                |   | 25,715  |      |  |   | 109,632 |   |  |   | 82,053   |  
|Related income taxes                                 |  |                                 | (14,140 | ) |                                |   | (11,755 | )    |  |   | (42,235 | ) |  |   | (13,007  | )
|                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |          |  
|                                                     |  |                                 | 22,405  |   |                                |   | 15,760  |      |  |   | 67,397  |   |  |   | 20,626   |  
|                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |          |  
|Comprehensive Income (Loss)                          |  | $                               | 295,098 |   |                                | $ | (16,089 | )    |  | $ | 281,311 |   |  | $ | (264,171 | )
|                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |          |  

See notes to consolidated financial statements.



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)

(share and dollar amounts in thousands)



|                                    |  |              |  |                            |     |                             |   |         |                                        |   |          |                |  |   |         |   |  |        |   |  |   |          |   |  |   |          |  
|----------------------------------- |  | ------------ |  | -------------------------- | --- | --------------------------- | - | ------- | -------------------------------------- | - | -------- | -------------- |  | - | ------- | - |  | ------ | - |  | - | -------- | - |  | - | -------- | -
|                                    |  | Common Stock |  | Additional Paid-in Capital |     | Retained Earnings (Deficit) |   |         | Accumulated Other Comprehensive Income |   |          | Treasury Stock |  |   |         |  
|                                    |  | Shares       |  | Amount                     |     |                             |   |         | Shares                                 |   |          | Amount         |  |   | Total   |  
|Balance, December 31, 2005          |  | 78,416       |  | $                          | 784 |                             | $ | 940,988 |                                        | $ | (133,664 | )              |  | $ | (89,566 | ) |  | (5     | ) |  | $ | (205     | ) |  | $ | 718,337  |  
|Net income                          |  | -            |  |                            | -   |                             |   | -       |                                        |   | 213,914  |                |  |   | -       |   |  | -      |   |  |   | -        |   |  |   | 213,914  |  
|Other comprehensive income          |  | -            |  |                            | -   |                             |   | -       |                                        |   | -        |                |  |   | 67,397  |   |  | -      |   |  |   | -        |   |  |   | 67,397   |  
|Stock-based compensation awards     |  |              |  |                            |     |                             |   |         |                                        |   |          |                |  |   |         |   |  |        |   |  |   |          |   |  |   |          |  
|Issuance of stock                   |  | 688          |  |                            | 7   |                             |   | -       |                                        |   | -        |                |  |   | -       |   |  | 5      |   |  |   | 205      |   |  |   | 212      |  
|Deferred compensation               |  | -            |  |                            | -   |                             |   | 31,794  |                                        |   | -        |                |  |   | -       |   |  | -      |   |  |   | -        |   |  |   | 31,794   |  
|Treasury stock transactions         |  |              |  |                            |     |                             |   |         |                                        |   |          |                |  |   |         |   |  |        |   |  |   |          |   |  |   |          |  
|Treasury stock purchases            |  | -            |  |                            | -   |                             |   | -       |                                        |   | -        |                |  |   | -       |   |  | (2,462 | ) |  |   | (100,817 | ) |  |   | (100,817 | )
|Shares held by Rabbi Trust          |  | -            |  |                            | -   |                             |   | 9,582   |                                        |   | -        |                |  |   | -       |   |  | (254   | ) |  |   | (9,582   | ) |  |   | -        |  
|Exercise of stock options and other |  | 37           |  |                            | -   |                             |   | 715     |                                        |   | -        |                |  |   | -       |   |  | -      |   |  |   | -        |   |  |   | 715      |  
|                                    |  |              |  |                            |     |                             |   |         |                                        |   |          |                |  |   |         |   |  |        |   |  |   |          |   |  |   |          |  
|Balance, September 30, 2006         |  | 79,141       |  | $                          | 791 |                             | $ | 983,079 |                                        | $ | 80,250   |                |  | $ | (22,169 | ) |  | (2,716 | ) |  | $ | (110,399 | ) |  | $ | 931,552  |  
|                                    |  |              |  |                            |     |                             |   |         |                                        |   |          |                |  |   |         |   |  |        |   |  |   |          |   |  |   |          |  

See notes to consolidated financial statements.



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PLAINS EXPLORATION & PRODUCTION COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1Organization and Significant Accounting Policies

The
condensed consolidated financial statements of Plains Exploration & Production Company (PXP, us, our, we or the Company) 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 condensed consolidated financial statements and related notes present our consolidated financial position as of September 30, 2006 and December 31, 2005,
the results of our operations and our comprehensive income for the three months and nine months ended September 30, 2006 and 2005, our cash flows for the nine months ended September 30, 2006 and 2005 and the changes in our
stockholders equity for the nine months ended September 30, 2006. 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 financial statements to conform to the current year presentation. The results of our operations for
the nine months ended September 30, 2006 are not necessarily indicative of the results of our operations to be expected for the full year.

These financial
statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by
accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2005.

Stone Energy Corporation.    On April 24, 2006 we announced that we had entered into a definitive
agreement to acquire Stone Energy Corporation (Stone) in a stock-for-stock transaction. On June 22, 2006 the agreement was terminated by Stone in order for Stone to enter into a merger agreement with another company. In
connection with the termination of the merger agreement we received a termination fee of $43.5 million. Earnings for the nine months ended September 30, 2006 include a gain on the termination of the merger agreement of $37.9 million
representing the termination fee net of certain merger related costs incurred by the Company.

Asset Retirement Obligations.    The
following table reflects the changes in our asset retirement obligation during the nine months ended September 30, 2006 (in thousands):



|                                                  |  |                                     |         |    
|------------------------------------------------- |  | ----------------------------------- | ------- | ---
|                                                  |  | Nine Months EndedSeptember 30, 2006 |        
|Asset retirement obligation - December 31, 2005   |  | $                                   | 160,955 |    
|Accretion expense                                 |  |                                     | 7,506   |    
|Asset retirement additions                        |  |                                     | 5,644   |    
|Settlements                                       |  |                                     | (886    | )  
|Properties sold                                   |  |                                     | (31,030 | )  
|                                                  |  |                                     |         |    
|Asset retirement obligation - September 30, 2006  |  | $                                   | 142,189 | (1)
|                                                  |  |                                     |         |    
|(1) $3.4 million included in current liabilities. |  |                                     |         |    



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Earnings Per Share.    For the three months and nine months ended September 30, 2006 and 2005
the weighted average shares outstanding for computing basic and diluted earnings per share (EPS) (in thousands):



|                                                                                              |  |                                |  |                               |  |        |  |       
|--------------------------------------------------------------------------------------------- |  | ------------------------------ |  | ----------------------------- |  | ------ |  | ------
|                                                                                              |  | Three MonthsEndedSeptember 30, |  | Nine MonthsEndedSeptember 30,
|                                                                                              |  | 2006                           |  | 2005                          |  | 2006   |  | 2005  
|Weighted average shares outstanding - basic                                                   |  | 76,622                         |  | 78,053                        |  | 77,911 |  | 77,531
|Unvested restricted stock, restricted stock units and stock options                           |  | 1,180                          |  | -                             |  | 891    |  | -     
|                                                                                              |  |                                |  |                               |  |        |  |       
|Weighted average shares outstanding - diluted                                                 |  | 77,802                         |  | 78,053                        |  | 78,802 |  | 77,531
|                                                                                              |  |                                |  |                               |  |        |  |       
|Unvested restricted stock, restricted stock units and stock options not included in computing |  |                                |  |                               |  |        |  |       
|EPS due to antidilutive effect                                                                |  | -                              |  | 614                           |  | -      |  | 800   
|                                                                                              |  |                                |  |                               |  |        |  |       

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

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



|                       |  |                   |        |                  |   |       
|---------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                       |  | September 30,2006 |        | December 31,2005
|Oil                    |  | $                 | 4,228  |                  | $ | 2,099 
|Materials and supplies |  |                   | 8,363  |                  |   | 8,226 
|                       |  |                   |        |                  |   |       
|                       |  | $                 | 12,591 |                  | $ | 10,325
|                       |  |                   |        |                  |   |       

Stockholders Equity.    Our Board of Directors has authorized the repurchase of up to $500
million of our common stock. The shares will be repurchased from time to time in open market transactions or privately negotiated transactions at our discretion, subject to market conditions and other factors. In the third quarter of 2006 we
repurchased 2,461,900 common shares at a cost of $100.8 million.

At September 30, 2006, approximately 254,000 of the treasury stock shares represent shares
issued to a rabbi trust for the benefit of certain of the Companys officers who retired or resigned in the first nine months of 2006.

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; (6) stock-based compensation and (7) valuation of derivative instruments. Although management believes these estimates are reasonable, actual results could differ from these estimates.

Stock Based Compensation.    Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No.123R
Share-Based Payment (SFAS 123R) that requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. We used the modified prospective approach as allowed
under SFAS 123R. See Note 5.



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Goodwill.    Goodwill decreased by $15.2 million in 2006 as a result of a change in the tax basis
related to our acquisition of Nuevo Energy Company (Nuevo).

Buy/Sell Contracts.    Steam generators utilized in our thermal
recovery operations in California are fueled by natural gas. In certain instances we have entered into buy/sell contracts that allow us to exchange gas we produce elsewhere for gas delivered to and used in thermal recovery operations. Effective
January 1, 2006 we adopted Emerging Issues Task Force Issue No. 04-13 (EITF 04-13), Accounting for Purchases and Sales of Inventory with the Same Counterparty. EITF 04-13 requires that two or more inventory
transactions with the same counterparty be viewed as a single non-monetary transaction if the transactions were entered into in contemplation of one another (as determined in accordance with EITF 04-13). We have determined that transactions under
certain of our buy/sell contracts should be presented net in accordance with EITF 04-13. Accordingly, certain costs previously recorded gross in revenues and operating costs in prior periods will be recorded net in 2006 and subsequent periods.

Recent Accounting Pronouncements.    In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS 155), which eliminates the exemption from applying SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to
interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. SFAS 155 also allows the election of fair value measurement at acquisition, at issuance, or when a
previously recognized financial instrument is subject to a remeasurement event. Adoption is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. Early
adoption is permitted. We do not expect the adoption of SFAS 155 to have a material effect on our consolidated financial position, results of operations or cash flows.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (SFAS 156), which requires all separately recognized servicing assets and servicing liabilities be initially
measured at fair value. SFAS 156 permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Adoption is required as of the beginning of the first fiscal year that begins after
September 15, 2006. Early adoption is permitted. We do not expect the adoption of SFAS 156 to have a material effect on our consolidated financial position, results of operations or cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109) which is
effective for fiscal years beginning after December 15, 2006 with earlier adoption encouraged. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We are currently evaluating the potential impact of this interpretation.

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

In September 2006, the FASB issued FASB Staff Position AUG AIR-1, Accounting for Planned Major Maintenance Activities which is effective for fiscal
years beginning after December 15, 2006. This position statement eliminates the accrue-in-advance method of accounting for planned major maintenance activities. We do not expect this pronouncement to have a significant impact on our
consolidated financial position, results of operations or cash flows.



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In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108 (SAB No. 108), Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, in an effort to address diversity in the accounting practice of quantifying misstatements and the potential for improper amounts on
the balance sheet. Prior to the issuance of SAB No. 108, the two methods used for quantifying the effects of financial statement errors were the roll-over and iron curtain methods. Under the roll-over method,
the primary focus is the income statement, including the reversing effect of prior year misstatements. The criticism of this method is that misstatements can accumulate on the balance sheet. The iron curtain method focuses on the effect
of correcting the ending balance sheet, with less importance on the reversing effects of prior year errors in the income statement. SAB No. 108 establishes a dual approach which requires the quantification of the effect of financial
statement errors on each financial statement, as well as related disclosures. Public companies are required to record the cumulative effect of initially adopting the dual approach method in the first year ending after November 16,
2006 by recording any necessary corrections to asset and liability balances with an offsetting adjustment to the opening balance of retained earnings. The use of this cumulative effect transition method also requires detailed disclosures of the
nature and amount of each error being corrected and how and when they arose. We are currently evaluating the impact that SAB No. 108 may have on our consolidated financial position, results of operations or cash flows.

Note 2Property Divestitures

On September 29, 2006 we closed on the sale of
oil and gas properties to subsidiaries of Occidental Petroleum Corporation (Occidental). This transaction had an effective date of October 1, 2006. We received approximately $864 million in cash proceeds and recognized a
$345.5 million pre-tax gain.

As of December 31, 2005, our independent reserve engineers estimated these properties had proven reserves of approximately
45 million equivalent barrels of oil, which represented approximately 11% of our proved reserve volumes. On a barrel of oil equivalent basis, these properties represented approximately 12% of our sales volumes for the third quarter of 2006.

We follow the full cost method of accounting under which proceeds from the sale of oil and gas properties are accounted for as reductions to capitalized costs
unless such sales involve a significant change in the relationship between capitalized costs and proved reserves, in which case a gain or loss is recognized. When a gain or loss is recognized, total capitalized costs within the cost center are
allocated between the reserves sold and the reserves retained on the same basis used to compute amortization unless there are substantial economic differences between the properties sold and those retained, in which case capitalized costs are
allocated on the basis of the relative fair values of the properties. With respect to the sale of properties to Occidental, capitalized costs were allocated on the basis of the relative fair values of the properties. A portion of the gain was
allocated to certain of our subsidiaries based on the relative reserve volumes sold.

Subsequent Event

On November 1, 2006 we closed the sale of certain non-producing oil and gas properties to Statoil Gulf of Mexico LLC (Statoil). This transaction had an
effective date of September 1, 2006. The Company received approximately $706 million in cash proceeds and in the fourth quarter of 2006 we expect to recognize a gain with respect to this transaction of approximately $635 million
to $640 million because the sale involves a significant change in the relationship between capitalized costs and proved reserves. With respect to the sale of properties to Statoil, capitalized costs consist of the costs of the prospects that
were classified as costs not subject to amortization. At September 30, 2006 these costs are classified as Assets Held for Sale in the consolidated balance sheet.



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Note 3Long-Term and Short-Term Debt

At September 30, 2006 and December 31, 2005 long-term debt consisted of:



|                                                                                                                |  |                    |         |                   |   |        
|--------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- | - | -------
|                                                                                                                |  | September 30, 2006 |         | December 31, 2005
|Senior revolving credit facility                                                                                |  | $                  | -       |                   | $ | 272,000
|8.75% senior subordinated notes, including unamortized premium of $1.4 million in 2006 and $1.5 million in 2005 |  |                    | 276,388 |                   |   | 276,538
|7.125% senior notes, including unamortized discount of $1.1 million in 2006 and $1.2 million in 2005            |  |                    | 248,915 |                   |   | 248,837
|                                                                                                                |  |                    |         |                   |   |        
|                                                                                                                |  | $                  | 525,303 |                   | $ | 797,375
|                                                                                                                |  |                    |         |                   |   |        

On September 29, 2006 we used a portion of the proceeds from the sale of oil and gas properties to Occidental to pay
the $304.9 million outstanding under our senior revolving credit facility and short-term credit facility.

Subsequent Events

Effective November 1, 2006 the borrowing base for the Companys senior revolving credit facility was redetermined to be $1.25 billion. The commitment under the
credit facility remains unchanged at $750 million.

On November 3, 2006 we made payments totaling $268.6 million to retire all $250 million
outstanding principal amount of our 7.125% Senior Notes due 2014 (the Senior Notes). The redemption price of $1.074.50 per $1,000 principal amount is based on a make-whole calculation tied to a comparable United States
Treasury security.

On November 3, 2006 we made payments totaling $291.9 million to retire $274.9 million of the $275 million outstanding
principal amount of our 8.75% Senior Subordinated Notes due 2012 (the Senior Subordinated Notes). The purchase price of $1,042.07 per $1,000 principal amount is based on a 50 basis point spread over a reference U.S. Treasury security, as
determined on October 19, 2006. The payment to holders who provided consents to eliminate substantially all the restrictive covenants and certain events of default from the indenture governing the Senior Subordinated Notes included a
consent payment of $20.00 per $1,000 principal amount of notes tendered (a total of $5.5 million).

In the fourth quarter of 2006 we expect to record a charge
to earnings in connection with the debt retirement transactions of approximately $45 million.

Note 4Derivative Instruments and Hedging Activities

We use various derivative instruments to manage our exposure to commodity price risk on sales of oil and gas production and the purchase of natural gas used in
our thermal recovery operations. All derivative instruments are recorded on the balance sheet at fair value. If a derivative does not qualify as a hedge or is not designated as a hedge, the changes in fair value, both realized and unrealized, are
recognized currently in our income statement as a gain or (loss) on mark-to-market derivative contracts. Cash flows are only impacted to the extent the actual settlements under the contracts result in making a payment to or receiving a payment from
the counterparty. If a derivative is designated as a cash flow hedge and qualifies for hedge accounting, any unrealized gain or loss is deferred in Accumulated Other Comprehensive Income (OCI), a component of Stockholders Equity,
until the



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hedged oil and gas production is sold. Realized gains and losses on derivative instruments that are designated as a hedge and qualify for hedge accounting are
generally included in oil and gas revenues in the period the hedged volumes are sold. Gains and losses deferred in OCI related to cash flow hedges for which hedge accounting has been discontinued remain in OCI until the related product has been
delivered.

At December 31, 2005 we had collars on 22,000 barrels of oil per day for all of 2007 and 2008 with a floor price of $25.00 and an average ceiling
price of $34.76. In April 2006, we executed a series of offsetting contracts to eliminate all of these crude oil price collars at a pre-tax cost of approximately $593 million. This amount represents the fair value of the collars on the date we
entered into the offsetting positions. Since the collars were not designated as a hedge such amount has been recognized in our income statement as a loss on mark-to-market derivative contracts ($170 million in 2006 and $423 million in prior
periods).

Subsequent Event

On October 31, 2006 and
November 2, 2006 we made payments totaling $605.0 million to settle all of our 2007 and 2008 crude oil price collars. The $11.8 million in excess of the fair value on the date we entered into the offsetting positions is
recognized in our income statement as interest expense.

At September 30, 2006 we had the following open commodity derivative positions, none of which were
designated as hedging instruments:



|                              |  |                 |  |               |  |                     |  |      
|----------------------------- |  | --------------- |  | ------------- |  | ------------------- |  | -----
|Period                        |  | Instrument Type |  | Daily Volumes |  | Average Price       |  | Index
|Sales of Crude Oil Production |  |                 |  |               |  |                     |  |      
|2006                          |  |                 |  |               |  |                     |  |      
|Oct - Dec                     |  | Put options     |  | 50,000 Bbls   |  | $55.00 Strike price |  | WTI  
|2007                          |  |                 |  |               |  |                     |  |      
|Jan - Dec                     |  | Put options     |  | 50,000 Bbls   |  | $55.00 Strike price |  | WTI  
|2008                          |  |                 |  |               |  |                     |  |      
|Jan - Dec                     |  | Put options     |  | 42,000 Bbls   |  | $55.00 Strike price |  | WTI  
|Purchases of Natural Gas      |  |                 |  |               |  |                     |  |      
|2006                          |  |                 |  |               |  |                     |  |      
|Oct - Dec                     |  | Call options    |  | 30,000 MMBtu  |  | $12.00 Strike price |  | Socal

The average strike prices for the put options and call options do not reflect the cost to purchase such options. The crude
oil put options cost an average of $4.91 per barrel for 2006, $5.57 per barrel for 2007 and $3.35 per barrel for 2008. The natural gas call options cost an average of $1.04 per MMBtu. The premiums for the put and call options will be paid when the
options are settled.

During the three months ended September 30, 2006 and 2005 we recognized pre-tax gains (losses) of $12.3 million and
$(141.6) million, respectively, from derivatives that do not qualify or were not designated for hedge accounting. During such periods we made cash payments of $25.5 million and $101.4 million, respectively, on derivatives that do not
qualify for hedge accounting that settled during the periods.

During the nine months ended September 30, 2006 and 2005 we recognized pre-tax losses of
$299.9 million and $629.6 million, respectively, from derivatives that do not qualify or were not designated for hedge accounting. During such periods we made cash payments of $75.6 million and $189.3 million, respectively, on
derivatives that do not qualify for hedge accounting that settled during the periods.



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Cash payments made during the nine months ended September 30, 2005 do not include the $145.4 million we paid to eliminate our
2006 oil price collars.

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

Other Comprehensive Income

During the three months and nine months ended September 30, 2006 net deferred losses of $36.5 million and $109.6 million, respectively, attributable to
cancelled 2006 swaps were reclassified from OCI and charged to oil and gas revenues. During the three months and nine months ended September 30, 2005 net deferred losses of $25.7 million and $115.2 million, respectively, were
reclassified from OCI and charged to oil and gas revenues and steam gas costs and during the nine months ended September 30, 2005 we recognized $0.1 million for ineffectiveness of derivatives that qualify for hedge accounting.

At September 30, 2006 and December 31, 2005 OCI consisted of $36.1 million ($22.2 million, net of tax) and $145.8 million
($89.6 million, net of tax), respectively, of deferred losses attributable to cancelled 2006 swaps that are being reclassified to oil revenues in 2006.

Note
5Stock Based Compensation

Prior to January 1, 2006, we accounted for stock based compensation using the intrinsic value method pursuant to Accounting
Principles Bulletin No. 25 Accounting for Stock Issued to Employees (APB 25). No adjustments to our net income or earnings per share would have been required under SFAS No. 123 Accounting for Stock Based
Compensation (SFAS 123). Effective January 1, 2006, we adopted the provisions of SFAS 123R. Under the provisions of SFAS 123R, stock-based compensation is measured at the grant date, based on the calculated fair value of the
award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). We adopted SFAS 123R using the modified prospective application method, under which compensation cost is recognized in the
financial statements beginning with the adoption date for all share-based payments granted after that date, and for all unvested awards granted prior to the adoption of SFAS 123R. The cumulative adjustment at January 1, 2006 associated with the
adoption of SFAS 123R resulted in a $2.2 million charge to earnings (net of a $1.4 million tax benefit). Our paid-in capital was increased by $3.6 million and our deferred tax liability was decreased by $1.4 million.

We have two stock incentive plans, the 2002 Stock Incentive Plan (the 2002 Plan), which provides for a maximum of 1.5 million shares available for awards, and the
2004 Stock Incentive Plan (the 2004 Plan), which provides for a maximum of 5.0 million shares available for awards. The 2002 Plan and the 2004 Plan provide for the grant of stock options, and other awards (including performance
units, performance shares, share awards, restricted stock, restricted stock units and stock appreciation rights, or SARs) to our directors, officers, employees, consultants and advisors. Our compensation committee may grant options and
SARs on such terms, including vesting and payment forms, as it deems appropriate in its discretion, however, no option or SARs may be exercised more than 10 years after its grant, and the purchase price for incentive stock options and non-qualified
stock options may not be less than 100% of the fair market value of our common stock on the date of grant. The



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compensation committee may grant restricted stock awards, restricted stock units, share awards, performance units and performance shares on such terms and conditions
as it may in its discretion decide.

For the nine months ended September 30, 2006 $43.0 million of stock-based compensation expense was charged to earnings
($26.1 million after a tax benefit of $16.9 million). In addition, during such period $4.0 million of stock-based compensation expense was capitalized. Additionally, there was $139.7 million of total unrecognized compensation
cost related to unvested share-based compensation arrangements that is expected to be recognized over a weighted-average period of approximately nine years. The tax benefit realized as a result of the vesting of restricted stock and restricted stock
unit awards during the nine months ended September 30, 2006 was $3.3 million. Stock based compensation expense for the nine months ended September 30, 2006 includes $10.2 million resulting from the accelerated vesting
of 0.5 million restricted stock units held by certain former officers that resigned their positions during the period.

Estimates of fair value are not intended
to predict actual future events of the value ultimately realized by employees who receive share-based awards, and subsequent events are not indicative of the reasonableness of original estimates of fair value made by the Company under SFAS 123R.

Stock Appreciation Rights

SARs grants generally vest ratably over three
years and expire within five years after the date of grant. These awards are similar to stock options, but are settled in cash rather than in shares of common stock and are classified as liability awards. Under the provisions of SFAS 123R,
compensation cost for these awards is determined using a fair-value method and remeasured at each reporting date until the date of settlement. Stock-based compensation expense recognized in the nine months ended September 30, 2006 is based
on SARs ultimately expected to vest and has been reduced for estimated forfeitures.

The following table summarizes the status of our SARs at
September 30, 2006 and the changes during the nine months then ended:



|                                  |  |                         |   |  |                                 |       |                                         |   |                                                      |  |    
|--------------------------------- |  | ----------------------- | - |  | ------------------------------- | ----- | --------------------------------------- | - | ---------------------------------------------------- |  | ---
|                                  |  | Outstanding (thousands) |   |  | Weighted Average Exercise Price |       | Aggregate Intrinsic Value ($ thousands) |   | Weighted Average Remaining Contractural Life (Years)
|Outstanding at January 1, 2006    |  | 2,615                   |   |  | $                               | 16.82 |                                         |   |                                                      |  |    
|Granted                           |  | 301                     |   |  |                                 | 40.67 |                                         |   |                                                      |  |    
|Exercised                         |  | (358                    | ) |  |                                 | 12.30 |                                         |   |                                                      |  |    
|Cancelled                         |  | (99                     | ) |  |                                 | 35.05 |                                         |   |                                                      |  |    
|                                  |  |                         |   |  |                                 |       |                                         |   |                                                      |  |    
|Outstanding at September 30, 2006 |  | 2,459                   |   |  |                                 | 19.66 |                                         | $ | 57,164                                               |  | 3.6
|                                  |  |                         |   |  |                                 |       |                                         |   |                                                      |  |    
|Exercisable at September 30, 2006 |  | 1,613                   |   |  |                                 | 10.86 |                                         | $ | 51,712                                               |  | 3.5
|                                  |  |                         |   |  |                                 |       |                                         |   |                                                      |  |    

The total intrinsic value of SARs exercised in the nine months ended September 30, 2006 was $10.4 million and the
fair value as of September 30, 2006 for SARs granted in the nine months then ended was $10.42 per share.



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We estimate the fair value of SARs granted using the Black-Scholes valuation model and the fair value of the SARs are remeasured at
the end of the period. The following assumptions are as of September 30, 2006:



|                         |  |              
|------------------------ |  | -------------
|Expected life (in years) |  | 1 - 5        
|Volatility               |  | 26.6% - 39.9%
|Risk-free interest rate  |  | 5.1% - 5.2%  
|Dividend yield           |  | 0%           

Expected volatility is based on the historical volatility of our common stock and other factors. We use historical
experience with exercise and post-vesting exercise behavior to determine the SARs expected life. The expected life represents the period of time that SARs granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate
with a maturity date corresponding to the SARs expected life.

Service Based Restricted Stock and Restricted Stock Units

Our stock compensation plans allow grants of restricted stock and restricted stock units. Restricted stock is issued on the grant date but is restricted as to transferability.
Restricted stock unit awards represent the right to receive common stock when vesting occurs.

Restricted stock and restricted stock unit grants generally vest
ratably over three years of service. Compensation cost for these awards is based on the closing market price of our common stock on the date preceding the date of grant. Stock-based compensation expense is based on the awards ultimately expected to
vest, and has been reduced for estimated forfeitures. The following table summarizes the status under the provisions of SFAS 123R of our restricted stock and restricted stock units at September 30, 2006 and the changes during the nine
months then ended:



|                                  |  |                         |   |  |                             |       |                                         |   |                                                      |  |    
|--------------------------------- |  | ----------------------- | - |  | --------------------------- | ----- | --------------------------------------- | - | ---------------------------------------------------- |  | ---
|                                  |  | Outstanding (thousands) |   |  | Weighted Average Fair Value |       | Aggregate Intrinsic Value ($ thousands) |   | Weighted Average Remaining Contractural Life (Years)
|Outstanding at January 1, 2006    |  | 1,100                   |   |  | $                           | 25.87 |                                         |   |                                                      |  |    
|Granted                           |  | 1,293                   |   |  |                             | 40.47 |                                         |   |                                                      |  |    
|Vested                            |  | (791                    | ) |  |                             | 27.69 |                                         |   |                                                      |  |    
|Cancelled                         |  | (93                     | ) |  |                             | 38.46 |                                         |   |                                                      |  |    
|                                  |  |                         |   |  |                             |       |                                         |   |                                                      |  |    
|Outstanding at September 30, 2006 |  | 1,509                   |   |  |                             | 36.73 |                                         | $ | 64,753                                               |  | 2.3
|                                  |  |                         |   |  |                             |       |                                         |   |                                                      |  |    



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Executives Long-Term Retention and Deferred Compensation Plan

Under the terms of this plan certain executives have been granted the right to receive annual restricted stock grants beginning in 2005. Under the provisions of SFAS 123R all such
future grants are deemed granted in 2005 for the purpose of determining stock-based compensation expense. At January 1, 2006 these restricted stock units were classified as equity instruments (as defined in SFAS 123R) and the valuation under
SFAS 123R was unchanged from the intrinsic valuation under APB 25. The following table summarizes the status of these restricted stock units under the provisions of SFAS 123R at September 30, 2006 and the changes during the nine months
then ended:



|                                        |  |                                |   |  |                             |       |                                         |   |                                                      |  |    
|--------------------------------------- |  | ------------------------------ | - |  | --------------------------- | ----- | --------------------------------------- | - | ---------------------------------------------------- |  | ---
|                                        |  | Equity Instruments (thousands) |   |  | Weighted Average Fair Value |       | Aggregate Intrinsic Value ($ thousands) |   | Weighted Average Remaining Contractural Life (Years)
|Outstanding at January 1, 2006          |  | 2,990                          |   |  | $                           | 40.40 |                                         |   |                                                      |  |    
|Reclassified to liability instruments   |  | (111                           | ) |  |                             | 40.40 |                                         |   |                                                      |  |    
|Vested                                  |  | (99                            | ) |  |                             | 40.40 |                                         |   |                                                      |  |    
|Cancelled                               |  | (561                           | ) |  |                             | 40.40 |                                         |   |                                                      |  |    
|Reclassified from liability instruments |  | 111                            |   |  |                             | 40.54 |                                         |   |                                                      |  |    
|                                        |  |                                |   |  |                             |       |                                         |   |                                                      |  |    
|Outstanding at September 30, 2006       |  | 2,330                          |   |  |                             | 40.41 |                                         | $ | 99,980                                               |  | 7.5
|                                        |  |                                |   |  |                             |       |                                         |   |                                                      |  |    

In addition, the annual grants may be increased if certain common stock price based performance targets are achieved. We
have used a Monte-Carlo simulation model to estimate the number of restricted stock units expected to be granted in the future. This model involves forecasting potential future stock price paths based on the expected return on the common stock and
its volatility, then calculating the number of restricted stock units to be granted based on the results of the simulations.

The following assumptions were used at
September 30, 2006 with respect to the Monte Carlo simulation model:



|                         |  |      |  
|------------------------ |  | ---- | -
|Expected annual return   |  | 9.80 | %
|Expected daily return    |  | 0.04 | %
|Daily standard deviation |  | 2.19 | %

During 2006 certain of these restricted stock units were reclassified as liability instruments (as defined in SFAS 123R) and
revalued under the fair value approach in accordance with the provisions of SFAS 123R instead of the previously applied intrinsic valuation method prescribed by APB 25. The following tables summarize the status of these restricted stock units under
the provisions of SFAS 123R at September 30, 2006 and the changes during the nine months then ended:



|                                        |  |                                |   |  |                            |       |                                         |   |                                                     |  |    
|--------------------------------------- |  | ------------------------------ | - |  | -------------------------- | ----- | --------------------------------------- | - | --------------------------------------------------- |  | ---
|                                        |  | Equity Instruments (thousands) |   |  | Weighted Average FairValue |       | Aggregate Intrinsic Value ($ thousands) |   | Weighted Average Remaining Contractual Life (Years)
|Outstanding at January 1, 2006          |  | 496                            |   |  | $                          | 38.52 |                                         |   |                                                     |  |    
|Cancelled                               |  | (56                            | ) |  |                            | 38.52 |                                         |   |                                                     |  |    
|Change in Estimate                      |  | (28                            | ) |  |                            | 38.52 |                                         |   |                                                     |  |    
|Reclassified to liability instruments   |  | (412                           | ) |  |                            | 38.52 |                                         |   |                                                     |  |    
|Reclassified from liability instruments |  | 123                            |   |  |                            | 40.07 |                                         |   |                                                     |  |    
|                                        |  |                                |   |  |                            |       |                                         |   |                                                     |  |    
|Outstanding at September 30, 2006       |  | 123                            |   |  |                            | 40.07 |                                         | $ | 5,278                                               |  | 4.7
|                                        |  |                                |   |  |                            |       |                                         |   |                                                     |  |    



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|                                     |  |                                   |   |  |                             |       |                                         |   |                                                     |  |    
|------------------------------------ |  | --------------------------------- | - |  | --------------------------- | ----- | --------------------------------------- | - | --------------------------------------------------- |  | ---
|                                     |  | Liability Instruments (thousands) |   |  | Weighted Average Fair Value |       | Aggregate Intrinsic Value ($ thousands) |   | Weighted Average Remaining Contractual Life (Years)
|Outstanding at January 1, 2006       |  | -                                 |   |  | $                           | -     |                                         |   |                                                     |  |    
|Reclassified from equity instruments |  | 412                               |   |  |                             | 37.64 |                                         |   |                                                     |  |    
|Cancelled                            |  | (52                               | ) |  |                             | 37.64 |                                         |   |                                                     |  |    
|Change in Estimate                   |  | 16                                |   |  |                             | 41.89 |                                         |   |                                                     |  |    
|Reclassified to equity instruments   |  | (123                              | ) |  |                             | 40.07 |                                         |   |                                                     |  |    
|                                     |  |                                   |   |  |                             |       |                                         |   |                                                     |  |    
|Outstanding at September 30, 2006    |  | 253                               |   |  |                             | 41.89 |                                         | $ | 10,856                                              |  | 5.8
|                                     |  |                                   |   |  |                             |       |                                         |   |                                                     |  |    

Stock Options

As a result of the
acquisition of Nuevo in 2004, we converted certain of Nuevos outstanding stock options to options on our common stock. At September 30, 2006 there were 119,915 options outstanding with an average exercise price of $14.56 per
share and an average remaining life of 2.9 years.

Note 6Commitments and Contingencies

Operating leases.    In March 2006 we entered into an operating lease with respect to an aircraft under the terms of which we will be required to make
lease payments as follows: 2006 - $2.3 million, 2007 through 2010 - $6.1 million, and thereafter - $16.0 million.

Environmental
matters.    As an owner or lessee and operator of oil and gas properties, we are subject to various federal, state, and local laws and regulations relating to discharge of materials into, and protection of, the environment.
Often these regulations are more burdensome on older properties that were operated before the regulations came into effect such as some of our properties in California that have operated for over 90 years. We have established policies for continuing
compliance with environmental laws and regulations. We also maintain insurance coverage for environmental matters, which we believe is customary in the industry, but we are not fully insured against all environmental risks. Current or future local,
state or federal rules and regulations may require us to spend material amounts to comply with such rules and regulations.

Plugging, Abandonment and Remediation
Obligations.Consistent with normal industry practices, substantially all of our oil and gas leases require that, upon termination of economic production, the working interest owners plug and abandon non-producing
wellbores, remove tanks, production equipment and flow lines and restore the wellsite. Typically, when producing oil and gas assets are purchased the purchaser assumes the obligation to plug and abandon wells that are part of such assets. However,
in some instances, we receive an indemnity with respect to those costs. We may not be able to collect on these indemnities.

In connection with the sale of certain
properties offshore California in December 2004 we retained the responsibility for certain abandonment costs, including removing, dismantling and disposing of the existing offshore platforms. The present value of such abandonment costs,
$40 million ($80 million undiscounted), are included in our asset retirement obligation as reflected on our consolidated balance sheet. In addition, we agreed to guarantee the performance of the purchaser with respect to the remaining
abandonment obligations related to the properties (approximately $44 million). The fair value of our obligation, $0.5 million, is included in Other Long-Term Liabilities in the Consolidated Balance Sheet.



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

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

CMS sold its interest in the Congolese properties to a subsidiary of
Perenco, S.A. (Perenco) in 2002. Both CMS and Perenco, have received from the Internal Revenue Service, in accordance with the U.S. consolidated return regulations, a closing agreement confirming that the transaction will not trigger
recapture. We and Perenco have finalized closing agreements with the IRS confirming that neither our merger with Nuevo, nor the sale of our interest in the Congolese properties to Perenco will trigger recapture. At December 31, 2005 the
estimated remaining contingent liabilities were $15.2 million relative to Nuevos former interest, and $21.4 million relative to CMS former interest, for which we would be jointly liable. We believe the occurrence of a triggering
event in the future is remote and we do not believe the agreements will have a material adverse affect upon us.

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

On November 15, 2005, the United States Court of Federal Claims issued a ruling granting the plaintiffs motion for summary judgment as to liability and partial summary
judgment as to damages in the breach of contract lawsuit Amber Resources Company et al. v. United States, Case No. 02-30c. The Courts ruling also denied the United States motion to dismiss and motion for summary judgment. The
United States Court of Federal Claims ruled that the federal governments imposition of new and onerous requirements that stood as a significant obstacle to oil and gas development breached agreements that it made when it sold 36 federal leases
offshore California. The Court further ruled that the Government must give back to the current lessees the more than $1.1 billion in lease bonuses it had received at the time of sale. The final ruling in the case will not be made until the Court
addresses the plaintiffs additional claims regarding the hundreds of millions of dollars that have been spent in the successful efforts to find oil and gas in the disputed lease area, and other matters. The final ruling,



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including the rulings made on November 15, 2005 will be subject to appeal, and no payments will be made until all appeals have either been waived or
exhausted. We are among the current lessees of the 36 leases. Our share of the $1.1 billion award is in excess of $80 million.

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

Note
7Consolidating Financial Statements

We are the issuer of the Senior Notes and the Senior Subordinated Notes. The Senior Notes and the Senior Subordinated
Notes are jointly and severally guaranteed on a full and unconditional basis by certain of our domestic wholly owned restricted subsidiaries (referred to as Guarantor Subsidiaries). Certain of our subsidiaries do not guarantee the Senior
Notes and the Senior Subordinated Notes (referred to as Non-Guarantor Subsidiaries).

In the third quarter of 2006 we recognized a gain on the sale of
oil and gas properties to Occidental (see Note 2). A portion of the gain was allocated to certain of our subsidiaries based on the relative reserve volumes sold.

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



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



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



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



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



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



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

SEPTEMBER 30, 2006

(in thousands)



|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|----------------------------------------------------------- |  | ------ | --------- | - | ---------------------- | - | -------- | -------------------------- |  | ------------------------- | ----- |  | ------------ | -------- | - |  | - | --------- | -
|                                                            |  | Issuer |           |   | Guarantor Subsidiaries |   |          | Non-Guarantor Subsidiaries |  | Intercompany Eliminations |       |  | Consolidated |         
|ASSETS                                                      |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Current Assets                                              |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Cash and cash equivalents                                   |  | $      | 542,248   |   |                        | $ | 1        |                            |  | $                         | -     |  | $            | -        |   |  | $ | 542,249   |  
|Accounts receivable and other current assets                |  |        | 456,685   |   |                        |   | 39,197   |                            |  |                           | -     |  |              | -        |   |  |   | 495,882   |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|                                                            |  |        | 998,933   |   |                        |   | 39,198   |                            |  |                           | -     |  |              | -        |   |  |   | 1,038,131 |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Property and Equipment, at cost                             |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Oil and natural gas properties - full cost method           |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Subject to amortization                                     |  |        | 2,052,407 |   |                        |   | 438,628  |                            |  |                           | -     |  |              | -        |   |  |   | 2,491,035 |  
|Not subject to amortization                                 |  |        | 77,995    |   |                        |   | 35,449   |                            |  |                           | -     |  |              | -        |   |  |   | 113,444   |  
|Other property and equipment                                |  |        | 19,087    |   |                        |   | 1,387    |                            |  |                           | -     |  |              | -        |   |  |   | 20,474    |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|                                                            |  |        | 2,149,489 |   |                        |   | 475,464  |                            |  |                           | -     |  |              | -        |   |  |   | 2,624,953 |  
|Less allowance for depreciation, depletion and amortization |  |        | (365,654  | ) |                        |   | (281,439 | )                          |  |                           | -     |  |              | -        |   |  |   | (647,093  | )
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|                                                            |  |        | 1,783,835 |   |                        |   | 194,025  |                            |  |                           | -     |  |              | -        |   |  |   | 1,977,860 |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Investment in and Advances to Subsidiaries                  |  |        | 312,960   |   |                        |   | -        |                            |  |                           | -     |  |              | (312,960 | ) |  |   | -         |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Other Assets                                                |  |        | 24,650    |   |                        |   | 169,362  |                            |  |                           | 6,813 |  |              | -        |   |  |   | 200,825   |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|                                                            |  | $      | 3,120,378 |   |                        | $ | 402,585  |                            |  | $                         | 6,813 |  | $            | (312,960 | ) |  | $ | 3,216,816 |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Current Liabilities                                         |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Accounts payable and other current liabilities              |  | $      | 305,698   |   |                        | $ | 45,208   |                            |  | $                         | -     |  | $            | -        |   |  | $ | 350,906   |  
|Commodity derivative contracts                              |  |        | 337,683   |   |                        |   | -        |                            |  |                           | -     |  |              | -        |   |  |   | 337,683   |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|                                                            |  |        | 643,381   |   |                        |   | 45,208   |                            |  |                           | -     |  |              | -        |   |  |   | 688,589   |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Long-Term Debt                                              |  |        | 525,303   |   |                        |   | -        |                            |  |                           | -     |  |              | -        |   |  |   | 525,303   |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Other Long-Term Liabilities                                 |  |        | 533,581   |   |                        |   | 18,377   |                            |  |                           | -     |  |              | -        |   |  |   | 551,958   |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Payable to Parent                                           |  |        | -         |   |                        |   | (146,685 | )                          |  |                           | 3,807 |  |              | 142,878  |   |  |   | -         |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Deferred Income Taxes                                       |  |        | 486,561   |   |                        |   | 32,853   |                            |  |                           | -     |  |              | -        |   |  |   | 519,414   |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Stockholders Equity                                        |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|Stockholders equity                                        |  |        | 953,721   |   |                        |   | 460,448  |                            |  |                           | 3,006 |  |              | (463,454 | ) |  |   | 953,721   |  
|Accumulated other comprehensive income                      |  |        | (22,169   | ) |                        |   | (7,616   | )                          |  |                           | -     |  |              | 7,616    |   |  |   | (22,169   | )
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|                                                            |  |        | 931,552   |   |                        |   | 452,832  |                            |  |                           | 3,006 |  |              | (455,838 | ) |  |   | 931,552   |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  
|                                                            |  | $      | 3,120,378 |   |                        | $ | 402,585  |                            |  | $                         | 6,813 |  | $            | (312,960 | ) |  | $ | 3,216,816 |  
|                                                            |  |        |           |   |                        |   |          |                            |  |                           |       |  |              |          |   |  |   |           |  



19



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

DECEMBER 31, 2005

(in thousands)



|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|----------------------------------------------------------- |  | ------ | --------- | - | ---------------------- | - | -------- | ------------------------- |  | - | ------------ | - |  | - | --------- | -
|                                                            |  | Issuer |           |   | Guarantor Subsidiaries |   |          | Intercompany Eliminations |  |   | Consolidated |  
|ASSETS                                                      |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Current Assets                                              |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Cash and cash equivalents                                   |  | $      | 1,548     |   |                        | $ | 4        |                           |  | $ | -            |   |  | $ | 1,552     |  
|Accounts receivable and other current assets                |  |        | 247,721   |   |                        |   | 44,059   |                           |  |   | -            |   |  |   | 291,780   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 249,269   |   |                        |   | 44,063   |                           |  |   | -            |   |  |   | 293,332   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Property and Equipment, at cost                             |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Oil and natural gas properties - full cost method           |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Subject to amortization                                     |  |        | 2,126,960 |   |                        |   | 477,932  |                           |  |   | -            |   |  |   | 2,604,892 |  
|Not subject to amortization                                 |  |        | 73,987    |   |                        |   | 38,217   |                           |  |   | -            |   |  |   | 112,204   |  
|Other property and equipment                                |  |        | 15,375    |   |                        |   | 907      |                           |  |   | -            |   |  |   | 16,282    |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 2,216,322 |   |                        |   | 517,056  |                           |  |   | -            |   |  |   | 2,733,378 |  
|Less allowance for depreciation, depletion and amortization |  |        | (305,510  | ) |                        |   | (192,565 | )                         |  |   | -            |   |  |   | (498,075  | )
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 1,910,812 |   |                        |   | 324,491  |                           |  |   | -            |   |  |   | 2,235,303 |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Investment in and Advances to Subsidiaries                  |  |        | 458,984   |   |                        |   | -        |                           |  |   | (458,984     | ) |  |   | -         |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Other Assets                                                |  |        | 50,412    |   |                        |   | 162,895  |                           |  |   | -            |   |  |   | 213,307   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  | $      | 2,669,477 |   |                        | $ | 531,449  |                           |  | $ | (458,984     | ) |  | $ | 2,741,942 |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Current Liabilities                                         |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Accounts payable and other current liabilities              |  | $      | 199,508   |   |                        | $ | 78,894   |                           |  | $ | -            |   |  | $ | 278,402   |  
|Commodity derivative contracts                              |  |        | 85,596    |   |                        |   | -        |                           |  |   | -            |   |  |   | 85,596    |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 285,104   |   |                        |   | 78,894   |                           |  |   | -            |   |  |   | 363,998   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Long-Term Debt                                              |  |        | 797,375   |   |                        |   | -        |                           |  |   | -            |   |  |   | 797,375   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Other Long-Term Liabilities                                 |  |        | 573,848   |   |                        |   | 29,574   |                           |  |   | -            |   |  |   | 603,422   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Payable to Parent                                           |  |        | -         |   |                        |   | 103,526  |                           |  |   | (103,526     | ) |  |   | -         |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Deferred Income Taxes                                       |  |        | 294,813   |   |                        |   | (36,003  | )                         |  |   | -            |   |  |   | 258,810   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Stockholders Equity                                        |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Stockholders equity                                        |  |        | 807,903   |   |                        |   | 386,229  |                           |  |   | (386,229     | ) |  |   | 807,903   |  
|Accumulated other comprehensive income                      |  |        | (89,566   | ) |                        |   | (30,771  | )                         |  |   | 30,771       |   |  |   | (89,566   | )
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  |        | 718,337   |   |                        |   | 355,458  |                           |  |   | (355,458     | ) |  |   | 718,337   |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|                                                            |  | $      | 2,669,477 |   |                        | $ | 531,449  |                           |  | $ | (458,984     | ) |  | $ | 2,741,942 |  
|                                                            |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED SEPTEMBER 30, 2006

(in thousands)



|                                                    |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|--------------------------------------------------- |  | ------ | -------- | - | ---------------------- | - | -------- | -------------------------- |  | ------------------------- | - |  | ------------ | ------- | - |  | - | -------- | -
|                                                    |  | Parent |          |   | Guarantor Subsidiaries |   |          | Non-Guarantor Subsidiaries |  | Intercompany Eliminations |   |  | Consolidated |        
|Revenues                                            |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Oil sales                                           |  | $      | 224,023  |   |                        | $ | 29,821   |                            |  | $                         | - |  | $            | -       |   |  | $ | 253,844  |  
|Gas sales                                           |  |        | 14,189   |   |                        |   | 12,535   |                            |  |                           | - |  |              | -       |   |  |   | 26,724   |  
|Other operating revenues                            |  |        | 172      |   |                        |   | 167      |                            |  |                           | - |  |              | -       |   |  |   | 339      |  
|                                                    |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|                                                    |  |        | 238,384  |   |                        |   | 42,523   |                            |  |                           | - |  |              | -       |   |  |   | 280,907  |  
|                                                    |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Costs and Expenses                                  |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Production costs                                    |  |        | 64,167   |   |                        |   | 21,168   |                            |  |                           | - |  |              | -       |   |  |   | 85,335   |  
|General and administrative                          |  |        | 30,051   |   |                        |   | 1,442    |                            |  |                           | - |  |              | -       |   |  |   | 31,493   |  
|Depreciation, depletion, amortization and accretion |  |        | 32,392   |   |                        |   | 21,016   |                            |  |                           | - |  |              | -       |   |  |   | 53,408   |  
|Gain on sale of oil and gas properties              |  |        | (219,094 | ) |                        |   | (126,386 | )                          |  |                           | - |  |              | -       |   |  |   | (345,480 | )
|                                                    |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|                                                    |  |        | (92,484  | ) |                        |   | (82,760  | )                          |  |                           | - |  |              | -       |   |  |   | (175,244 | )
|                                                    |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Income from Operations                              |  |        | 330,868  |   |                        |   | 125,283  |                            |  |                           | - |  |              | -       |   |  |   | 456,151  |  
|Other Income (Expense)                              |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Equity in earnings of subsidiaries                  |  |        | 74,579   |   |                        |   | -        |                            |  |                           | - |  |              | (74,579 | ) |  |   | -        |  
|Interest expense                                    |  |        | (19,093  | ) |                        |   | (3,085   | )                          |  |                           | - |  |              | -       |   |  |   | (22,178  | )
|Gain on mark-to-market derivative contracts         |  |        | 12,340   |   |                        |   | -        |                            |  |                           | - |  |              | -       |   |  |   | 12,340   |  
|Interest and other income                           |  |        | 500      |   |                        |   | -        |                            |  |                           | - |  |              | -       |   |  |   | 500      |  
|                                                    |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Income (Loss) Before Income Taxes                   |  |        | 399,194  |   |                        |   | 122,198  |                            |  |                           | - |  |              | (74,579 | ) |  |   | 446,813  |  
|Income tax benefit (expense)                        |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Current                                             |  |        | (60,177  | ) |                        |   | 12,687   |                            |  |                           | - |  |              | -       |   |  |   | (47,490  | )
|Deferred                                            |  |        | (66,324  | ) |                        |   | (60,306  | )                          |  |                           | - |  |              | -       |   |  |   | (126,630 | )
|                                                    |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Net Income (Loss)                                   |  | $      | 272,693  |   |                        | $ | 74,579   |                            |  | $                         | - |  | $            | (74,579 | ) |  | $ | 272,693  |  
|                                                    |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED SEPTEMBER 30, 2005

(in thousands)



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



22



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2006

(in thousands)



|                                                                             |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|---------------------------------------------------------------------------- |  | ------ | -------- | - | ---------------------- | - | -------- | -------------------------- |  | ------------------------- | - |  | ------------ | ------- | - |  | - | -------- | -
|                                                                             |  | Parent |          |   | Guarantor Subsidiaries |   |          | Non-Guarantor Subsidiaries |  | Intercompany Eliminations |   |  | Consolidated |        
|Revenues                                                                     |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Oil sales                                                                    |  | $      | 624,005  |   |                        | $ | 94,836   |                            |  | $                         | - |  | $            | -       |   |  | $ | 718,841  |  
|Gas sales                                                                    |  |        | 25,498   |   |                        |   | 64,381   |                            |  |                           | - |  |              | -       |   |  |   | 89,879   |  
|Other operating revenues                                                     |  |        | 1,310    |   |                        |   | 882      |                            |  |                           | - |  |              | -       |   |  |   | 2,192    |  
|                                                                             |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|                                                                             |  |        | 650,813  |   |                        |   | 160,099  |                            |  |                           | - |  |              | -       |   |  |   | 810,912  |  
|                                                                             |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Costs and Expenses                                                           |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Production costs                                                             |  |        | 169,878  |   |                        |   | 63,226   |                            |  |                           | - |  |              | -       |   |  |   | 233,104  |  
|General and administrative                                                   |  |        | 89,225   |   |                        |   | 3,305    |                            |  |                           | - |  |              | -       |   |  |   | 92,530   |  
|Depreciation, depletion, amortization and accretion                          |  |        | 68,670   |   |                        |   | 90,364   |                            |  |                           | - |  |              | -       |   |  |   | 159,034  |  
|Gain on sale of oil and gas properties                                       |  |        | (219,094 | ) |                        |   | (126,386 | )                          |  |                           | - |  |              | -       |   |  |   | (345,480 | )
|                                                                             |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|                                                                             |  |        | 108,679  |   |                        |   | 30,509   |                            |  |                           | - |  |              | -       |   |  |   | 139,188  |  
|                                                                             |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Income from Operations                                                       |  |        | 542,134  |   |                        |   | 129,590  |                            |  |                           | - |  |              | -       |   |  |   | 671,724  |  
|Other Income (Expense)                                                       |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Equity in earnings of subsidiaries                                           |  |        | 74,218   |   |                        |   | -        |                            |  |                           | - |  |              | (74,218 | ) |  |   | -        |  
|Interest expense                                                             |  |        | (48,621  | ) |                        |   | (8,561   | )                          |  |                           | - |  |              | -       |   |  |   | (57,182  | )
|Loss on mark-to-market derivative contracts                                  |  |        | (299,902 | ) |                        |   | -        |                            |  |                           | - |  |              | -       |   |  |   | (299,902 | )
|Interest and other income                                                    |  |        | 40,022   |   |                        |   | -        |                            |  |                           | - |  |              | -       |   |  |   | 40,022   |  
|                                                                             |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Income (Loss) Before Income Taxes and Cumulative Effect of Accounting Change |  |        | 307,851  |   |                        |   | 121,029  |                            |  |                           | - |  |              | (74,218 | ) |  |   | 354,662  |  
|Income tax benefit (expense)                                                 |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Current                                                                      |  |        | (63,784  | ) |                        |   | 7,537    |                            |  |                           | - |  |              | -       |   |  |   | (56,247  | )
|Deferred                                                                     |  |        | (27,971  | ) |                        |   | (54,348  | )                          |  |                           | - |  |              | -       |   |  |   | (82,319  | )
|                                                                             |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Net Income (Loss) Before Cumulative Effect of Accounting Change              |  |        | 216,096  |   |                        |   | 74,218   |                            |  |                           | - |  |              | (74,218 | ) |  |   | 216,096  |  
|Cumulative effect of accounting change, net of tax benefit                   |  |        | (2,182   | ) |                        |   | -        |                            |  |                           | - |  |              | -       |   |  |   | (2,182   | )
|                                                                             |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  
|Net Income (Loss)                                                            |  | $      | 213,914  |   |                        | $ | 74,218   |                            |  | $                         | - |  | $            | (74,218 | ) |  | $ | 213,914  |  
|                                                                             |  |        |          |   |                        |   |          |                            |  |                           |   |  |              |         |   |  |   |          |  



23



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2005

(in thousands)



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



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2006

(in thousands of dollars)



|                                                           |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|---------------------------------------------------------- |  | ------ | ---------- | - | ---------------------- | - | -------- | --------------------------- |  | - | ------------------------- | - |  | ------------ | ------- | - |  | - | ---------- | -
|                                                           |  | Parent |            |   | Guarantor Subsidiaries |   |          | Non- Guarantor Subsidiaries |  |   | Intercompany Eliminations |   |  | Consolidated |        
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|Net income (loss)                                          |  | $      | 213,914    |   |                        | $ | 74,218   |                             |  | $ | -                         |   |  | $            | (74,218 | ) |  | $ | 213,914    |  
|Items not affecting cash flows from operating activities   |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|Depreciation, depletion, amortization and accretion        |  |        | 68,670     |   |                        |   | 90,364   |                             |  |   | -                         |   |  |              | -       |   |  |   | 159,034    |  
|Equity in earnings of subsidiaries                         |  |        | (74,218    | ) |                        |   | -        |                             |  |   | -                         |   |  |              | 74,218  |   |  |   | -          |  
|Deferred income taxes                                      |  |        | 27,971     |   |                        |   | 54,348   |                             |  |   | -                         |   |  |              | -       |   |  |   | 82,319     |  
|Gain on sale of oil and gas properties                     |  |        | (219,094   | ) |                        |   | (126,386 | )                           |  |   | -                         |   |  |              | -       |   |  |   | (345,480   | )
|Cumulative effect of adoption of accounting change         |  |        | 2,182      |   |                        |   | -        |                             |  |   | -                         |   |  |              | -       |   |  |   | 2,182      |  
|Commodity derivative contracts                             |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|Loss on derivatives                                        |  |        | 296,311    |   |                        |   | 37,665   |                             |  |   | -                         |   |  |              | -       |   |  |   | 333,976    |  
|Reclassify derivative settlements                          |  |        | 96,773     |   |                        |   | -        |                             |  |   | -                         |   |  |              | -       |   |  |   | 96,773     |  
|Noncash compensation                                       |  |        | 32,594     |   |                        |   | -        |                             |  |   | -                         |   |  |              | -       |   |  |   | 32,594     |  
|Other noncash items                                        |  |        | (64        | ) |                        |   | -        |                             |  |   | -                         |   |  |              | -       |   |  |   | (64        | )
|Change in assets and liabilities from operating activities |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|Accounts receivable and other assets                       |  |        | 7,486      |   |                        |   | (1,526   | )                           |  |   | -                         |   |  |              | -       |   |  |   | 5,960      |  
|Accounts payable and other liabilities                     |  |        | 61,914     |   |                        |   | (1,755   | )                           |  |   | -                         |   |  |              | -       |   |  |   | 60,159     |  
|Commodity derivative contracts                             |  |        | (21,215    | ) |                        |   | -        |                             |  |   | -                         |   |  |              | -       |   |  |   | (21,215    | )
|                                                           |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|Net cash provided by operating activities                  |  |        | 493,224    |   |                        |   | 126,928  |                             |  |   | -                         |   |  |              | -       |   |  |   | 620,152    |  
|                                                           |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|Additions to oil and gas properties                        |  |        | (335,295   | ) |                        |   | (121,501 | )                           |  |   | -                         |   |  |              | -       |   |  |   | (456,796   | )
|Proceeds from property sales, net                          |  |        | 850,427    |   |                        |   | -        |                             |  |   | -                         |   |  |              | -       |   |  |   | 850,427    |  
|Derivative settlements                                     |  |        | (68,194    | ) |                        |   | -        |                             |  |   | -                         |   |  |              | -       |   |  |   | (68,194    | )
|Other                                                      |  |        | (3,177     | ) |                        |   | (480     | )                           |  |   | (3,810                    | ) |  |              | -       |   |  |   | (7,467     | )
|                                                           |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|Net cash provided by (used in) investing activities        |  |        | 443,761    |   |                        |   | (121,981 | )                           |  |   | (3,810                    | ) |  |              | -       |   |  |   | 317,970    |  
|                                                           |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|Revolving credit facilities                                |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|Borrowings                                                 |  |        | 1,182,700  |   |                        |   | -        |                             |  |   | -                         |   |  |              | -       |   |  |   | 1,182,700  |  
|Repayments                                                 |  |        | (1,454,700 | ) |                        |   | -        |                             |  |   | -                         |   |  |              | -       |   |  |   | (1,454,700 | )
|Derivative settlements                                     |  |        | (28,579    | ) |                        |   | -        |                             |  |   | -                         |   |  |              | -       |   |  |   | (28,579    | )
|Investment in and advances to affiliates                   |  |        | 1,140      |   |                        |   | (4,950   | )                           |  |   | 3,810                     |   |  |              | -       |   |  |   | -          |  
|Purchase treasury stock                                    |  |        | (100,817   | ) |                        |   | -        |                             |  |   | -                         |   |  |              | -       |   |  |   | (100,817   | )
|Excess tax benefit from stock-based compensation           |  |        | 3,294      |   |                        |   | -        |                             |  |   | -                         |   |  |              | -       |   |  |   | 3,294      |  
|Other                                                      |  |        | 677        |   |                        |   | -        |                             |  |   | -                         |   |  |              | -       |   |  |   | 677        |  
|                                                           |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|Net cash provided by (used in) financing activities        |  |        | (396,285   | ) |                        |   | (4,950   | )                           |  |   | 3,810                     |   |  |              | -       |   |  |   | (397,425   | )
|                                                           |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|Net increase (decrease) in cash and cash equivalents       |  |        | 540,700    |   |                        |   | (3       | )                           |  |   | -                         |   |  |              | -       |   |  |   | 540,697    |  
|Cash and cash equivalents, beginning of period             |  |        | 1,548      |   |                        |   | 4        |                             |  |   | -                         |   |  |              | -       |   |  |   | 1,552      |  
|                                                           |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  
|Cash and cash equivalents, end of period                   |  | $      | 542,248    |   |                        | $ | 1        |                             |  | $ | -                         |   |  | $            | -       |   |  | $ | 542,249    |  
|                                                           |  |        |            |   |                        |   |          |                             |  |   |                           |   |  |              |         |   |  |   |            |  



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PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2005

(in thousands of dollars)



|                                                           |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|---------------------------------------------------------- |  | ------ | --------- | - | ---------------------- | - | -------- | ------------------------- |  | - | ------------ | - |  | - | --------- | -
|                                                           |  | Parent |           |   | Guarantor Subsidiaries |   |          | Intercompany Eliminations |  |   | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Net income (loss)                                          |  | $      | (284,797  | ) |                        | $ | 25,697   |                           |  | $ | (25,697      | ) |  | $ | (284,797  | )
|Items not affecting cash flows from operating activities   |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Depreciation, depletion, amortization and accretion        |  |        | 86,866    |   |                        |   | 48,703   |                           |  |   | -            |   |  |   | 135,569   |  
|Equity in earnings of subsidiaries                         |  |        | (25,697   | ) |                        |   | -        |                           |  |   | 25,697       |   |  |   | -         |  
|Deferred income taxes                                      |  |        | (164,490  | ) |                        |   | (2,329   | )                         |  |   | -            |   |  |   | (166,819  | )
|Commodity derivative contracts                             |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Loss (gain) on derivatives                                 |  |        | 319,668   |   |                        |   | 39,170   |                           |  |   | -            |   |  |   | 358,838   |  
|Reclassify financing derivative settlements                |  |        | 361,451   |   |                        |   | 3,481    |                           |  |   |              |   |  |   | 364,932   |  
|Noncash compensation                                       |  |        | 59,807    |   |                        |   | -        |                           |  |   | -            |   |  |   | 59,807    |  
|Other noncash items                                        |  |        | (69       | ) |                        |   | -        |                           |  |   | -            |   |  |   | (69       | )
|Change in assets and liabilities from operating activities |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Accounts receivable and other assets                       |  |        | (10,782   | ) |                        |   | 176      |                           |  |   | -            |   |  |   | (10,606   | )
|Accounts payable and other liabilities                     |  |        | (25,653   | ) |                        |   | (7,679   | )                         |  |   | -            |   |  |   | (33,332   | )
|Commodity derivative contracts                             |  |        | (135,348  | ) |                        |   | -        |                           |  |   | -            |   |  |   | (135,348  | )
|                                                           |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Net cash provided by operating activities                  |  |        | 180,956   |   |                        |   | 107,219  |                           |  |   | -            |   |  |   | 288,175   |  
|                                                           |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Additions to oil and gas properties                        |  |        | (196,684  | ) |                        |   | (196,694 | )                         |  |   | -            |   |  |   | (393,378  | )
|Proceeds from sales of properties                          |  |        | 6,500     |   |                        |   | 336,596  |                           |  |   | -            |   |  |   | 343,096   |  
|Other property and equipment                               |  |        | (3,390    | ) |                        |   | (133     | )                         |  |   | -            |   |  |   | (3,523    | )
|                                                           |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Net cash provided by (used in) investing activities        |  |        | (193,574  | ) |                        |   | 139,769  |                           |  |   | -            |   |  |   | (53,805   | )
|                                                           |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Revolving credit facilities                                |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Borrowings                                                 |  |        | 1,092,700 |   |                        |   | -        |                           |  |   | -            |   |  |   | 1,092,700 |  
|Repayments                                                 |  |        | (964,200  | ) |                        |   | -        |                           |  |   | -            |   |  |   | (964,200  | )
|Derivative settlements                                     |  |        | (361,451  | ) |                        |   | (3,481   | )                         |  |   | -            |   |  |   | (364,932  | )
|Investment in and advances to affiliates                   |  |        | 244,169   |   |                        |   | (244,169 | )                         |  |   | -            |   |  |   | -         |  
|Other                                                      |  |        | 1,823     |   |                        |   | -        |                           |  |   | -            |   |  |   | 1,823     |  
|                                                           |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Net cash provided by (used in) financing activities        |  |        | 13,041    |   |                        |   | (247,650 | )                         |  |   | -            |   |  |   | (234,609  | )
|                                                           |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Net increase (decrease) in cash and cash equivalents       |  |        | 423       |   |                        |   | (662     | )                         |  |   | -            |   |  |   | (239      | )
|Cash and cash equivalents, beginning of period             |  |        | 876       |   |                        |   | 669      |                           |  |   | -            |   |  |   | 1,545     |  
|                                                           |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  
|Cash and cash equivalents, end of period                   |  | $      | 1,299     |   |                        | $ | 7        |                           |  | $ | -            |   |  | $ | 1,306     |  
|                                                           |  |        |           |   |                        |   |          |                           |  |   |              |   |  |   |           |  



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

The following information
should be read in connection with the information contained in the consolidated financial statements and notes thereto included elsewhere in this report and our Form 10-K for the year ended December 31, 2005.

Company Overview

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



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



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



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

Assets in
our principal focus areas include mature properties with long-lived reserves and significant development and exploitation opportunities as well as newer properties with development, exploitation and exploration potential. Our primary sources of
liquidity are cash generated from our operations and our senior revolving credit facility. At September 30, 2006 we had approximately $739 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 senior revolving credit facility to meet our short-term and long-term normal recurring operating needs, derivative obligations, debt service obligations, contingencies,
anticipated capital expenditures and expenditures under our stock repurchase program. In addition, the majority of our capital expenditures and expenditures under our stock repurchase program are discretionary and could be curtailed if our cash
flows declined from expected levels.

Our cash flows depend on many factors, including the price of oil and gas, the success of our acquisition and drilling
activities and the operational performance of our producing properties. We use derivative instruments to manage our commodity price risk. This practice may prevent us from receiving the full advantage of increases in oil or gas prices above the
maximum fixed amount specified in the derivative agreement. The level of derivative activity depends on our view of market conditions, available derivative prices and our operating strategy (see  Derivative Instruments and
Hedging).

In September 2006 and November 2006 we completed property sales transactions that generated approximately $1.6 billion of cash proceeds. We used the
proceeds to repay the balance outstanding on our senior revolving credit facility and short-term credit facility, redeem all $250 million outstanding principal of our 7.125% Senior Notes, purchase $274.9 million of the $275 million
outstanding principal of our 8.75% Senior Subordinated Notes, and settle the $605 million liability associated with our 2007 and 2008 crude oil collars. Following these transactions, the Company will have no outstanding long-term or short-term
debt.

Property Divestitures

On September 29, 2006 we closed on the
sale of oil and gas properties to subsidiaries of Occidental Petroleum Corporation (Occidental). This transaction had an effective date of October 1, 2006. We received approximately $864 million in cash proceeds and recognized
a $345.5 million pre-tax gain.



27



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##### Table of Contents

As of December 31, 2005, our independent reserve engineers estimated these properties had proven reserves of approximately
45 million equivalent barrels of oil. On a barrel of oil equivalent basis, these properties represented approximately 12% of our sales volumes for the third quarter of 2006.

On November 1, 2006 we closed on the sale of certain non-producing oil and gas properties to Statoil Gulf of Mexico LLC (Statoil). This transaction had an effective date of September 1, 2006. The
Company received approximately $706 million in cash proceeds and in the fourth quarter of 2006 we expect to recognize a pre-tax gain related to this transaction of approximately $635 million to $640 million. Statoil has also been
granted certain negotiation rights with respect to future sales of other PXP Gulf of Mexico exploration assets.

Debt Retirement

On September 29, 2006 we paid the $304.9 million outstanding under our senior revolving credit facility and short-term credit facility.

On November 3, 2006 we made payments totaling $268.6 million to retire all $250 million outstanding principal amount of our 7.125% Senior Notes due 2014 (the
Senior Notes). The redemption price of $1,074.50 per $1,000 principal amount is based on a make-whole calculation tied to a comparable United States Treasury security.

On November 3, 2006 we made payments totaling $291.9 million to retire $274.9 million of the $275 million outstanding principal amount of our 8.75% Senior
Subordinated Notes due 2012 (the Senior Subordinated Notes). The purchase price of $1,042.07 per $1,000 principal amount is based on a 50 basis point spread over a reference U.S. Treasury security, as determined on
October 19, 2006. The payments to holders who provided consents to eliminate substantially all the restrictive covenants and certain events of default from the indenture governing the Senior Subordinated Notes included a consent payment of
$20.00 per $1,000 principal amount of notes tendered (a total of $5.5 million).

In the fourth quarter of 2006 we expect to record a charge to earnings in
connection with the debt retirement transactions of approximately $45 million.

Derivative Instruments and Hedging

At December 31, 2005 we had collars on 22,000 barrels of oil per day for all of 2007 and 2008 with a floor price of $25.00 and an average ceiling price of $34.76. In April
2006, we executed a series of offsetting contracts to eliminate all of these crude oil price collars at a pre-tax cost of approximately $593 million. This amount represents the fair value of the collars on the date we entered into the offsetting
positions. Since the collars were not designated as a hedge, such amount has been recognized in our income statement as a loss on mark-to-market derivative contracts ($170 million in 2006 and $423 million in prior periods).

On October 31, 2006 and November 2, 2006 we made payments totaling $605.0 million to settle the 2007 and 2008 collars. The $11.8 million in excess of
the fair value on the date we entered into the offsetting positions is recognized in our income statement as interest expense.

For the remainder of 2006 our crude
oil derivative position consists exclusively of purchased put option contracts with a strike price of $55.00 on 50,000 barrels per day. The only cash settlements we are required to make on these contracts are option premiums, which are expected to
total approximately $7.5 million per month. In return, to the extent the daily average NYMEX price for West Texas Intermediate crude oil is less than $55.00, we will receive the difference between $55.00 and the daily average NYMEX price for West
Texas Intermediate crude oil.



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In addition to our 2006 crude oil put options, we also have purchased put option contracts with a strike price of $55.00 on 50,000
barrels per day in 2007 and 42,000 barrels per day in 2008. We also have call options on 30,000 MMBtu per day of natural gas for the remainder of 2006.

Since our
remaining derivative position consists entirely of crude oil put options and natural gas call options, we expect a decrease in the volatility in derivative gains or losses on our income statement.

See Item 3  Quantitative and Qualitative Disclosures About Market Risks for a discussion of our current derivative positions.

Stone Energy Corporation

On April 24, 2006 we announced that we had entered
into a definitive agreement to acquire Stone Energy Corporation (Stone) in a stock-for-stock transaction. On June 22, 2006 the agreement was terminated by Stone in order for Stone to enter into a merger agreement with another
company. In connection with the termination of the merger agreement we received a termination fee of $43.5 million. Earnings for the nine months ended September 30, 2006 include a gain on the termination of the merger agreement of $37.9
million representing the termination fee net of certain merger related costs incurred by the Company.

General

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

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

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



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Results Overview

In the first nine
months of 2006 we reported net income of $213.9 million, or $2.71 per diluted share. Net income for the period includes a $345.5 million pre-tax gain on the sale of oil and gas properties and a $299.9 million pre-tax derivative
mark-to-market loss. We received cash proceeds from the property sale of approximately $864 million and cash payments related to mark-to-market derivative contracts totaled approximately $76 million. Our net income in 2006 includes a
non-cash, after-tax expense related to the adoption of SFAS 123R of $2.2 million, or $0.03 per share.

Our earnings are subject to volatility due to: (i) gains
and losses on derivative contracts subject to mark-to-market accounting as changes occur in the NYMEX price indexes; and (ii) stock appreciation rights (SARs) and certain of our restricted stock units, which are subject to variable
accounting based on changes in fair value. The fair value of SARs and restricted stock units is related to the market price of our common stock and will fluctuate with movements in our stock price.

In the first nine months of 2005, primarily as a result of a $629.6 million pre-tax derivative mark-to-market loss, we reported a net loss of $284.8 million, or
$3.67 per share.

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 EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                      |  | 2006                            |        | 2005                           |   | 2006   |  | 2005
|Daily Average Volumes                 |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Oil and liquids sales (Bbls)          |  |                                 | 53,043 |                                |   | 50,374 |  |      | 52,815 |  |   | 50,520
|Gas (Mcf)                             |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Production                            |  |                                 | 62,266 |                                |   | 66,687 |  |      | 63,782 |  |   | 87,593
|Used in steam operations              |  |                                 | 16,721 |                                |   | 13,730 |  |      | 14,732 |  |   | 14,670
|Sales (1)                             |  |                                 | 45,545 |                                |   | 52,957 |  |      | 49,050 |  |   | 72,923
|BOE                                   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Production                            |  |                                 | 63,421 |                                |   | 61,487 |  |      | 63,445 |  |   | 65,117
|Sales (1)                             |  |                                 | 60,634 |                                |   | 59,196 |  |      | 60,990 |  |   | 62,674
|Unit Economics (in dollars) (2)       |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Average NYMEX Prices                  |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Oil                                   |  | $                               | 70.54  |                                | $ | 63.16  |  | $    | 68.25  |  | $ | 55.45 
|Gas                                   |  |                                 | 6.62   |                                |   | 8.52   |  |      | 7.44   |  |   | 7.18  
|Average Realized Sales Price Before   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Derivative Transactions               |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Oil (per Bbl)                         |  | $                               | 59.51  |                                | $ | 52.53  |  | $    | 57.46  |  | $ | 45.69 
|Gas (per Mcf)                         |  |                                 | 6.38   |                                |   | 7.37   |  |      | 6.71   |  |   | 6.43  
|Per BOE                               |  |                                 | 56.85  |                                |   | 51.03  |  |      | 55.16  |  |   | 44.08 
|Costs and Expenses per BOE            |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Production costs                      |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Lease operating expenses              |  | $                               | 9.03   |                                | $ | 6.41   |  | $    | 8.24   |  | $ | 5.93  
|Steam gas costs                       |  |                                 | 2.82   |                                |   | 3.17   |  |      | 2.48   |  |   | 2.87  
|Electricity                           |  |                                 | 1.79   |                                |   | 1.58   |  |      | 1.73   |  |   | 1.33  
|Production and ad valorem taxes       |  |                                 | 1.25   |                                |   | 0.90   |  |      | 1.19   |  |   | 1.04  
|Gathering and transportation          |  |                                 | 0.41   |                                |   | 0.44   |  |      | 0.36   |  |   | 0.47  
|DD&A per BOE (oil and gas properties) |  |                                 | 8.45   |                                |   | 6.89   |  |      | 8.45   |  |   | 7.06  

---

|(1) | 2005 amounts represent volumes presented on a basis consistent with 2006. See Note 2.
|--- | -------------------------------------------------------------------------------------

|(2) | In 2005 gas revenues included amounts attributable to buy-sell contracts related to our thermal recovery operations in California and associated costs were included in steam gas costs. As a
result of our adoption of EITF 04-13 effective January 1, 2006, in 2006 certain costs associated with such contracts are reflected as a reduction in gas revenues and the associated volumes are not included in sales volumes. Amounts per BOE
reflected in the foregoing table are based on production volumes for 2005 and sales volumes for 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|                                               |  |                                  |         |   |                                 |   |          |      |  |   |         |   |  |   |          |  
|---------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | - | -------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                               |  | Three Months Ended September 30, |         |   | Nine Months Ended September 30, |  
|                                               |  | 2006                             |         |   | 2005                            |   |          | 2006 |  |   | 2005    |  
|Contracts accounted for using hedge accounting |  |                                  |         |   |                                 |   |          |      |  |   |         |   |  |   |          |  
|Oil revenues                                   |  | $                                | -       |   |                                 | $ | -        |      |  | $ | -       |   |  | $ | (53,044  | )
|Gas revenues                                   |  |                                  | -       |   |                                 |   | (1,372   | )    |  |   | -       |   |  |   | (3,729   | )
|Steam gas costs                                |  |                                  | -       |   |                                 |   | 2,327    |      |  |   | -       |   |  |   | 5,534    |  
|Mark-to-market contracts                       |  |                                  |         |   |                                 |   |          |      |  |   |         |   |  |   |          |  
|Oil sales                                      |  |                                  | (22,583 | ) |                                 |   | (101,395 | )    |  |   | (67,013 | ) |  |   | (189,259 | )
|Gas purchases                                  |  |                                  | (2,880  | ) |                                 |   | -        |      |  |   | (8,545  | ) |  |   | -        |  

Comparison of Three Months Ended September 30, 2006 to Three Months Ended September 30, 2005

Oil and gas revenues.    Oil and gas revenues increased $18.6 million, to $280.6 million for 2006 from $262.0 million for 2005. The
increase is primarily due to higher realized prices.

Oil revenues excluding the effects of hedging, increased $46.9 million to $290.4 million for 2006
from $243.5 million for 2005 reflecting higher realized prices ($32.3 million) and higher sales volumes ($14.6 million). Our average realized price for oil increased $6.98 to $59.51 per Bbl for 2006 from $52.53 per Bbl for 2005. The
increase is primarily attributable to an improvement in the NYMEX oil price, which averaged $70.54 per Bbl in 2006 versus $63.16 per Bbl in 2005. Oil sales volumes increased to 53.0 MBbls per day in 2006 from 50.4 MBbls per day
in 2005.

Hedging had the effect of decreasing our oil revenues by $36.5 million, or $7.49 per Bbl in 2006 compared to $25.7 million or $5.55 per Bbl
in 2005. The 2006 amount represents the deferred losses related to 2006 swaps that were terminated in 2005. These losses were deferred in OCI and are being recognized as a noncash reduction to oil revenues as the hedged production is sold.

Gas revenues excluding the effects of hedging, decreased $18.5 million to $26.7 million in 2006 from $45.2 million in 2005 due to decreased sales
volumes ($4.4 million), a decrease in revenues due to a change in the presentation of certain costs related to buy-sell contracts ($8.6 million) and lower realized prices ($5.5 million). Gas revenues for 2005 include $8.6 million
attributable to buy-sell contracts related to our thermal recovery operations in California. As a result of our adoption of EITF 04-13 effective January 1, 2006 (see Note 1 to the condensed consolidated financial statements), in 2006 certain
costs associated with such contracts are reflected as a reduction in gas revenues. Our average realized price for gas was $6.38 per Mcf in 2006 compared to $7.37 per Mcf in 2005. Hedging had the effect of decreasing our 2005 gas revenues
by $1.0 million, or $0.28 per Mcf. Gas sales volumes decreased from 53.0 MMcf per day in 2005 to 45.5 MMcf per day in 2006.

Lease operating
expenses.    Lease operating expenses increased $14.1 million, to $50.4 million in 2006 from $36.3 million in 2005. The increase is primarily attributable to increased labor costs, general cost increases from
service providers and higher expenditures for repairs and maintenance and well workovers. On a per unit basis, lease operating expenses increased to $9.03 per BOE in 2006 versus $6.41 per BOE in 2005 primarily due to the increased costs.

Steam gas costs.    Steam gas costs decreased $2.2 million, to $15.7 million in 2006 from $17.9 million in 2005. Steam gas
costs for 2005 include certain costs ($8.6 million) attributable to buy-sell contracts



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that after the adoption of EITF 04-13 would be included in gas revenues. On a basis comparable to 2006, 2005 steam gas costs would have been $9.3 million, or $1.65 per
BOE, compared to $15.7 million, or $2.82 per BOE, in 2006, primarily reflecting the increased steam volumes partially offset by a decrease in the cost of natural gas used in the process.

Electricity.    Electricity increased $1.1 million, to $10.0 million in 2006 from $8.9 million in 2005, primarily reflecting higher cost for purchased electricity. On a per unit basis,
electricity increased to $1.79 per BOE in 2006 versus $1.58 per BOE in 2005.

Production and ad valorem
taxes.    Production and ad valorem taxes increased $1.9 million, to $7.0 million in 2006 from $5.1 million in 2005 primarily reflecting the effect of increased oil prices.

General and administrative expense.    G&A expense decreased $21.3 million, to $31.5 million in 2006 from $52.8 million in 2005.
G&A expense, excluding amounts attributable to stock based compensation, was $18.3 million in 2006 compared to $12.6 million in 2005. The increase primarily reflects increased contributions, aircraft costs and compensation costs. Stock
based compensation expense was $13.2 million in 2006 compared to $40.1 million in 2005. Stock based compensation costs for 2006 includes approximately $2 million related to officer resignations and organizational changes. Stock based
compensation costs for 2005 includes approximately $19 million related to restricted stock units that vested based on the performance of our common stock. Excluding such amounts, stock-based compensation expense was approximately
$11 million in 2006 compared to approximately $21 million in 2005. The decrease in 2006 primarily reflects lower expense for SARs which fluctuates with changes in our stock price and other factors that impact fair value.

G&A expense does not include amounts capitalized as part of our acquisition, exploration and development activities. Capitalized costs were $6.1 million in 2006 compared
to $6.4 million in 2005.

Depreciation, depletion and amortization, or DD&A.    DD&A expense increased $10.2 million, to
$50.8 million in 2006 from $40.6 million in 2005. Approximately $9.8 million of the increase was attributable to our oil and gas DD&A, primarily due to a higher per unit rate. Our oil and gas unit of production rate increased to
$8.45 per BOE in 2006 compared to $6.89 per BOE in 2005. The increase primarily reflects the effect of property acquisitions, higher future development costs and 2005 capital costs for which there were no immediate reserve additions.

Accretion expense.    Accretion expense increased $0.7 million, to $2.6 million in 2006 from $1.9 million in 2005, primarily
reflecting higher estimated future costs of our abandonment obligations. See Company Overview  Property Divestitures.

Gain on sale of oil and gas
properties.    On September 29, 2006 we closed on the sale of oil and gas properties to subsidiaries of Occidental and recognized a $345.5 million pre-tax gain.

Interest expense.    Interest expense increased $7.7 million, to $22.2 million in 2006 from $14.5 million in 2005 primarily due to higher
interest rates and higher interest costs related to certain of our derivative transactions. Interest expense does not include interest capitalized on oil and gas properties not subject to amortization. We capitalized $2.6 million and
$0.8 million of interest in 2006 and 2005, respectively.

Gain (loss) on mark-to-market derivative contracts.    We do not use hedge
accounting for certain of our derivative instruments, because the derivatives do not qualify or we have elected not to use hedge accounting. Consequently, these derivative contracts are marked-to-market each quarter with fair value gains and losses,
both realized and unrealized, recognized currently as a gain or loss on



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mark-to-market derivative contracts on the income statement. Cash flow is only impacted to the extent the actual settlements under the contracts result in making or
receiving a payment from the counterparty.

As discussed in Company Overview  Derivative Instruments and Hedging, in the second quarter of 2006 we executed a
series of offsetting contracts to eliminate all of our crude oil price collars. As a result, our only derivative instruments in the third quarter of 2006 were crude oil put option contracts and natural gas call option contracts. We recognized a
$12.3 million gain related to these mark-to-market derivative contracts. Cash payments related to contracts that settled in 2006 totaled $25.5 million. In 2005 we recognized a loss on mark-to-market derivative contracts, consisting primarily of
crude oil price collars, of $141.6 million. Cash payments related to contracts that settled in 2005 totaled $101.4 million.

Income
taxes.    During interim periods income tax expense is generally based on the estimated effective income tax rate that is expected for the entire year. Variances in our estimated annual effective tax rate from the 35% federal
statutory rate primarily result from the effect of state income taxes, changes in the estimated California apportionment factor, estimated permanent differences primarily reflecting expenses that are not deductible because of IRS limitations and, in
2005, the beneficial effect of certain tax credits related to our enhanced oil recovery operations in California. At September 30, 2006 our estimated 2006 annual effective tax rate was approximately 39% and at September 30, 2005
our estimated 2005 annual effective tax rate was approximately 38%.

At September 30, 2006 our estimated annual effective current tax rate was approximately 16%
compared to 0.4% at September 30, 2005. The 2006 rate reflects the effects of the property divestitures, debt retirement and derivative instrument transactions discussed in Company Overview.

Comparison of Nine Months Ended September 30, 2006 to Nine Months Ended September 30, 2005

Oil and gas revenues.    Oil and gas revenues increased $141.0 million, to $808.7 million for 2006 from $667.7 million for 2005 primarily due to higher realized prices.

Oil revenues excluding the effects of hedging, increased $198.4 million to $828.5 million for 2006 from $630.1 million for 2005 reflecting higher realized prices
($162.4 million) and higher sales volumes ($36.0 million). Our average realized price for oil increased $11.77 to $57.46 per Bbl for 2006 from $45.69 per Bbl for 2005. The increase is primarily attributable to an improvement in the NYMEX
oil price, which averaged $68.25 per Bbl in 2006 versus $55.45 per Bbl in 2005. Oil sales volumes increased 2.3 MBbls per day to 52.8 MBbls in 2006 from 50.5 MBbls per day in 2005.

Hedging had the effect of decreasing our oil revenues by $109.6 million, or $7.60 per Bbl in 2006 compared to $115.0 million or $8.34 per Bbl in 2005. The 2006
amount represents the deferred losses related to 2006 swaps that were terminated in 2005. These losses were deferred in OCI and are being recognized as a noncash reduction to oil revenues as the hedged production is sold.

Gas revenues, excluding the effects of hedging, decreased $63.7 million to $89.9 million in 2006 from $153.6 million in 2005 due to decreased sales volumes
($43.7 million) and a decrease in revenues due to a change in the presentation of certain costs related to buy-sell contracts ($24.7 million), partially offset by higher realized prices ($4.7 million). Gas revenues for 2005 include
$24.7 million attributable to buy-sell contracts related to our thermal recovery operations in California. As a result of our adoption of EITF 04-13 effective January 1, 2006 (see Note 1 to the condensed consolidated financial statements),
in 2006 certain costs associated with such contracts are reflected as a reduction in gas revenues. Our average realized price for gas was $6.71 per Mcf in 2006 compared to $6.43 per Mcf in 2005.



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Gas sales volumes decreased from 72.9 MMcf per day in 2005 to 49.1 MMcf per day in 2006 primarily due to the
sale of our properties in East Texas and Oklahoma in the second quarter of 2005.

Lease operating expenses.    Lease operating expenses
increased $31.8 million, to $137.3 million in 2006 from $105.5 million in 2005. The increase is primarily attributable to increased labor costs, general cost increases from service providers and higher expenditures for repairs and
maintenance and well workovers. On a per unit basis, lease operating expenses increased to $8.24 per BOE in 2006 versus $5.93 per BOE in 2005 due to lower volumes and increased costs.

Steam gas costs.    Steam gas costs decreased $9.7 million, to $41.3 million in 2006 from $51.0 million in 2005. Steam gas costs for 2005
include certain costs ($24.7 million) attributable to buy-sell contracts that after the adoption of EITF 04-13 would be included in gas revenues. On a basis comparable to 2006, 2005 steam gas costs would have been $26.3 million, or $1.48 per BOE,
compared to $41.3 million, or $2.48 per BOE, in 2006, primarily reflecting higher steam volumes partially offset by a decrease in the cost of natural gas used in the process.

Electricity.    Electricity increased $5.1 million, to $28.8 million in 2006 from $23.7 million in 2005, primarily reflecting higher cost for purchased electricity. On a per unit basis,
electricity increased to $1.73 per BOE in 2006 versus $1.33 per BOE in 2005.

Production and ad valorem
taxes.    Production and ad valorem taxes increased $1.4 million, to $19.8 million in 2006 from $18.4 million in 2005 primarily reflecting the effect of increased oil and gas prices partially offset by the
effect of the properties sold in the second quarter of 2005.

Gathering and transportation expenses.    Gathering and transportation
expenses decreased $2.5 million, to $5.9 million in 2006 from $8.4 million in 2005 primarily reflecting the properties sold in the second quarter of 2005.

General and administrative expense.    G&A expense decreased $16.1 million, to $92.5 million in 2006 from $108.6 million in 2005. G&A expense, excluding amounts attributable to stock based
compensation, was $50.4 million in 2006 compared to $35.9 million in 2005. The 2006 expense includes $2.9 million related to officer resignations and organizational changes. The remainder of the increase primarily reflects increased
compensation costs, aircraft costs and contributions. Stock based compensation expense was $42.1 million in 2006 compared to $72.8 million in 2005. Stock based compensation costs for 2006 includes approximately $11 million related to
officer resignations and organizational changes. Stock based compensation costs for 2005 includes approximately $19 million related to restricted stock units that vested based on the performance of our common stock. Excluding such amounts,
stock-based compensation expense was approximately $31 million in 2006 compared to approximately $54 million in 2005. The decrease in 2006 primarily reflects lower expense for SARs which fluctuates with changes in our stock price and other
factors that impact fair value.

G&A expense does not include amounts capitalized as part of our acquisition, exploration and development activities. Capitalized
costs increased to $22.0 million in 2006 compared to $17.2 million in 2005, primarily reflecting increased costs.

Depreciation, depletion and
amortization, or DD&A.    DD&A expense increased $21.5 million, to $151.5 million in 2006 from $130.0 million in 2005. Approximately $20 million of the increase was attributable to our oil and gas
DD&A, primarily due to a higher per unit rate. Our oil and gas unit of production rate increased to $8.45 per BOE in 2006 compared to $7.06 per BOE in 2005. The increase primarily reflects the effect of property acquisitions, higher future
development costs and 2005 capital costs for which there were no immediate reserve additions.



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Accretion expense.    Accretion expense increased $1.9 million, to $7.5 million in 2006 from
$5.6 million in 2005, primarily reflecting higher estimated future costs of our abandonment obligations.

Gain on sale of oil and gas
properties.    On September 29, 2006 we closed on the sale of oil and gas properties to subsidiaries of Occidental and recognized a $345.5 million pre-tax gain. See Company Overview  Property Divestitures.

Interest expense.    Interest expense increased $17.2 million, to $57.2 million in 2006 from $40.0 million in 2005
primarily due to higher outstanding debt and higher interest rates and higher interest costs related to certain of our derivative transactions. Interest expense does not include interest capitalized on oil and gas properties not subject to
amortization. We capitalized $6.5 million and $2.1 million of interest in 2006 and 2005, respectively.

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

As a result of the significant increase in oil prices, we recognized
a $299.9 million loss related to mark-to-market derivative contracts in 2006. Cash payments related to these contracts that settled in 2006 totaled $75.6 million. In 2005 we recognized a loss on mark-to-market derivative contracts of
$629.6 million. Cash payments related to these contracts that settled in 2005 totaled $189.3 million. In addition, in 2005 we paid $145.4 million in connection with the elimination of our 2006 collars.

Gain on termination of merger agreement.    On April 24, 2006 we announced that we had entered into a definitive agreement to acquire Stone in
a stock-for-stock transaction. On June 22, 2006 the agreement was terminated by Stone in order for Stone to enter into a merger agreement with another company. In connection with the termination of the merger agreement we received a
termination fee of $43.5 million. The gain recognized in 2006 reflects the termination fee net of certain merger related costs incurred by the Company.

Income
taxes.    During interim periods income tax expense is generally based on the estimated effective income tax rate that is expected for the entire year. Variances in our estimated annual effective tax rate from the 35% federal
statutory rate primarily result from the effect of state income taxes, changes in the estimated California apportionment factor, estimated permanent differences primarily reflecting expenses that are not deductible because of IRS limitations and, in
2005, the beneficial effect of certain tax credits related to our enhanced oil recovery operations in California. At September 30, 2006 our estimated 2006 annual effective tax rate was approximately 39% and at September 30, 2005
our estimated 2005 annual effective tax rate was approximately 38%.

At September 30, 2006 our estimated annual effective current tax rate was approximately 16%
compared to 0.4% at September 30, 2005. The 2006 rate reflects the effects of the property divestitures, debt retirement and derivative instrument transactions discussed in Company Overview.

Liquidity and Capital Resources

In September 2006 and November 2006 we completed
property sales transactions that generated $1.6 billion of cash proceeds. We used the proceeds to repay the balance outstanding on our senior revolving credit facility and short-term credit facility, redeem all $250 million outstanding principal of
our



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7.125% Senior Notes, purchase $274.9 million of the $275 million outstanding principal of our 8.75% Senior Subordinated Notes, and settle the $605 million
liability associated with our 2007 and 2008 crude oil collars. Following these transactions, the Company will have no outstanding long-term or short-term debt. See Company Overview for a more complete discussion of these transactions.

Our primary sources of liquidity are cash generated from our operations and our revolving credit facility. At September 30, 2006 we had approximately $739 million
of availability under our revolving credit facility. We have made and will continue to make substantial capital expenditures for the acquisition, exploitation, development, exploration and production of oil and gas. As of September 30, 2006 we
had remaining expenditures of approximately $136 million under our $610 million capital budget for 2006, a 2007 capital budget of approximately $600 million and approximately $399 million remaining authorization under our stock repurchase
program. We believe that we have sufficient liquidity through our cash from operations and borrowing capacity under our revolving credit facility to meet our short-term and long-term normal recurring operating needs, derivative obligations, debt
service obligations, expenditures under our stock repurchase program, contingencies and anticipated capital expenditures.

Our cash flows depend on many factors,
including the price of oil and gas, the success of our acquisition and drilling activities and the operational performance of our producing properties. We use derivative instruments to manage our commodity price risk. This practice may prevent us
from receiving the full advantage of increases in oil or gas prices above the maximum fixed amount specified in the derivative agreement. The level of derivative activity depends on our view of market conditions, available derivative prices and our
operating strategy. In addition, the majority of our capital expenditures and expenditures under our stock repurchase program are discretionary and could be curtailed if our cash flows declined from expected levels.

Cash Flows



|                            |  |                                 |        |   |      |   |        |  
|--------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                            |  | Nine Months Ended September 30, |       
|                            |  | 2006                            |        |   | 2005 |  
|                            |  | (in millions)                   |       
|Cash provided by (used in): |  |                                 |        |   |      |   |        |  
|Operating activities        |  | $                               | 620.1  |   |      | $ | 288.2  |  
|Investing activities        |  |                                 | 318.0  |   |      |   | (53.8  | )
|Financing activities        |  |                                 | (397.4 | ) |      |   | (234.6 | )

Net cash provided by operating activities was $620.1 million in 2006 compared to $288.2 million in 2005. The increase
in net cash provided by operating activities in 2006 is primarily a result of increased oil and gas prices, the proceeds from the termination of the merger agreement with Stone and the effect in 2005 of a $147.3 million payment to eliminate our 2006
oil price swaps. As discussed below, certain of our derivative cash payments are classified as financing or investing activities.

Net cash provided by investing
activities was $318.0 million in 2006 primarily reflecting the $850.4 million proceeds, net of related costs and expenses, from the sale of oil and gas properties to Occidental, partially offset by additions to oil and gas properties of
$456.8 million and derivative settlements of $68.2 million. Net cash used in investing activities was $53.8 million in 2005 primarily reflecting property sales proceeds of $343.1 million partially offset by additions to oil and gas
properties of $393.4 million. Derivative settlements related to derivatives that have not been qualified for hedge accounting and do not contain a significant financing element are reflected as investing activities.

Net cash used in financing activities in 2006 was $397.4 million, primarily reflecting $272.0 million in net repayments under our revolving credit facilities, the
payment of $100.8 million to purchase treasury



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##### Table of Contents

stock and the payment of $28.6 million in financing derivative settlements. Net cash used in financing activities in 2005 was $234.6 million, primarily
reflecting $128.5 million in net borrowings under our senior revolving credit facilities and the payment of $364.9 million in financing derivative settlements. Under SFAS 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities, certain of our derivatives are deemed to contain a significant financing element and cash settlements with respect to such derivatives are required to be reflected as financing activities.

Stock Repurchase Program

Our Board of Directors has authorized the repurchase of up to
$500 million of our common stock. The shares will be repurchased from time to time in open market transactions or privately negotiated transactions at our discretion, subject to market conditions and other factors. In the third quarter of 2006 we
repurchased 2,461,900 common shares at a cost of $100.8 million.

Stock Appreciation Rights

We incur cash expenditures upon the exercise of SARs, but our common shares outstanding do not increase. At September 30, 2006 we had approximately 2.5 million SARs outstanding of which 1.6 million were
vested. If all of the vested SARs were exercised, based on $42.91, the price of our common stock as of September 30, 2006, we would pay $51.7 million to holders of the SARs. In the first nine months of 2006 we made cash payments of
$10.4 million for SARs that were exercised during that period.

Commitments and Contingencies

Contractual obligations. In March 2006 we entered into an operating lease with respect to an aircraft under the terms of which we will be required to make lease
payments as follows: 2006 - $2.3 million, 2007 and 2008 - $6.1 million, 2009 and 2010 - $6.1 million and thereafter - $16.0 million.

Critical
Accounting Policies and Factors that May Affect Future Results

Based on the accounting policies that we have in place, certain factors may impact our future
financial results. Critical accounting policies related to commodity pricing and risk management activities, write-downs under full cost ceiling test rules, oil and gas reserves, stock based compensation and goodwill are discussed in our Annual
Report on Form 10-K for the year ended December 31, 2005.

Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS 155 which eliminates the exemption from applying SFAS No. 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of
the form of the instruments. SFAS 155 also allows the election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event. Adoption is effective for all financial
instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS 155 is not expected to have a material effect on our consolidated financial
position, results of operations or cash flows.

In March 2006, the FASB issued SFAS 156 which requires all separately recognized servicing assets and servicing
liabilities be initially measured at fair value. SFAS 156 permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Adoption is required as of the beginning of the first fiscal year that
begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS 156 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.



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##### Table of Contents

In June 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (an interpretation
of FASB Statement No. 109) which is effective for fiscal years beginning after December 15, 2006 with earlier adoption encouraged. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in
the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We are currently evaluating the
potential impact of this interpretation.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements which is effective for fiscal years
beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. We are currently evaluating the
potential impact of this statement.

In September 2006, the FASB issued FASB Staff Position AUG AIR-1, Accounting for Planned Major Maintenance
Activities which is effective for fiscal years beginning after December 15, 2006. This position statement eliminates the accrue-in-advance method of accounting for planned major maintenance activities. We do not expect this pronouncement
to have a significant impact on our consolidated financial position, results of operations or cash flows.

In September 2006, the SEC Staff issued Staff Accounting
Bulletin No. 108 (SAB No. 108), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, in an effort to address diversity in the accounting practice
of quantifying misstatements and the potential for improper amounts on the balance sheet. Prior to the issuance of SAB No. 108, the two methods used for quantifying the effects of financial statement errors were the roll-over and
iron curtain methods. Under the roll-over method, the primary focus is the income statement, including the reversing effect of prior year misstatements. The criticism of this method is that misstatements can accumulate on the
balance sheet. The iron curtain method focuses on the effect of correcting the ending balance sheet, with less importance on the reversing effects of prior year errors in the income statement. SAB No. 108 establishes a dual
approach which requires the quantification of the effect of financial statement errors on each financial statement, as well as related disclosures. Public companies are required to record the cumulative effect of initially adopting the
dual approach method in the first year ending after November 16, 2006 by recording any necessary corrections to asset and liability balances with an offsetting adjustment to the opening balance of retained earnings. The use of this
cumulative effect transition method also requires detailed disclosures of the nature and amount of each error being corrected and how and when they arose. We are currently evaluating the impact that SAB No. 108 may have on our consolidated
financial position, results of operations or cash flows.



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##### Table of Contents

Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking information regarding Plains Exploration & Production Company that is intended to be covered by the safe harbor for forward-looking statements provided by the
Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as will, would, should,
plans, likely, expects, anticipates, intends, believes, estimates, thinks, may, and similar expressions, are forward-looking statements.
Although we believe that our expectations are based on reasonable assumptions, there are risks, uncertainties and other factors that could cause actual results to be materially different from those in the forward-looking statements. These factors
include, among other things:



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



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



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



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



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



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



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



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



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



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



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



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

All
forward-looking statements in this report are made as of the date hereof, and you should not place undue reliance on these statements without also considering the risks and uncertainties associated with these statements and our business that are
discussed in this report and our other filings with the SEC. Moreover, although we believe the expectations reflected in the forward-looking statements are based upon reasonable assumptions, we can give no assurance that we will attain these
expectations or that any deviations will not be material. Except for any obligation to disclose material information under the Federal securities laws, we do not intend to update these forward-looking statements and information. See Item 1A
 Risk Factors and Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations  Critical Accounting Policies and Factors That May Affect Future Results in our
Annual Report on Form 10-K for the year ended December 31, 2005 for additional discussions of risks and uncertainties.



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##### Table of Contents

Item 3  Quantitative and Qualitative Disclosures About Market Risks

Commodity Price Risk

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

See Note 4
to the Consolidated Financial Statements  Derivative Instruments and Hedging Activities for a discussion of our derivative activities.

At
December 31, 2005 we had collars on 22,000 barrels of oil per day for all of 2007 and 2008 with a floor price of $25.00 and an average ceiling price of $34.76. In April 2006, we executed a series of offsetting contracts to eliminate all of
these crude oil price collars at a pre-tax cost of approximately $593 million. This amount represents the fair value of the collars on the date we entered into the offsetting positions. Since the collars were not designated as a hedge, such amount
has been recognized in our income statement as a loss on mark-to-market derivative contracts ($170 million in 2006 and $423 million in prior periods).

On
October 31, 2006 and November 2, 2006, we made payments totaling $605.0 million to settle the collars. The $11.8 million in excess of the fair value on the date we entered into the offsetting positions is recognized in
our income statement as interest expense.

At September 30, 2006 we had the following open commodity derivative positions, none of which were designated as
hedging instruments:



|                              |  |                 |  |               |  |                     |  |      
|----------------------------- |  | --------------- |  | ------------- |  | ------------------- |  | -----
|Period                        |  | Instrument Type |  | Daily Volumes |  | Average Price       |  | Index
|Sales of Crude Oil Production |  |                 |  |               |  |                    
|2006                          |  |                 |  |               |  |                     |  |      
|Oct - Dec                     |  | Put options     |  | 50,000 Bbls   |  | $55.00 Strike price |  | WTI  
|2007                          |  |                 |  |               |  |                     |  |      
|Jan - Dec                     |  | Put options     |  | 50,000 Bbls   |  | $55.00 Strike price |  | WTI  
|2008                          |  |                 |  |               |  |                     |  |      
|Jan - Dec                     |  | Put options     |  | 42,000 Bbls   |  | $55.00 Strike price |  | WTI  
|Purchases of Natural Gas      |  |                 |  |               |  |                    
|2006                          |  |                 |  |               |  |                     |  |      
|Oct - Dec                     |  | Call options    |  | 30,000 MMBtu  |  | $12.00 Strike price |  | Socal

The average strike price for the put options and call options do not reflect the cost to purchase such options. The crude
oil put options cost an average of $4.91 per barrel for 2006, $5.57 per barrel for 2007 and $3.35 per barrel for 2008. The natural gas call options cost an average of $1.04 per MMBtu. The premiums for the put and call options will be paid when the
options are settled.



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##### Table of Contents

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



|                                                                                         |  |                              |        |   |                              |   |       |  
|---------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---------------------------- | - | ----- | -
|                                                                                         |  | September 30, 2006           |       
|                                                                                         |  | Asset (Liability) Fair Value |        |   | Effect of 10% Price Increase |  
|Crude oil put options and natural gas call options                                       |  | $                            | 54.4   |   |                              | $ | (26.1 | )
|Crude oil collars (1)                                                                    |  |                              | (593.3 | ) |                              |   | -     |  
|                                                                                        
|(1)   Since we have offsetting positions, price changes have no effect on our liability. | 

The fair value of the commodity derivative contracts are estimated based on quoted prices from independent reporting
services compared to the contract price of the agreement, and approximate the gain or loss that would have been realized if the contracts had been closed out at period end. All positions offset physical positions exposed to the cash market. None of
these offsetting physical positions are included in the above table. Price risk sensitivities were calculated by assuming an across-the-board 10% increase 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 cost of our puts and calls is not included in the fair value of derivatives in the foregoing table.

The seven financial institutions that are contract
counterparties for our derivative commodity contracts all have Standard & Poors ratings of A or better and all seven of the financial institutions are participating lenders in our revolving credit facility. At
September 30, 2006 we were in a net liability position with all such counterparties.

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

ITEM 4  Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our
principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) to the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer believe that the disclosure controls and procedures as of September 30, 2006 were effective to ensure that information we are required to disclose in the reports that
we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and (ii) accumulated and communicated to our management, including our
principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

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

Changes in Internal Control Over Financial Reporting

There were no
changes in our internal control over financial reporting during the quarter ended September 30, 2006 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

PART II. OTHER INFORMATION

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

Following is a summary of all repurchases by the Company of its common stock during the three-month period ended September 30, 2006:

Issuer Purchases of Equity Securities



|                        |  |                                  |  |                              |       |                                                                                  |           |                                                                                                              |   |            
|----------------------- |  | -------------------------------- |  | ---------------------------- | ----- | -------------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------------------------------ | - | -----------
|Period                  |  | Total Number of Shares Purchased |  | Average Price Paid per Share |       | Total Number of Shares Purchased As Part of Publicly Announced Plans
or Programs |           | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
|July 1 to July 31, 2006 |  | 2,461,900                        |  | $                            | 40.93 |                                                                                  | 2,461,900 |                                                                                                              | $ | 399,240,000

On December 6, 2005 the Company announced that its Board of Directors had authorized the repurchase of up to $500
million of PXP common stock. The shares will be repurchased from time to time in open market transactions or privately negotiated transactions at the Companys discretion, subject to market conditions and other factors. These shares are the
first shares purchased under this program.

ITEM 6  Exhibits



|            |  |                                                                                                                                                                                                                                                                                                                                                                         
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                             
|            | 
|4.1*        |  | Fifth Supplemental Indenture, dated as of August 21, 2006, to Amended and Restated Indenture dated as of June 18, 2004, among Cane River Development LLC, PXP Deepwater L.L.C., Plains Exploration &
Production Company, the subsidiary guarantors party thereto and JPMorgan Chase Bank, National Association.                                                         
|            | 
|4.2*        |  | Third Supplemental Indenture, dated as of August 21, 2006, to Indenture dated as of June 30, 2004, among Cane River Development LLC, PXP Deepwater L.L.C., Plains Exploration & Production Company,
the subsidiary guarantors party thereto and Wells Fargo Bank, N.A.                                                                                                  
|            | 
|4.3         |  | Second Amendment and Waiver, dated as of September 28, 2006, to Credit Facility dated as of May 16, 2005, among Plains Exploration & Production Company, the lenders party thereto, and JPMorgan
Chase Bank, N.A., as administrative agent for the lenders (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed October 4, 2006).
|            | 
|10.1*       |  | First Amendment to the Plains Exploration & Production Company 2004 Stock Incentive Plan.                                                                                                                                                                                                                                                                               
|            | 
|10.2*       |  | First Amendment to the Plains Exploration & Production Company 2002 Rollover Stock Incentive Plan.                                                                                                                                                                                                                                                                      
|            | 
|10.3*       |  | Second Amendment to the Plains Exploration & Production Company 2002 Stock Incentive Plan.                                                                                                                                                                                                                                                                              



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | 
|10.4        |  | Purchase and Sale Agreement dated as of August 6, 2006, and effective as of October 1, 2006, by and among Plains Exploration & Production Company, PXP Gulf Coast Inc., PXP Texas Limited
Partnership, and Brown PXP Properties, LLC, and Vintage Production California LLC, Occidental of Elk Hills, Inc., Occidental Permian Ltd., Oxy USA Inc., and Occidental International Oil & Gas Ltd. (incorporated by reference to Exhibit 99.2
to the Companys Current Report on Form 8-K filed August 8, 2006).                  
|            | 
|10.5        |  | Amendment to Purchase and Sale Agreement dated as of September 29, 2006, by and among Plains Exploration & Production Company, PXP Gulf Coast Inc., PXP Texas Limited Partnership, Brown
PXP Properties, LLC, PXP Louisiana L.L.C., and PXP Texas, Inc. and Vintage Production California LLC, Occidental of Elk Hills, Inc., Occidental Permian Ltd., Oxy USA Inc. and Occidental International Oil & Gas Ltd. (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed October 4, 2006).
|            | 
|10.6        |  | Purchase and Sale Agreement dated as of September 15, 2006, and effective as of September 1, 2006, between Plains Exploration & Production Company and Statoil Gulf of Mexico LLC
(incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form 8-K filed September 18, 2006).                                                                                                                                                                                                                           
|            | 
|10.7*       |  | Form of Long-Term Retention and Deferral Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 
|10.8*       |  | Form of Restricted Stock Unit Agreement under the 2004 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | 
|10.9*       |  | Form of Plains Stock Appreciation Rights Agreement under the 2004 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 
|10.10*      |  | Form of Restricted Stock Unit Agreement under the 2002 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | 
|10.11*      |  | Form of Plains Stock Appreciation Rights Agreement under the 2002 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 
|31.1*       |  | Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                               
|            | 
|31.2*       |  | Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                               
|            | 
|32.1*       |  | Chief Executive Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                
|            | 
|32.2*       |  | Chief Financial Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                



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

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



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SIGNATURES

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



|                       |  |  |  |                                         |  |                                                                                    |  | 
|---------------------- |  |  |  | --------------------------------------- |  | ---------------------------------------------------------------------------------- |  | 
|                       |  |  |  | PLAINS EXPLORATION & PRODUCTION COMPANY
|Date: November 9, 2006 |  |  |  |                                        
|                       |  |  | 
|                       |  |  |  | By:                                     |  | /s/ Winston M. Talbert                                                            
|                       |  |  |  |                                         |  | Winston M. Talbert                                                                
|                       |  |  |  |                                         |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer)



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EXHIBIT INDEX



|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | 
|4.1*       |  | Fifth Supplemental Indenture, dated as of August 21, 2006, to Amended and Restated Indenture dated as of June 18, 2004, among Cane River Development LLC, PXP Deepwater L.L.C., Plains Exploration &
Production Company, the subsidiary guarantors party thereto and JPMorgan Chase Bank, National Association.                                                                                                                                                                                                               
|           | 
|4.2*       |  | Third Supplemental Indenture, dated as of August 21, 2006, to Indenture dated as of June 30, 2004, among Cane River Development LLC, PXP Deepwater L.L.C., Plains Exploration & Production Company,
the subsidiary guarantors party thereto and Wells Fargo Bank, N.A.                                                                                                                                                                                                                                                        
|           | 
|4.3        |  | Second Amendment and Waiver, dated as of September 28, 2006, to Credit Facility dated as of May 16, 2005, among Plains Exploration & Production Company, the lenders party thereto, and JPMorgan
Chase Bank, N.A., as administrative agent for the lenders (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed October 4, 2006).                                                                                                                                                      
|           | 
|10.1*      |  | First Amendment to the Plains Exploration & Production Company 2004 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | 
|10.2*      |  | First Amendment to the Plains Exploration & Production Company 2002 Rollover Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | 
|10.3*      |  | Second Amendment to the Plains Exploration & Production Company 2002 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | 
|10.4       |  | Purchase and Sale Agreement dated as of August 6, 2006, and effective as of October 1, 2006, by and among Plains Exploration & Production Company, PXP Gulf Coast Inc., PXP Texas Limited
Partnership, and Brown PXP Properties, LLC, and Vintage Production California LLC, Occidental of Elk Hills, Inc., Occidental Permian Ltd., Oxy USA Inc., and Occidental International Oil & Gas Ltd. (incorporated by reference to Exhibit 99.2
to the Companys Current Report on Form 8-K filed August 8, 2006).                  
|           | 
|10.5       |  | Amendment to Purchase and Sale Agreement dated as of September 29, 2006, by and among Plains Exploration & Production Company, PXP Gulf Coast Inc., PXP Texas Limited Partnership, Brown
PXP Properties, LLC, PXP Louisiana L.L.C., and PXP Texas, Inc. and Vintage Production California LLC, Occidental of Elk Hills, Inc., Occidental Permian Ltd., Oxy USA Inc. and Occidental International Oil & Gas Ltd. (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed October 4, 2006).
|           | 
|10.6       |  | Purchase and Sale Agreement dated as of September 15, 2006, and effective as of September 1, 2006, between Plains Exploration & Production Company and Statoil Gulf of Mexico LLC
(incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form 8-K filed September 18, 2006).                                                                                                                                                                                                                           
|           | 
|10.7*      |  | Form of Long-Term Retention and Deferral Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           | 
|10.8*      |  | Form of Restricted Stock Unit Agreement under the 2004 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           | 
|10.9*      |  | Form of Plains Stock Appreciation Rights Agreement under the 2004 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           | 
|10.10*     |  | Form of Restricted Stock Unit Agreement under the 2002 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           | 
|10.11*     |  | Form of Plains Stock Appreciation Rights Agreement under the 2002 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                             



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|           |  |                                                                                                                                               
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                   
|           | 
|31.1*      |  | Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                               
|           | 
|31.2*      |  | Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                               
|           | 
|32.1*      |  | Chief Executive Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|           | 
|32.2*      |  | Chief Financial Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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



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