Pyramid Oil Company (PDO)

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14-Nov-2008 Quarterly Report

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION

Crude oil prices have decreased by approximately $45.20 per barrel as of November 12, 2008, when compared with prices at September 30, 2008.

Management has implemented operational and developmental changes to react to the decline in crude oil prices and the expected decline in earnings. In late October, management postponed the drilling of a planned developmental oil well on one of the Company's existing oil and gas properties until sometime in 2009. This was done in anticipation of additional declines in crude oil values.

Although management expects significant reductions in revenues and earnings in the near future, the Company is financially and operationally positioned to withstand these conditions. The Company has in excess of $4,000,000 in cash and short-term investments (CD's), less than $30,000 in long-term debt and no obligatory capital projects scheduled. Operationally, management has used cash generated by prior months of high oil prices to complete its programs of up-grading Company wells, facilities and equipment.

The Company's Texas joint venture is currently producing natural gas at much smaller rates than previously expected. The consensus opinion of participants on the project is that the well has a skin damage condition (a condition that prevents the entry of gas into the well bore). A small workover and an acid job are being proposed to remedy the problem. Additionally, the participants in the joint venture are currently considering a change in operator on the project.

Management believes there may be new opportunities in this period of declining crude oil values to seek out existing oil and gas production that could be available for acquisition.

The Company's growth during the balance of 2008 will be highly dependant on the success of its operations and capital investments, including the outcome of wells that have not yet been drilled. The Company's future capital investment program may be modified due to exploration and development successes or failures, market conditions and other variables.

15 The production and sales of oil and gas involve many complex processes that are subject to numerous uncertainties, including reservoir risk, mechanical failures, human error and market conditions.

The Company has positioned itself over the past several years to withstand various types of economic uncertainties, with a program of consolidating operations on certain producing properties and concentrating on properties that provide the major revenue sources. The drilling of a new well and several limited workovers of certain wells have allowed the Company to maintain its crude oil reserves for the last three years. The Company expects to maintain its reserve base in 2008 by drilling new wells and routine maintenance of its existing wells.

The Company may be subject to future costs necessary for compliance with the new implementation of air and water environmental quality requirements of the various state and federal governmental agencies. The requirements and costs are unknown at this time, but management believes that costs could be significant in some cases. As the scope of the requirements become more clearly defined, management may be better equipped to determine the true costs to the Company.

The Company continues to absorb the costs for various state and local fees and permits under new environmental programs, the sum of which were not material during 2008 and 2007. The Company retains outside consultants to assist it in maintaining compliance with these regulations. The Company is actively pursuing an ongoing policy of upgrading and restoring older properties to comply with current and proposed environmental regulations. The costs of upgrading and restoring older properties to comply with environmental regulations have not been determined. Management believes that these costs will not have a material adverse effect upon its financial position or results of operations.

Portions of the Quarterly Report, including Management's Discussion and Analysis, contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this release. Such forward-looking statements speak only as of the date of this report and the Company expressly disclaims any obligation to update or revise any forward-looking statements found herein to reflect any changes in Company expectations or results or any change in events. Factors that could cause results to differ materially include, but are not limited to: the timing and extent of changes in commodity prices of oil, gas and electricity, environmental risk, drilling and operational costs, uncertainties about estimates of reserves and government regulations.

16 ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2008 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2007

REVENUES

Oil and gas revenues increased by 71% for the three months ended September 30, 2008 when compared with the same period for 2007. Oil and gas revenues increased by 63% due to higher average crude oil prices for the third quarter of 2008. The average price of the Company's oil and gas for the third quarter of 2008 increased by approximately $40.41 per equivalent barrel when compared to the same period of 2007. Revenues increased by 8% due to higher crude oil production/shipments. The Company's net revenue share of crude oil production/sales increased by approximately 1,400 barrels for the third quarter of 2008. The increase in production/sales volume is due primarily to the drilling of new wells on the Anderson lease and fracturing procedures that were done in the first quarter of 2008.

Gain on Sale of Fixed Assets - The amounts for the three months ended September 30, 2007 reflects a gain on the sale of real property (160 acres of grazing land). The Proceeds from the sale were $448,471 for a gain on the sale of real property before taxes of $440,473.

OPERATING EXPENSES

Operating expenses increased by approximately 31% for the third quarter of 2008. The cost to produce an equivalent barrel of crude oil increased by approximately $5.31 per barrel (total cost of approximately $30.24 per equivalent barrel) for the third quarter of 2008 when compared with the third quarter of 2007. The increase in operating expenses of approximately $131,000 was due to many factors. These include higher costs for down-hole pump repairs, labor, equipment fuel, parts and supplies, equipment rental and insurance.

Down-hole pump repairs increased by approximately 6% due to the replacement of down-hole pumps with more expensive pumps that are more efficient and have better longevity. Labor costs increased by approximately 6% due primarily to an increase in overtime wages and the addition of one full-time and one part- time employee in 2008. Equipment fuel increased by approximately 4% due primarily to the increased per unit costs of gasoline and diesel fuel during the first nine months of 2008. Repair and maintenance parts and supplies increased by approximately 3.5% due to increased levels of repair and maintenance activities. Equipment rental increased by approximately 3% due primarily to the rental of crude oil storage tanks for the new wells that have been drilled in 2007 and 2008 on the Anderson and Santa Fe leases. The Company also rented crude oil storage tanks for the three wells that were fraced in the first quarter of 2008.

17 GENERAL AND ADMINISTRATIVE

General and administrative expenses increased by approximately 12% for the quarter ended September 30, 2008, when compared with the same period for 2007. Legal fees increased by approximately 14% due to services that were rendered for the stock split that was declared on June 5, 2008 (see footnote 7), increased costs for compliance with SEC filings and general corporate matters. Accounting services decreased by 17% for the quarter ended September 30, 2008, due primarily to a decrease in fees for compliance costs associated with Sarbanes-Oxley Section 404, management's report on internal controls over financial reporting. Compensation costs increased by 8% due primarily to an increase in annual salaries that was effective June 1, 2008.

PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION

The provision for depletion, depreciation and amortization increased by 48% for the quarter ended September 30, 2008, when compared with the same period for 2007. The increase is due primarily to a 43% increase in depletion of the Company's oil and gas properties. The increase in depletion is due primarily to an increase in the depletable base of oil and gas properties due to the drilling of three new wells in 2006 and one new well in 2007 and 2008 and higher crude oil production sales during the third quarter of 2008.

ACCRETION EXPENSE

The increase in accretion expense of $49,381 for the quarter ended September 30, 2008, is due primarily to an increase in the Company's liability for asset retirement obligations (ARO). The adjustment to the ARO is due to an increase in the estimated costs associated with the retirement of its oil and gas properties.

OTHER COSTS AND EXPENSES

Other costs and expenses increased by approximately $18,000 for the third quarter of 2008, when compared with the same period for 2007. The increase is due to the retention of an investor relations consultant at a monthly fee of $5,000 that was effective March 12, 2008 (see footnote 12). The remaining increase in costs is due to an increase in the annual listing fees for the American Stock Exchange.

18 RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2007

REVENUES

Oil and gas revenues increased by approximately 84% for the nine months ended September 30, 2008 when compared with the same period for 2007. Oil and gas revenues increased by 78% due to higher average crude oil prices for the nine months ended September 30, 2008. The average price of the Company's oil and gas for the first nine months of 2008 increased by approximately $45.40 per equivalent barrel when compared with the same period for 2007. Revenues increased by 6% due to higher crude oil production/shipments. The Company's net revenue share of crude oil production/sales increased by approximately 2,900 barrels for the nine months ended September 30, 2008. The increase in production/sales volume is due primarily to the drilling of new wells on the Anderson lease and fracturing procedures that were done in the first quarter of 2008.

OPERATING EXPENSES

Operating expenses increased by approximately 21% for the nine months ended September 30, 2008, when compared with the same period for 2007. The cost to produce an equivalent barrel of crude oil increased by approximately $3.30 per barrel (total cost of approximately $26.76 per equivalent barrel) for the nine months ended September 30, 2008. The increase in operating expenses of approximately $244,000 was due to many factors. These include higher costs for down-hole pump repairs, labor, equipment fuel, parts and supplies, equipment rental and insurance. This was offset by lower costs for contract operations and outside services.

Down-hole pump repairs increased by approximately 5% due to the replacement of down-hole pumps with more expensive pumps that are more efficient and have better longevity. Labor costs increased by approximately 5% due primarily to an increase in overtime wages and the addition of one full-time and one part- time employee in 2008. Equipment fuel increased by approximately 3.4% due primarily to the increased per unit costs of gasoline and diesel fuel during the first nine months of 2008. Repair and maintenance parts and supplies increased by approximately 2.6% due to increased levels of repair and maintenance activities. Equipment rental increased by approximately 2.3% due primarily to the rental of crude oil storage tanks for the new wells that have been drilled in 2007 and 2008 on the Anderson and Santa Fe leases. The Company also rented crude oil storage tanks for the three wells that were fraced in the first quarter of 2008. Insurance costs increased by approximately 2% due to higher premiums for workers' compensation and employee medical insurance. Contract operations decreased by approximately 2% due to lower costs for the New York gas properties that were shut-in during the first nine months of 2008. Waste water disposal decreased by approximately 1%.

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EXPLORATION COSTS

In the first quarter of 2008, the Company received a payment, from its joint venture partner, in the amount of $28,812 for its share of certain tangible completion equipment on an exploratory well that had been abandoned in 2006.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses increased by approximately 3% for the nine months ended September 30, 2008, when compared with the same period for 2007. Legal fees increased by approximately 6% due to services that were rendered for the stock split that was declared on June 5, 2008 (see footnote
7), increased costs for compliance with SEC filings and general corporate matters. Accounting services decreased by 2% for the nine months ended September 30, 2008, due primarily to a decrease in fees for compliance costs associated with Sarbanes-Oxley Section 404, management's report on internal controls over financial reporting. Compensation costs decreased by 4% due primarily to the severance award agreement (see footnote 8). The severance award agreement was effective January 9, 2007 and was recorded in the first quarter of 2007.

PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION

The provision for depletion, depreciation and amortization increased by 57% for the nine months ended September 30, 2008, when compared with the same period for 2007. The increase is due primarily to a 52% increase in depletion of the Company's oil and gas properties. The increase in depletion is due primarily to an increase in the depletable base of oil and gas properties due to the drilling of three new wells in 2006 and one new well in 2007 and 2008 and higher crude oil production sales during the first nine months of 2008.

ACCRETION EXPENSE

The increase in accretion expense of $49,881 for the nine months ended September 30, 2008, is due primarily to an increase in the Company's liability for asset retirement obligations (ARO). The adjustment to the ARO is due to an increase in the estimated costs associated with the retirement of its oil and gas properties.

OTHER COSTS AND EXPENSES

Other costs and expenses increased by approximately $70,000 for the nine months ended September 30, 2008, when compared with the same period for 2007. The increase is due to the retention of an investor relations consultant at a monthly fee of $5,000 that was effective March 12, 2008 (see footnote 12). The remaining increase in costs is due to an increase in the annual listing fees for the American Stock Exchange (AMEX) and the payment of a one-time fee to the AMEX for the stock split that was declared on June 5, 2008 (see footnote 7).

20 IMPACT OF CHANGING PRICES

The Company's revenue is affected by crude oil prices paid by the major oil companies. Average crude oil prices for the third quarter of 2008 increased by approximately $40.41 when compared with the same period for 2007. Average crude oil prices for the first nine months of 2008 increased by approximately $45.40 per equivalent barrel when compared with the same period for 2007. At the end of the third quarter of 2008, crude oil prices had increased by approximately $4.35 per barrel when compared with crude oil prices at December 31, 2007.

LIQUIDITY AND CAPITAL RESOURCES

Cash increased by $1,337,637 for the nine months ended September 30, 2008. During the first nine months of 2008, operating activities provided cash of $3,204,561. This was offset by capital expenditures of $1,054,286, purchases of short-term investments of $750,000 and principal payments on long-term debt totaling $21,037 during the first nine months of 2008. See the Statements of Cash Flows for additional detailed information. The Company had available a line of credit of $500,000 and short-term investments of $2,271,080 that could have provided additional liquidity during the first nine months of 2008.