The CYP161C2 (PntM) from Streptomyces arenae is a member of the cytochrome P450 enzymes, which catalyzes the unusual oxidative rearrangement of pentalenolactone F (1) to the sesquiterpenoid antibiotic pentalenolactone (3). On the basis of the crystal structure of PntM bound with substrate, quantum mechanical/molecular mechanics (QM/MM) calculations have been performed to explore the detailed mechanism of PntM-catalyzed oxidative rearrangement. The conversion from pentalenolactone F (1) to pentalenolactone (3) involves the stereo-specific removal of the H-lsi from 1, the syn-1,2-migration of the 2si methyl group, and the antarafacial loss of H-3re. The abstraction of H-lsi by Cpd I is calculated to be rate limiting with an energy barrier of 20.3 kcal/mol, which basically agrees with the estimated free energy barrier from experiments (18.6 kcal/mol). It is the unfavorable geometry of Fe-OH-C1 that blocks the oxygen rebound reaction, and the subsequent intramolecular syn-1,2-methyl migration is accompanied by an electron transfer from the substrate to the porphyrin ring via an Fe-OH group, generating the carbocation intermediate. Owing to the positive charge, the intermediate can easily lose a proton to form the final products. Our calculation results indicate that both the carboxyl group of porphyrin and Fe-OH can act as bases to accept the proton of the substrate. The target product pentalenolactone and the three isomeric byproducts correspond to four different modes of deprotonation.