Accrete Energy Inc.
TSX : GZ

Accrete Energy Inc.

May 15, 2006 18:14 ET

Accrete Energy Inc. Announces First Quarter Results

CALGARY, ALBERTA--(CCNMatthews - May 15, 2006) - Accrete Energy Inc. (TSX:GZ) is pleased to announce the operational and financial results for the three month period ended March 31, 2006.



Quarterly Review

Three Months Three Months
$ Except for production / day, Ended March 31, Ended March 31, %
common shares 2006 2005 Change
------------------------------------------------------------------------
Financial :
Total revenue($) 9,820,781 3,633,360 170
Cash Flow (1)
Total ($) 5,383,344 1,823,311 195
Per share basic 0.35 0.14 150
Net Income
Total ($) 1,583,824 707,153 124
Per share basic 0.10 0.05 100
Per Share diluted 0.10 0.05 100
Common Shares Outstanding 15,232,936 13,232,936 15
Net debt including working
capital 33,257,136 14,642,481 127

Operational ($) :
Sales 9,820,781 3,633,360 170
Royalties 2,566,998 783,851 227
Operating Costs 922,567 419,209 120
---------------------------------------
Net Back (2) 6,331,216 2,430,300 161
---------------------------------------
Net Back/ bbl (2) 31.63 26.75 18
General and Administrative 716,576 606,989 18
General and Administrative/bbl 3.58 6.67 (46)

Volumes :
Natural gas (mcf/d) 8,353 4,281 95
---------------------------------------
Oil (bbl/d) 169 70 141
NGL's (bbl/d) 663 226 193
---------------------------------------
Total Boe/d 2,224 1,010 120
---------------------------------------

Wells Drilled (Gross):
Oil 4 4 -
Gas 3 2 50
D&A - 1 100
---------------------------------------
Total 7 7 -
---------------------------------------
---------------------------------------

Capital Expenditures 10,778,257 10,824,563 -


(1)(2) The terms "Cash Flow and Netback are not recognized measures
under Canadian generally accepted accounting principles. See the
Management Discussion and Analysis for further detail in respect
to non GAAP Definitions.


President's Message


To our Shareholders:

The company continued its mandate of aggressive development in Q1/2006.

We have made significant gains over the equivalent period last year. Total revenue is up 170%, cash flow is up 195% and volumes are up 120%.

After reporting two years of exceptional low finding costs, the Company's mission for 2006 is to convert those reserves to production.

The December 31, 2005 independent reserve evaluation process relied heavily on volumetric analysis. Our technical staff felt confident that our production forecast based on production histories of older wells in our Harmattan pool and offsetting analogous pools represented a more realistic profile. With stabilized production at higher levels than originally expected a capital project was approved to install additional compression in the Harmattan area. This will have a two fold effect in that not only will production increase in this area but overall working interest throughput will increase as well. The project is slated to be operational by late May 2006 with a design capacity of 13MMcf/d which should yield net production of 2400 boe/d net to GZ.

Almost $11 million dollars were spent on capital projects during the quarter. Close to $8.5 million of this was spent on drilling and completions, $1.5 million on land, and $1.0 on tangibles.

At Claresholm, we drilled 3 Sunburst gas wells (1.9 net) and 1 Sunburst oil well (1 net) and at Harmattan, we drilled 3 Cardium oil wells for a success rate of 100%.

The Claresholm wells drilled in the first quarter increased production from that area to approximately 800boe/d net. The Company is reviewing the past winters seismic and drilling programs on the exploration land base and at least one well is slated for the later this year.

The Company strategy of lower risk exploration and exploitation in facility constrained areas has been very rewarding in the past. Consistent with that strategy the Company has recently acquire 3 sections and entered into a 9 section farmin in the Ansell/Minehead area of central Alberta. This is an area in which our technical group has considerable expertise and was able to demonstrate exceptional success while at the predecessor to Accrete. Plans are to drill the initial earning well in early June 2006 which will help to delineate the pool and orient further development drilling for the balance of the year.

In April, we closed the sale of our Boltan property which we had determined no longer met the Company's long-term objectives. This will allow us to redeploy the capital in higher growth prospects.

Our plans are to drill up to 11 wells during the balance of 2006 as well as complete up to 10 additional zones in existing wells with a capital budget of $23 million.

We expect that commodity prices for the remainder of the year will continue to be very volatile and the costs of the goods and services that we consume will continue to rise. Although we cannot control commodity prices, we will continue to execute our plans on in a prudent and efficient manner so as to offset rising costs to the extent possible.

For further information about our Company, please visit our website at www.accrere-energy.com.

Peter M. Salamon

President and Chief Executive Officer


Management Discussion and Analysis

The following discussion and analysis was prepared on May 9, 2006 and is management's assessment of Accrete's historical financial and operating results and should be read in conjunction with the audited financial statements for the year ended December 31, 2005 and the seven month period ended December 31, 2004.

The financial data presented has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). Additional information may be found on the Company's web site at www.accrete-energy.com the 2005 Revised Renewal Annual Information Form which was filed May 3, 2006 and available on the SEDAR web site at www.sedar.ca subsequent to the actual filing.

Accrete's operations to the end of the first quarter of 2006 were concentrated in the Harmattan, Claresholm and Boltan areas of Alberta.

On April 19, 2006, Accrete closed the sale of all of its interests in the Boltan area for gross proceeds of $9.55 million. The effective date of the sale was January 1, 2006. Revenues received and expenditures incurred in 2006 in respect to that area are included in Accrete's results until the closing date and will be accounted for as adjustments to the sale price in accordance with generally accepted accounting principles.

Business Environment

Record commodity pricing prevailed throughout 2005. This was attributable to increasing demand in flourishing new markets, production instability in significant producing areas and the weather. The price of natural gas declined significantly during the 1st quarter of 2006 from the record pricing of the 4th quarter of 2006 as moderate temperatures prevailed and it was feared that supply would significantly outstrip demand. The sales price of oil on the other hand, declined only slightly during the 1st quarter of 2006. AECO-C prices for natural gas averaged $7.48 per MCF over the 1st quarter of 2006 as opposed to $11.61 per MCF for the 4th quarter of 2005. Edmonton par prices for oil averaged $68.88 versus $72.50 for the corresponding periods.

The cost of goods and services used in the industry continued to creep upwards in the face of increased demand.



Financial Information


Net Income Net Income
Total Net (Loss) Basic Diluted
Revenue($) Income($) $/Share $/Share
------------------------------------------------------------------------
2006

First Quarter 9,820,781 1,583,824 0.10 0.10

2005

First Quarter 3,633,360 707,153 0.05 0.05
Second Quarter 2,953,784 (818,297) (0.06) -
Third Quarter 6,057,942 850,334 0.06 0.05
Fourth Quarter 13,199,898 2,546,281 0.17 0.16
Total 25,844,984 3,285,471 0.23 0.21

2004
Second Quarter 197,505 (209,321) (0.03) -
Third Quarter 490,332 (155,719) (0.02) -
Fourth Quarter 872,979 (407,991) (0.02) -
Total 1,560,816 (773,031) (0.07)


The Company commenced operations on June 1, 2004 when it acquired assets under a plan of arrangement entered into by Provident Energy Trust, Provident Energy Ltd., Olympia Energy Inc. and Accrete Energy Inc. Accordingly, the reporting period included only one month of production. Second quarter 2004 production comprised just over 150 BOE/Day of production, split approximately one quarter from Atlee Buffalo and three quarters from Boltan.

Production increased from an average of approximately 150 BOE/Day in the second and third quarters of 2004, to almost 250 BOE/Day for the fourth quarter 2004. This increase in production was brought about by the addition of production from the Claresholm area in mid-October and the Harmattan area at the end of December. The full impact of the increase in production was offset in part by slightly lower prices during the last quarter of 2004.

Production increased to an average of 1,010 BOE/Day for the first quarter of 2005 as a result of having the Claresholm and Harmattan areas on stream for the full quarter. An increase in sales prices of oil and natural gas also contributed to the increase in revenue.

The second quarter of 2005 saw a decrease in production from that which was achieved in the first quarter because third party testing of wells in the Boltan area caused erratic production there, the operator of the processing facilities in Claresholm limited capacity available to the Company and production from one of the strongest wells in the Harmattan area was curtailed due to regulatory issues. Extremely wet weather delayed tie ins and facility expansion plans, particularly at Harmattan. Production averaged 668 BOE/Day vs. 1,010 for the previous quarter. The effect of this was offset in part by an increase in product prices received by the Company. A total of $1,189,235 was charged to stock based compensation costs in the quarter. This included $618,543 that related to prior period stock based compensation for stock options that were approved by the shareholders at their annual meeting that was held during the quarter. The Company issued 2,000,000 shares for proceeds of $7.05 in June 2005 which had an effect on per share numbers.

Production increased to an average of 1,201 BOE/Day for the third quarter as weather improved and tie ins could be completed and regulatory problems were resolved at Harmattan. During the quarter, the Company constructed a gas processing plant at Claresholm that was commissioned in September thus allowing previously shut in wells there to flow. The prices received for oil and gas increased during the quarter resulted from the effects of hurricane activity, increased demand and political instability overseas. All of this resulted in a large increase in revenues.

Production increased to an average of 2,216 BOE/Day for the fourth quarter of 2005. This reflects the effect of a full quarter of production from Claresholm, continued drilling successes at Harmattan and the effect of infrastructure improvements at Boltan. Record prices for natural gas were recorded in December and oil prices remained very strong during the period. All of this resulted in a very large increase in revenues. This was offset in part by increasing operating costs and increases in royalties because of both the price sensitive nature of Crown royalties and a larger proportion of freehold and gross overriding royalty bearing wells.

Production for the first quarter of 2006 remained flat. The Company drilled 7 (5.2) net wells during the period vs. 12 (7.4 net) in the previous period. Of the 7 wells drilled, only 2 were tied in by the end of the quarter due to delays in the field. Oil prices remained strong due to political instability in major overseas producing areas while natural gas prices declined from the previous period due to mild weather and the resultant high storage levels. Since almost two thirds of the Company's production is derived from natural gas, the reduction in the price of natural gas had a significant impact on revenue for the first quarter. The escalation of costs and the scarcity of supply of field services continued to plague the company and indeed the industry as a whole further affecting earnings for the period.



Operational Activities

Production

3 Months 3 Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Oil (bbl/d) 169 70
NGL (bbl/d) 663 226
------------------------------------------------------------------------
Total Oil/NGL (bbl/d) 832 296
Gas (mcf/d) 8,353 4,281
------------------------------------------------------------------------
Total (boe/d) 2,224 1,010
------------------------------------------------------------------------


Natural Gas Production (mcf/d)
3 Months 3 Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo 32 120
Boltan 520 394
Claresholm 3,175 1,155
Harmattan 4,626 2,612
------------------------------------------------------------------------
Total 8,353 4,281
------------------------------------------------------------------------

Crude Oil Sales (bbl/d)
3 Months 3 Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - -
Boltan - -
Claresholm - -
Harmattan 169 70
------------------------------------------------------------------------
Total 169 70
------------------------------------------------------------------------

Natural Gas Liquids Sales (bbl/d)

3 Months 3 Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - -
Boltan 4 2
Claresholm 47 8
Harmattan 612 216
------------------------------------------------------------------------
Total 663 226
------------------------------------------------------------------------


The increase in production levels are a direct result of the Company's drilling activity over the intervening year. At March 31, 2006 five of the seven wells drilled by the Company were not tied in as a result of field delays.



Revenue

Total Sales
($) 3 Months 3 Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Oil 1,015,254 331,738
NGL 2,550,839 687,488
Gas 6,176,938 2,614,134
Processing 77,750 -
------------------------------------------------------------------------
Total 9,820,781 3,633,360
------------------------------------------------------------------------

Natural Gas Sales Revenue
($) 3 Months 3 Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo 23,633 67,937
Boltan 378,418 217,436
Claresholm 2,516,734 773,482
Harmattan 3,258,153 1,555,279
------------------------------------------------------------------------
Total 6,176,938 2,614,134
------------------------------------------------------------------------


Crude Oil Sales Revenue
($) 3 Months 3 Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - -
Boltan - -
Claresholm - -
Harmattan 1,015,254 331,738
------------------------------------------------------------------------
Total 1,015,254 331,738
------------------------------------------------------------------------

Natural Gas Liquids (NGL) Sales Revenue
($) 3 Months 3 Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - -
Boltan 20,369 9,857
Claresholm 284,062 52,812
Harmattan 2,246,408 624,819
------------------------------------------------------------------------
` 2,550,839 687,488
------------------------------------------------------------------------

Processing Revenue
($) 3 Months 3 Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - -
Boltan - -
Claresholm 32,750 -
Harmattan 45,000 -
------------------------------------------------------------------------
Total 77,750 -
------------------------------------------------------------------------


Oil and natural gas sales increased commensurate with the increase in volumes and prices. NGL sales increased because of higher volumes, prices and a higher condensate component.



Product Prices

Natural Gas Prices ($/mcf)
3 Months 3 Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo 8.18 6.29
Boltan 8.08 6.13
Claresholm 8.81 7.44
Harmattan 7.83 6.62
------------------------------------------------------------------------
Average Price 8.22 6.78
------------------------------------------------------------------------

Crude Oil Sales Prices ($/bbl)
3 Months 3 Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - -
Boltan - -
Claresholm - -
Harmattan 66.63 52.36
------------------------------------------------------------------------
Average Price 66.63 52.36
------------------------------------------------------------------------

Natural Gas Liquids (NGL) Sales Prices ($/bbl)
3 Months 3 Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - -
Boltan 58.39 55.36
Claresholm 66.20 74.81
Harmattan 40.87 32.15
------------------------------------------------------------------------
Average Price 42.80 33.84
------------------------------------------------------------------------


Natural gas prices rose during 2005 reaching peak levels by the end of the year. Prices began to fall during the first quarter of 2006 from the record prices received in December 2005 but were still greater than those received during the first quarter of 2005. Claresholm area natural gas is higher in heating content because it includes ethanes and therefore it normally commands a higher price.

Continued strength in world oil prices is reflected in the increased crude oil price realized by Accrete although off slightly from year end levels.

At Harmattan, NGLs comprise a considerable portion of ethanes which are relatively low priced. Claresholm NGL's are higher in pentanes, which command higher prices. NGL's at Boltan comprise a blended product stream.

The Company gleans processing revenue from its facilities at Claresholm and Harmattan that did not exist in 2005.



Royalties

3 Months 3 Months
Ended March Ended March
31, 2006 31, 2005
Area Total $ Rate Total $ Rate
------------------------------------------------------------------------
Atlee-Buffalo 5,935 25% 16,994 25%
Boltan 38,076 10% 17,651 8%
Claresholm 751,895 27% 159,785 19%
Harmattan 1,771,092 27% 589,421 23%
------------------------------------------------------------------------
Total 2,566,998 26% 783,851 22%
------------------------------------------------------------------------


Crown royalties, net of Alberta Royalty Tax Credit, were $2,030,509. Total gross overriding royalties were $415,881 and freehold royalties totaled $120,608. Crown royalties are up generally due to an increase in price because they are price sensitive and because a lower proportion of Accrete's wells have been classified and subject to low productivity well royalty rates. Boltan production enjoys a Deep Gas Crown Royalty Holiday although it is still subject to some overriding royalties. Claresholm and Harmattan royalties are increasing due to increasing Crown rates and increased production from freehold and farm in wells especially at Harmattan.



Production and Transportation Expenses

3 Months 3 Months
Ended March Ended March
($) 31, 2006 31, 2005
------------------------------------------------------------------------
Area $ $/boe $ $/boe
Atlee-Buffalo 4,749 9.87 26,917 14.95
Boltan 124,008 15.21 40,274 6.61
Claresholm 268,853 5.18 52,426 2.91
Harmattan 524,957 3.78 299,592 4.61
------------------------------------------------------------------------
Total 922,567 4.61 419,209 4.61
------------------------------------------------------------------------


The Atlee Buffalo area first quarter 2005 production expenses contained a significant catch up by the operator for 2004 expenses. Atlee Buffalo is a very small part of the overall operation and although operating costs are high, the effect on total expenses is minimal.

Boltan costs reflect ongoing start up costs incurred in connection with the rental compression facility.

Claresholm costs reflect start up costs on new wells and the processing plant.

Less start up costs were incurred in the period at Harmattan as only 2 of 7 wells drilled in the period we tied in and put on stream.

In spite of the Company's efforts to manage costs, some increases will be inevitable as the industry as a whole is challenged by a scarcity of supply of services and increasing prices that result.



Field and Corporate Netbacks

Field Netback
($/boe) 3 Months 3 Months
Ended March Ended March
Area 31, 2006 31, 2005
------------------------------------------------------------------------

Atlee-Buffalo 25.97 13.35
Boltan 29.03 27.80
Claresholm 34.91 34.05
Harmattan 30.56 24.99
------------------------------------------------------------------------
Field Netback 31.63 26.75
------------------------------------------------------------------------

Field net backs basically reflect the effect of higher product prices
offset in part by increasing royalty costs.

Corporate Netback
($) 3 Months 3 Months
Ended March Ended March
Area 31, 2006 31, 2005
------------------------------------------------------------------------
Field Netback 6,331,216 2,430,300
General and Administrative 716,576 606,989
------------------------------------------------------------------------
Corporate Netback 5,614,640 1,823,311
------------------------------------------------------------------------

Corporate netback increased with volumes and prices offset in part by
increases in general and administrative expenses.

General and Administrative Expense
($) 3 Months 3 Months
Ended March Ended March
31, 2006 31, 2005
------------------------------------------------------------------------
Salary & Benefits 521,334 474,892
General Office Expenses 363,497 249,080
------------------------------------------------------------------------
884,831 723,972
Recoveries (168,255) (116,983)
------------------------------------------------------------------------
Total 716,576 606,989
------------------------------------------------------------------------


The Company has increased staffing levels over the past year and now employs 16 people. General office expenses have increased primarily because the rent free period offered by the Company's landlord expired in the second quarter of 2005.

General and administrative expenses are recovered through billings to participants in company operated projects in accordance with standard industry practice. The increase in recoveries relates to the increase in capital expended on capital projects.

Interest Expense

There was no debt outstanding at December 31, 2004. At March 31, 2006, Accrete's bank indebtedness was $23.8 million. Accrete utilized its operating line of credit and cash flow to fund its 2005 capital program. Interest expense of $231,296 was incurred in the first quarter of 2006 as a result.

Stock-Based Compensation

Stock-based compensation is accounted for using the fair value method. Under the fair value method of accounting, this compensation expense is recorded in the earnings statement over the vesting period. In the second quarter of 2005, Accrete recognized options previously disclosed but deemed to be not granted until the Annual General Meeting was held on May 5, 2005. This retroactive granting led to an abnormal period cost, with a large retroactive component to it.

Stock-based compensation costs during the first quarter were $283,659, down from $395,597 in the fourth quarter of 2005.

Depletion Depreciation & Accretion

Depletion, depreciation and accretion of the asset retirement obligation for the three month period ended March 31, 2006 totaled $2,597,000 or $12.97 per boe. Costs of $2,780,000 relating to unproved properties have been excluded from costs subject to depletion for the 3 month period ended March 31, 2006 ($1,440,000 was excluded in the 3 month period ending December 31, 2005).


Income Taxes

The Company is not liable for any cash taxes.

Cash Flow

Cash flow for the three months ended March 31, 2006 was $5,383,344 ($0.35 per share).

Capital Expenditures

Capital expenditures for the three months ending March 31, 2006:



3 Months
Ended
March 31,
2006
-------------
Drilling and Completions 8,453,264
Land 1,431,566
Equipping and Tie-Ins 890,562
Office Equipment 2,865
------------------------------------------------------------------------
Total Cash Expenditures 10,778,257
Allowance for future restoration expenditures 136,242
------------------------------------------------------------------------
Total 10,914,499
------------------------------------------------------------------------


During the first quarter the Company drilled 7 wells (5.2 net) comprising 4 (3.3 net) oil wells and 3 (1.9 net) gas wells. A success rate of 100% was achieved.



Liquidity and Capital Resources

Exploration and development program funding
$
-------------
Cash, Beginning of Year -
Cash flow 5,383,344
Change in non-cash working capital (4,788,887)
Increase in Bank Debt 9,226,129
Deposit on sale of Boltan property 957,671
Cash, end of period -
-------------
Capital expenditures during the period 10,778,257
-------------


Accrete intends to fund its capital expenditure program from internally generated cash flow, debt, and new equity if available on favorable terms.


At March 31, 2006 the Company's credit facility comprises a Revolving Operating Demand Loan facility with a credit limit of $40,000,000.

The underlying borrowing base for this facility was determined by the Bank after the consideration of the sale of the Boltan property.

This facility bears interest at bank prime plus one eighth percent and has no specific terms of repayment aside from the bank's right of demand and periodic review.

The capital intensive nature of the Company's activities may create a negative working capital position from time to time.

On March 16, 2006, the Company entered into an agreement to sell its interests in the Boltan area of Alberta for a total of $9.55 million prior to the purchase price adjustments previously referred to. The effective date of this sale is January 1, 2006. The sale closed on April 19, 2006.

The Company's drilling program is very flexible and can be tailored to available funds. Success in its focus areas means that additional funds will be raised through bank debt or additional share issuances or both to expedite the drilling program. Commodity prices and production volumes have a large impact on the ability of the Company to generate adequate cash flow to meet its obligations. A prolonged decrease in commodity prices would negatively affect cash flow from operations and would also likely result in a reduction in the amount of bank loan available. If the capital expenditure program does not result in sufficient additional reserves and/or production it would likely have a negative impact on the Company's liquidity. A lack of or restricted access to natural gas processing facilities would have a similar effect. A prolonged decrease in commodity prices would also likely affect the availability of funds through the public equity market. See the caption entitled "Risks" for further items that could affect liquidity.

Management expects that the public capital market will remain buoyant and that funds will be readily available. Management also believes that adequate bank financing is and will be available to supplement cash flow to fund its exploitation program. New equity will be used in such funding if available on favourable terms.

Outlook

The Company will continue to focus its development efforts on its acreage at Harmattan and Claresholm with a view to increasing reserves and production.

The Company will continue to seek opportunities in new areas while aggressively developing the core areas discussed in this report.

Critical Accounting Estimates

Oil and Gas Accounting

The Company follows the full-cost method of accounting whereby all costs related to the acquisition, exploration and development of petroleum and natural gas properties, net of government incentives, are capitalized. Such costs include lease acquisition costs, geological and geophysical expenditures, costs of drilling both productive and non-productive wells and related plant and production equipment costs.

Proceeds on disposition of petroleum and natural gas properties are accounted for as a reduction of capitalized costs with no gains or losses recognized unless such disposition results in a change of 20% or more in the depletion rate.

Capitalized costs, together with estimated future capital costs associated with proved reserves are depleted and depreciated using the unit-of-production method based on estimated gross proved reserves of petroleum and natural gas as determined by independent engineers. For purposes of this calculation, reserves and production are converted to equivalent units of oil based on the relative energy content of six thousand cubic feet of natural gas to one barrel of oil. Unproved properties are excluded from the depletion base until it is determined whether proved reserves are attributable to the properties or impairment occurs.

The net amount at which petroleum and natural gas properties are carried is subject to a cost recovery test (the "ceiling test").

Oil and gas assets are evaluated at least annually to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and gas assets. If the carrying value of the oil and gas assets is not assessed to be recoverable, an impairment loss will be recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost or market value unproved properties. The cash flows are estimated using future product prices and costs and are discounted using the risk free rate.

The Company records a liability for the fair value of legal obligations associated with the retirement of long-lived assets in the period in which they are incurred, normally when the asset is purchased or developed. On recognition of the liability, there is a corresponding increase in the carrying amount of the related asset known as the asset retirement cost which is depleted using the unit-of- production method. The liability is adjusted in each reporting period to reflect the passage of time, with the accretion charged to earnings, and for revisions to the estimated future cash flows.

Income Taxes

The determination of the Company's income and other tax liabilities requires interpretation of complex laws and regulations often involving multiple jurisdictions. All tax filings are subject to audit and potential reassessment after a considerable lapse of time. Accordingly, the actual income tax liability may differ significantly from the liability estimated or recorded.

Other Estimates

The accrual method of accounting requires management to incorporate certain estimates, including estimates of revenues, royalties and production costs at a specific reporting date but for which actual revenues and costs have not yet been received; and estimates on capital projects which are in progress or recently completed where actual costs have not been received at a specific reporting date.

The Company ensures that the individuals with the most knowledge of the activity are responsible for the estimate. These estimates are then reviewed for reasonableness and past estimates are compared to actual results in order to make informed decisions on future estimates.

Stock Based Compensation

The Company has not incorporated an estimated forfeiture rate for stock options that will not vest and will account for actual forfeitures as they occur. The fair value of each stock option is determined at each grant date using the Black-Scholes model.

Risks

Accrete, in common with other companies participating in the oil and gas business in Canada, is exposed to a number of business risks. These risks can be categorized as operational, financial and regulatory, with some beyond the Company's control.

Operational risks include finding and developing oil and natural gas reserves on an economic basis, reservoir production performance, commodity marketing risk and the risk that employees and contract services can be hired and retained on a cost effective basis.

Accrete has mitigated these risks to the extent possible by employing a team of highly qualified professionals, providing a compensation scheme that will reward above average performance and by maintaining long term relationships with its suppliers.

Accrete also maintains an insurance program that is consistent with industry practice that should protect against the loss of assets through fire, blowout, pollution and other untoward events and the resultant business interruption.

Accrete maintains an inventory of prospects that are within the scope of the Company's key areas and are strategically diverse so as to minimize the Company's exposure to drilling risk. Furthermore, Accrete employs the latest technological methods in that quest.

Commodity prices and production volumes have a large impact on the ability for the Company to generate adequate cash flow to meet its obligations. A prolonged decrease in commodity prices would negatively affect cash flow from operations and would also likely result in a reduction in the amount of bank loan available. If the capital expenditure program does not result in sufficient additional reserves and/or production it would likely have a negative impact on the Company's liquidity. A lack of, or restricted access to natural gas processing facilities would have a similar effect. A prolonged decrease in commodity prices would also likely affect the availability of funds through the public equity market.

Financial risks include commodity prices, and to some extent, interest rates and the Canadian/US exchange rate. The Company may employ financial instruments, when prudent, to lessen the effects of such risks, but it has no such contracts in place at this time.

Exploration, Development and Production Risks

Oil and natural gas exploration involves a high degree of risk, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. There is no assurance that expenditures made on future exploration by Accrete will result in new discoveries of oil or natural gas in commercial quantities. It is difficult to project the costs of implementing an exploratory drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering various drilling conditions such as over pressured zones and tools lost in the hole, and changes in drilling plans and locations as a result of prior exploratory wells or additional seismic data and interpretations thereof.

The long-term commercial success of Accrete depends on its ability to find, acquire, develop and commercially produce oil and natural gas reserves. No assurance can be given that Accrete will be able to continue to locate satisfactory properties for acquisition or participation. Moreover, if such acquisitions or participations are identified, Accrete may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations uneconomic.

Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions. While diligent well supervision and effective maintenance operations can contribute to maximizing production rates over time, production delays and declines from normal field operating conditions cannot be eliminated, and can be expected to adversely affect revenue and cash flow levels to varying degrees.

In addition, oil and gas operations are subject to the risks of exploration, development and production of oil and natural gas properties, including encountering unexpected formations or pressures, premature declines of reservoirs, blow-outs, cratering, sour gas releases, fires and spills. Losses resulting from the occurrence of any of these risks could have a materially adverse effect on Accrete and its future results of operations, liquidity and financial condition.

Disclosure Controls and Procedures

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure. The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the annual filings, that the Company's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the Company is made known to them by others within those entities. It should be noted that while the Company's Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Non GAAP Definitions

The forgoing contains the term "cash flow from operations" and "netbacks" which should not be considered an alternative to, or more meaningful than cash flow from operating activities as determined in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") as an indicator of the Company's performance. Accrete's definition of cash flow from operations and/or netbacks may not be comparable to that reported by other companies. The reconciliation between income and funds flow may be found in the statement of cash flows in the financial statements. The Company evaluates its performance based on net earnings and cash flow. The Company considers cash flow a key measure as it illustrates the Company's ability to meet obligations necessary to repay debt and fund future growth through capital investment. Cash flow per share is presented in this discussion using the weighted average shares outstanding in a manner consistent with that used to calculate earnings per share.

The reader is cautioned that the use of the term boe's ("barrels of oil equivalent") may be misleading particularly when used in isolation. A boe conversion of 6 mcf to 1 boe may not represent a value equivalency at the wellhead.

As the determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of these financial statements requires the use of estimates and assumptions which have been made using careful judgment. In the opinion of management, the unaudited interim financial statements have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized in the financial statements.

Disclaimers

Some of the statements contained herein including, without limitation, financial and business prospects and financial outlooks may be forward-looking statements which reflect management's expectations regarding future plans and intentions, growth, results of operations, performance and business prospects and opportunities. Words such as "may", "will", "should", "could", "anticipate", "believe", "expect", "intend", "plan", "potential", "continue" and similar expressions have been used to identify these forward-looking statements. These statements reflect management's current beliefs and are based on information currently available to management. Forward-looking statements involve significant risk and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements including, but not limited to, changes in general economic and market conditions and other risk factors. Although the forward-looking statements contained herein are based upon what management believes to be reasonable assumptions, management cannot assure that actual results will be consistent with these forward-looking statements. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances.

Forward-looking statements and other information contained herein concerning the oil and gas industry and Accrete's general expectations concerning this industry are based on estimates prepared by management using data from publicly available industry sources as well as from reserve reports, market research and industry analysis and on assumptions based on data and knowledge of this industry which Accrete believes to be reasonable. However, this data is inherently imprecise, although generally indicative of relative market positions, market shares and performance characteristics. While Accrete is not aware of any misstatements regarding any industry data presented herein, the industry involves risks and uncertainties and is subject to change based on various factors.



Accrete Energy Inc.
Balance Sheets
(Unaudited)

March 31, December 31,
2006 2005
$ $
------------------------------------------------------------------------

ASSETS

Current assets
Accounts receivable 7,070,363 8,220,761
Prepaid expenses 42,472 64,192
------------------------------------------------------------------------
7,112,835 8,284,953
Property and equipment (note 2) 74,399,826 66,082,769
------------------------------------------------------------------------
81,512,661 74,367,722
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities 15,587,986 21,548,992
Deposit - Sale of Boltan Property 957,671 -
Bank indebtedness (note 3) 23,824,314 14,598,185
------------------------------------------------------------------------
40,369,971 36,147,177

Asset retirement obligation (note 5) 1,310,889 1,152,101
Future income tax (note 6) 3,986,797 3,090,924
------------------------------------------------------------------------
45,667,657 40,390,202
------------------------------------------------------------------------

SHAREHOLDERS' EQUITY

Share capital (note 4) 29,617,526 29,617,526
Contributed surplus 2,876,839 2,593,179
Retained Earnings 3,350,639 1,766,815
------------------------------------------------------------------------
35,845,004 33,977,520
------------------------------------------------------------------------
81,512,661 74,367,722
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to financial statements

Approved by the Board of Directors:

"P. Salamon"

"B.Mellum"


Accrete Energy Inc.
Statements of Income and Retained Earnings (Deficit)
(Unaudited)


Three Months Three Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Revenue $ $
Petroleum and natural gas revenue 9,820,781 3,633,360
Royalties (net of Alberta Royalty
Tax Credit) (2,566,998) (783,851)

------------------------------------------------------------------------
7,253,783 2,849,509
------------------------------------------------------------------------

Expenses

Production expenses 827,434 378,232
Transportation expenses 95,133 40,977
General and administrative, net of
recoveries 716,576 606,989
Interest Expense 231,296 -
Stock based compensation cost (note 5) 283,659 152,929
Depletion, depreciation and accretion 2,619,988 929,738
------------------------------------------------------------------------
4,774,086 2,108,865
------------------------------------------------------------------------
Income before income taxes 2,479,697 740,644
Future income taxes (note 7) (895,873) (33,491)
------------------------------------------------------------------------
Net income for the period 1,583,824 707,153
Retained Earnings (Deficit) - beginning
of period 1,766,815 (1,518,656)
------------------------------------------------------------------------
Retained Earnings (Deficit) - end of
period 3,350,639 (811,503)
------------------------------------------------------------------------
------------------------------------------------------------------------
Weighted average number of shares
(note 5) 15,232,936 13,232,936
Income per share:
Basic 0.10 0.05
Diluted 0.10 0.05

See accompanying notes to financial statements


Accrete Energy Inc.
Statements of Cash Flows
(Unaudited)

Three Months Three Months
Ended Ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Cash provided by (used in): $ $
Operating Activities
Net income for the period 1,583,824 707,153
Items not affecting cash:
Stock based compensation cost 283,659 152,929
Future income taxes 895,873 33,491
Depletion, depreciation and accretion 2,619,988 929,738
------------------------------------------------------------------------
5,383,344 1,823,311
Change in non-cash working capital (note 8) (432,434) (2,038,938)
------------------------------------------------------------------------
4,950,910 (215,627)
------------------------------------------------------------------------
Investing Activities
Property and equipment additions (10,778,257) (10,824,563)
Deposit - Sale of Boltan Property 957,671 -
Change in non-cash working capital (note 8) (4,356,453) 4,151,885
------------------------------------------------------------------------
(14,177,039) (6,672,678)
------------------------------------------------------------------------
Financing Activities
Bank Debt 9,226,129 6,348,627
------------------------------------------------------------------------
9,226,129 6,348,627
------------------------------------------------------------------------
Increase (decrease) in cash - 539,678
Cash - beginning of period - (539,678)
------------------------------------------------------------------------
Cash - end of period - -
------------------------------------------------------------------------
------------------------------------------------------------------------

Supplemental Information :
Interest Paid 231,296 -
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to financial statements


Accrete Energy Inc.
Notes to the Financial Statements
For the period ended March 31, 2006
(Unaudited)


1. Significant Accounting Policies

As the determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of these financial statements requires the use of estimates and assumptions which have been made using careful judgement. In the opinion of management, these financial statements have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below.

Accrete Energy Inc. ("Accrete") commenced operations on June 1, 2004 when it acquired assets under a plan of arrangement entered into by Provident Energy Trust, Provident Energy Ltd., Olympia Energy Inc. and Accrete Energy Inc.

Oil and Gas Operations

Revenues from the sale of petroleum and natural gas are recorded when title passes to an external party.

The Company follows the full-cost method of accounting whereby all costs related to the acquisition, exploration and development of petroleum and natural gas properties, net of government incentives, are capitalized. Such costs include lease acquisition costs, geological and geophysical expenditures, costs of drilling both productive and non-productive wells and related plant and production equipment costs.

Proceeds on disposition of petroleum and natural gas properties are accounted for as a reduction of capitalized costs with no gains or losses recognized unless such disposition results in a change of 20% or more in the depletion rate.

Capitalized costs, together with estimated future capital costs associated with proved reserves are depleted and depreciated using the unit-of-production method based on estimated gross proved reserves of petroleum and natural gas as determined by independent engineers. For purposes of this calculation, reserves and production are converted to equivalent units of oil based on the relative energy content of six thousand cubic feet of natural gas to one barrel of oil. Unproved properties are excluded from the depletion base until it is determined whether proved reserves are attributable to the properties or impairment occurs.

Office furniture and fixtures are recorded at cost and are depreciated over their useful lives on a declining balance basis at 20% per annum.

The net amount at which petroleum and natural gas properties are carried is subject to a cost recovery test (the "ceiling test").

Oil and gas assets are evaluated at least annually to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and gas assets. If the carrying value of the oil and gas assets is not assessed to be recoverable, an impairment loss will be recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost or market value of unproved properties. The cash flows are estimated using expected future product prices and costs and are discounted using a risk-free rate of interest.

The Company records a liability for the fair value of legal obligations associated with the retirement of long-lived assets in the period in which they are incurred, normally when the asset is purchased or developed. On recognition of the liability, there is a corresponding increase in the carrying amount of the related asset, known as the asset retirement cost, which is depleted using the unit-of- production method. The liability is adjusted in each reporting period to reflect the passage of time, with the accretion charged to earnings, and for revisions to the estimated future cash flows.

Joint Ventures

A significant portion of the Company's exploration and production activities are conducted jointly with others and the financial statements reflect only the Company's proportionate interest in such activities.

Stock Based Compensation

The Company has an employee stock option plan. The compensation cost in respect of this plan is recognized in the financial statements using the fair market value method and the cost is recognized over the vesting period of the underlying security. The Company has not incorporated an estimated forfeiture rate for stock options that will not vest and will account for actual forfeitures as they occur.

Financial Instruments

The Company may enter into financial instruments and physical delivery commodity contracts from time to time to protect future earnings and cash flows from the potential impact of fluctuating commodity prices and not for speculative purposes. Gains or losses on these contracts will be included in revenues at the time the underlying commodity is sold or when the positions are settled.

To date the Company has not entered into any such agreements.

The carrying values of the Company's monetary assets and liabilities approximate their fair values.

Measurement Uncertainty

Amounts recorded for depreciation and depletion, the provision for asset retirement and abandonment costs and amounts used for ceiling test calculations are based on estimates of oil and natural gas reserves. The Company's reserve estimates are reviewed annually by an independent engineering firm. By their nature, these estimates of reserves and future cash flows are subject to measurement uncertainty, and the impact on the financial statements of future periods could be material.

Per Share Amounts

The Company uses the treasury stock method to determine the dilutive effect of stock options and other dilutive instruments. This method assumes that proceeds received from the exercise of in-the-money stock options and other dilutive instruments are used to purchase common shares at the average market price during the year.

Flow through Shares

The resource expenditure deductions for income tax purposes related to exploratory and development activities funded by flow through share arrangements are renounced to investors in accordance with income tax legislation. Future income tax liabilities and share capital are adjusted by the estimated cost of the renounced income tax deductions when the related flow through expenditures are renounced to investors.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes. Temporary differences arising from the differences between the tax basis of an asset or liability on the balance sheet are used to calculate future income tax assets or liabilities. Future income tax assets or liabilities are calculated using the rates that are anticipated to be in effect in the periods that the temporary differences are expected to reverse.



2. Property and Equipment


As At As at
March 31, December 31,
2006 2005
---------------------------
$ $
---------------------------
Petroleum and natural gas
properties and equipment 82,820,415 71,908,781
Furniture, fixtures and other 113,341 110,476
---------------------------
82,933,756 72,019,257
Less: Accumulated depletion
and depreciation 8,533,930 5,936,488
---------------------------
74,399,826 66,082,769
---------------------------


At March 31, 2006 costs of $2,780,000 ($ 1,440,000 at December 31, 2005) with respect to unproved properties have been excluded from costs subject to depletion. Direct salary costs related to geological and geophysical personnel in the amount of $53,000 have been charged to petroleum and gas properties during the period ($361,000 in fiscal 2005). No other salary or overhead charges have been capitalized.

3. Bank Indebtedness

At March 31, 2006 the Company's credit facility comprises a revolving Operating Demand Loan facility with a credit limit of $40,000,000 that bears interest at bank prime plus one eighth percent.

This facility has no specific terms of repayment aside from the bank's right of demand and periodic review and is secured by a general assignment of book debts, a $50,000,000 debenture with a first floating charge over all assets with a negative pledge and an undertaking to provide fixed charges on the Company's major producing reserves at the request of the bank.

At December 31, 2005 the Company's credit facility comprised:

A Revolving Operating Demand Loan facility with a credit limit of $25,000,000 and

A Non-revolving Acquisition/Development Demand Loan facility with a credit limit of $5,000,000.

The Revolving Operating Demand Loan facility bore interest at bank prime plus one eighth percent and had no specific terms of repayment aside from the bank's right of demand and periodic review.

The Non-revolving Acquisition/Development Demand Loan facility bore interest at bank prime plus one percent and was repayable in monthly installments over the half-life of the reserves being financed and is subject to the bank's right of demand and periodic review.

Both credit facilities were secured by a general assignment of book debts, a $50,000,000 debenture with a first floating charge over all assets with a negative pledge and an undertaking to provide fixed charges on the Company's major producing reserves at the request of the bank.

4. Share Capital

Authorized:

An unlimited number of common voting shares and an unlimited number of preferred shares issuable in series for which the directors may fix, among other things, the rights, privileges, restrictions, conditions, voting rights, rates, method of calculation and dates of payment of dividends and terms of redemption, purchase and conversion if any, and any other provisions.



Issued and outstanding:

Common Voting Shares Number of Amounts
Shares $
------------------------------------------------------------------------
Balance, January 1, 2005 13,232,936 16,594,505
Tax effect of flow through share (858,487)
Issued on private placement 2,000,000 14,500,000
Share issuance costs (net of tax) (618,492)
------------------------------------------------------------------------
Balance, December 31, 2005 15,232,936 29,617,526
------------------------------------------------------------------------
Balance, March 31, 2006 15,232,936 29,617,526
------------------------------------------------------------------------
- basic weighted average 15,232,936
- diluted 16,411,221


The following table reconciles the common shares used in calculating net
earnings per common share:

March 31,
2006 2005
------------------------
Weighted average common voting shares
outstanding - basic
15,232,936 13,232,936
Effect of dilutive stock options
1,178,285 781,693
------------------------
Weighted average common shares
outstanding - diluted
16,411,221 14,014,629
------------------------


Stock Options

Under the terms of the Accrete Energy Inc. 2004 Incentive Stock Option Plan, as amended, (the "plan"), directors, officers, employees and consultants (the "Participant(s)") are eligible to be granted options to purchase common shares. The plan provides for granting up to 1,926,394 common shares.

The maximum number of option shares that may be reserved for issuance to any one Participant under the plan cannot exceed 5% of the issued and outstanding common shares.

The exercise price under the plan is defined by the plan to be the closing price on the principal stock exchange on which the common shares are traded on the last business date preceding the date of grant or if the common shares did not trade on that date, the weighted average price for the five trading days preceding the date of grant.

The vesting of stock options is determined by the board of directors and the term, as also determined by the board of directors cannot exceed five years from the date of grant of such options.

A Participant's entitlement under the plan ceases upon ceasing to be a Participant. If such cessation is involuntary, then the vested and unvested options can be exercised for a period of ninety days after such date. Where a Participant is terminated for cause, the Participant may only exercise those options that have become vested. Where a Participant is terminated by the company without cause, the Participant is entitled to exercise stock options that have vested during the notice period or in the event of compensation being paid in lieu of notice, for 21 days after ceasing to be a Participant.

Options granted under the plan are not assignable and no financial assistance is extended to optionees.

The board of directors is empowered to amend the plan. Any amendment to the plan is subject to the receipt of necessary regulatory approvals and any amendment required by applicable law or regulatory policy to be approved by shareholders does not become effective until so approved.



The following table summarizes information about stock options
outstanding at March 31, 2006:


Weighted Weighted
Average Average
Remaining Number Exercise
Grant Options Contractual Exercisable Price
Price Outstanding Life (Vested) ($/Share)
------------------------------------------------------------------------
$1.00 926,845 3.2 Years 617,896 $1.00
$2.30 40,000 3.6 Years 13,333 $2.30
$2.60 395,000 3.7 Years 131,667 $2.60
$2.89 5,000 3.7 Years 1,667 $2.89
$3.12 40,000 3.7 Years 13,333 $3.12
$4.45 50,000 3.9 years 16,667 $4.45
$7.01 9,000 4.2 years - $7.01
------------------------------------------------------------------------
1,465,845 3.7 Years 794,563 $1.69
------------------------------------------------------------------------


The options granted have a term of five years to expiry. All but the $1.00 stock options vest equally over a three year period commencing on the first anniversary of the date of grant. The $1.00 stock options vest equally over a three year term commencing with the date of grant.

The Company has accounted for its employee stock options granted using the fair value method. The fair value for such options was estimated at the date of grant using a Black-Scholes Option Pricing Model to be $3,873,193 ($2.64 per option granted) This value is charged to stock based compensation cost over the vesting period. A total of $283,659 was charged in the first quarter of 2006. A total of $152,929 was charged in the first quarter 2005.



The following assumptions were used in calculating the fair value:

$1 All
Options Others
-------------------
Volatility factor of expected market price 45% 48%
Weighted average risk-free interest rate (%) 4.5 3.7
Dividend yield (%) - -
Weighted average expected life of options (years) 4 5

5. Asset Retirement Obligation

Asset retirement obligation comprises:

March 31, December 31,
2006 2005
-------------------------
$ $
-------------------------
Liabilities incurred 1,288,343 1,076,730
Accretion expense 22,546 75,371
-------------------------
Balance, end of period 1,310,889 1,152,101
-------------------------


The total future asset retirement obligation was estimated based on the Company's net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows to settle the asset retirement obligation is approximately $3,730,804 which will be incurred over the next twenty five years. A credit adjusted risk-free rate of 7% was used to calculate the fair value of the obligations.

6. Income Taxes

At March 31, 2006, the Company's exploration and development expenditures and undepreciated capital costs total $59,617,000. These costs may be carried forward indefinitely to reduce future taxable income.

The following reconciles the difference between income tax recorded and the expected income tax expense obtained by applying the expected income tax rate to earnings before taxes:



For the 3 For the 12
Months Ended Months Ended
March 31, 2006 December 31, 2005
----------------------------------
$ $
----------------------------------
Income/(Loss) before income taxes 2,479,697 5,838,794
----------------------------------
Expected income tax recovery at
the combined federal and provincial
statutory rate of 35.62% 883,269 2,196,553
Crown royalties 316,667 1,406,293
Resource allowance (217,883) (1,069,887)
Alberta Royalty Tax Credits (62,335) (122,261)
Stock based compensation cost 101,039 841,314
Attributed crown royalty income
(69,267) (122,958)
Tax-rate adjustments (56,831) (312,866)
Other 1,214 9,328
Valuation allowance - reversed
- (272,193)
----------------------------------
Future income tax expense 895,873 2,553,323
----------------------------------


The following table summarizes the tax effect of temporary differences.

March 31, December 31,
2006 2005
--------------------------
$ $
--------------------------
Future income tax assets (liabilities):

Carrying value of capital assets in
excess of tax basis (4,970,078) (3,976,144)
Asset retirement obligation 440,721 387,336
Share issue costs 345,527 370,118
Losses carried forward - -
Attributed crown royalty income 197,033 127,766
--------------------------
(3,986,797) (3,090,924)
--------------------------


7. Financial Instruments

The Company's financial instruments recognized on the balance sheets consist of cash, accounts receivable, prepaid expenses, bank indebtedness, and accounts payable and accrued expenses. The fair value of all financial instruments classified as current assets or current liabilities approximate their carrying amounts due to the short-term maturity of these instruments.

A portion of the Company's accounts receivable are from joint venture partners in the oil and gas business and are subject to normal industry credit risk. Purchasers of the Company's petroleum and natural gas products are subject to an internal credit review designed to mitigate the risk of non-payment and the carrying value reflects management's assessment of the associated credit risks.

The Company is exposed to fluctuations in commodity prices that are based in foreign currency.

The Company has not entered into any contracts during the year that would have reduced its exposure to fluctuations in commodity prices or exchange rates.



8. Supplemental Cash Flow Information

Change in non-cash working capital comprises:


Three Months Three Months
Ended Ended
March 31, March 31,
2006 2005
----------------------------
$ $
----------------------------
Accounts receivable 1,150,399 (864,532)
Prepaid expenses 21,719 (15,045)
Accounts payable and accrued liabilities (5,961,007) 2,992,524
----------------------------
Change in non-cash working capital (4,788,889) 2,112,947
----------------------------

Relating to:
Investing activities (4,356,453) 4,151,885
Operating activities (432,436) (2,038,938)
----------------------------
(4,788,889) 2,112,947
----------------------------


9. Commitments

The Company has entered into various commitments related to the leasing of office premises, office equipment and a compressor used in the Boltan area. The payments due under such leases are as follows:



Contractual 2006 2007 2008 2009 2010 Thereafter
obligations $ $ $ $ $ $
------------------------------------------------------------------------

Office Premises 188,966 188,966 47,241 - - -
Office equipment 18,236 8,897 2,162 901 - -
Boltan
compressor(1) 252,920 - - - - -
----------------------------------------------------
460,122 197,863 49,403 901 - -
----------------------------------------------------
(1) See Note 10 to these financial statements. The Company entered
into an agreement to sell its Boltan property subsequent to period
end. The lease relating to the Boltan compressor will be assumed by
the purchasers of the property on closing of the sale.


10. Subsequent Events

On March 16 2006, the Company entered into an agreement to sell its interests in the Boltan area of Alberta for a total of $9.55 million prior to purchase price adjustments. The effective date of this sale is January 1, 2006. The sale closed on April 19, 2006.

As this sale will not result in a change of 20% or more in the depletion rate, no gain will be recognized in the accounts in future periods.


Contact Information

  • Accrete Energy Inc.
    Mr. Peter Salamon
    President and CEO
    (403) 269-8846
    or
    Accrete Energy Inc.
    2100, 500 - 4th Avenue SW
    Calgary, Alberta T2P 2V6
    (403) 269-8846
    Email: investor@accrete-energy.com