Aquest Energy Ltd.
TSX : AEX

Aquest Energy Ltd.

May 12, 2005 09:30 ET

Aquest Announces First Quarter Financial Results

CALGARY, ALBERTA--(CCNMatthews - May 12, 2005) - Aquest Energy Ltd. (TSX: AEX) ("Aquest" or the "Company") is pleased to announce their 2005 financial and operating results for the three month period ending March 31.

Aquest Highlights for Q1 Included:

- Production increased 38.6% to 2,113 boepd made up of average gas rates of 8,972 mcfpd and liquids rates of 618 bpd,

- Revenues increased 62.4% to $9,409,930 on the strength of higher production rates and higher natural gas and oil prices,

- Cash flows increased 118.2% to $4,993,602 as operating netbacks increased to $30.02 per barrel of oil equivalent,

- Net income increased 264.2% to $456,184 as a result of stronger cash flows,

- Aquest successfully drilled 3 shallow gas wells in the Sylvan Lake area in addition to drilling another successful gas well in the Cardiff property area, and

- Based upon their revised April 1, 2005 price forecast, McDaniel's increased their estimate of Aquest's oil and gas reserve valuation on a proven plus probable basis discounted at 10% to $73.9 million, an increase of 17.1% from December 31, 2004. On a proven plus probable plus possible basis this value further increased to $91.2 million.



The financial and operating highlights are summarized below:

3 Months Ended March 31, 2005
-----------------------------------
2005 2004 Increase
-----------------------------------

FINANCIAL

Revenue ($) (after royalties) 7,561,282 4,472,553 69.1%
Cash flow from operations ($) 4,993,602 2,288,050 118.2%
Per share basic ($) 0.16 0.09 77.8%
Per share diluted ($) 0.16 0.09 77.8%

Net income ($) 456,184 125,262 264.2%
Per share basic ($) 0.01 0.00
Per share diluted ($) 0.01 0.00

Capital expenditures ($) 4,355,532 5,513,869
Working capital deficiency ($) 716,524 4,906,703
Bank Indebtedness ($) 17,219,684 13,375,320

Shares outstanding
At period end 30,892,574 28,483,756
Weighted average - basic 30,892,574 25,326,724
Weighted average - diluted 30,994,701 25,571,899



3 Months Ended March 31, 2005
-----------------------------------
2005 2004 Increase
-----------------------------------

OPERATIONS

Reported Production
Natural gas (mcf/d) 8,972 6,697 34.0%
Oil and natural gas liquids (bbls/d) 618 408 51.5%
Oil equivalent (boe/d) (6:1) 2,113 1,524 38.6%


RESERVES
Future Net
Reserves Income ($M)
Reserves (YE with April 1, 2005 Pricing Update) (boe's) (Disc. 10%)
------------------------
Proven 2,291,900 50,367,500
Probable 1,607,200 23,512,200
Total 3,899,100 73,879,700
Possible 1,776,300 17,303,900


Operational Review:

During the first three months of 2005 Aquest participated in the drilling of 12 ( 4.42 net) wells resulting in 9 (2.90 net) potential gas wells, 2 (1.44 net) suspended wells, and 1 (0.075 net) dry hole. In addition the Company farmed out for a non convertible override to a third party its interest in a Gilby exploration well. This well was cased as a potential gas well. Mild weather conditions in March resulted in the release of drilling rigs in the northern portion of the Province which allowed Aquest to contract the drilling of three shallow wells in the Sylvan Lake area, one shallow well at Davey and a deeper test at Cardiff. The three wells in Sylvan Lake were all successfully drilled and will be completed and tied in during the second quarter. Our 11-1-55-2W5 well at Cardiff was also cased as a dual gas discovery. Completion and tie-in operations should be completed in the second quarter. Aquest anticipates a net 200 boepd addition to production from these four wells. The Davey well will be deepened after spring road bans are removed.

At Clarke Lake we were unable to re-complete the previously drilled ba-89-K well. A remedial program was designed to re-complete the well but downhole equipment problems and unseasonable warm March weather prevented Aquest from proceeding with the designed workover. This operation is now postponed until next winter. During the same period Aquest drilled a new well into the Clarke Lake gas pool to the north at b-8-C. This well failed to encounter porous reef. While neither of these operations produced the desired result, the Clarke Lake pool continues to produce gas from the existing b-89-K well at approximately 1,500 mcfpd. This well has produced over 5.5 billion cubic feet and reservoir analysis continues to support an additional 70 billion cubic feet of gas reserves remaining in the pool. Aquest has now earned a 26.55% interest in this gas pool.

A new Keg River prospect at Muskwa was also tested by Aquest during the first quarter. This 3D seismically controlled reef was the subject of a re-entry drilling operation commencing in January. Unfortunately the original horizontal leg did not encounter porous reef. Aquest will return to this prospect next winter. By virtue of the first operation Aquest has earned a 41.25% interest in this 50 bcf prospect.

Production and Financial Results:

The first quarter production rates of 8,972 mcfpd and 618 bopd represented a 34% and 52% increase respectively over first quarter rates achieved in 2004. This average production rate of 2,113 boepd, combined with an average oil price of $51.93 per barrel and an average gas price of $7.80 per mcf, propelled Aquest to gross quarterly revenues of $9,409,930 or 62% above the first quarter 2004 total of $5,795,983. A reduction in unit operating costs for the Company of 19% to $6.90 per boe from the first quarter last year helped improve the operating netback for Aquest to $30.02 per boe. As a result cash flows increased 118% to $4,993,602 or $0.16 per share as compared to 2004 totals of $2,288,050 or $0.09 per share. This cash flow performance carried through to net income with a reported $456,184 or $0.01 per share representing a 264% increase over the first quarter 2004 reported net income of $125,262.

During the first quarter Aquest expended $4,355,532 on capital projects as compared to first quarter 2004 expenditure of $5,513,869. Bank debt at the end of the first quarter totaled $17,219,684 against a bank line of $20 million. Working capital deficiency substantially decreased from year end to $716,524. During 2004 and to date in 2005 Aquest has not issued any flow through shares and has therefore retained full use of its estimated year end $52 million in tax pools to offset 2005 revenues. Aquest continues to estimate a base cash flow for 2005 of $18-19 million or approximately $0.60 per share. This cash flow will provide the resources for a currently estimated $16 million capital program.

Outlook:

For the remainder of 2005 Aquest will be focusing on the development of our Alberta oil and gas assets. We currently carry a prospect drilling of over 30 wells all of which are accessible to operations on a year round basis. Drilling and service equipment availability generally increases during the summer months and Aquest will initiate these drilling programs in late May or early June. During the second quarter we will continue to build our undeveloped land position in Alberta from the year end 51,798 net acres through both Crown land sales and third party joint venture arrangements.

Our recent drilling problems in British Columbia have resulted in a market perception that has dropped our stock price to a twelve month low. At the publishing of this report Aquest was trading at approximately 3 times 2004 cash flow per share and less than three times estimated 2005 cash flow per share levels. We are committed to correcting this problem and will explore all alternatives available to the Company. Aquest remains financially strong supported by a growing production base and a strong Alberta prospect inventory. Despite the problems encountered this winter with the B.C. program, these remain operational issues. The upside potential of these projects are extremely significant and the technical evaluation remains sound. We look forward to the next twelve months and is focused upon continued growth and financial performance for the shareholders.

NOTICE OF OUR ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON FRIDAY, MAY 13, 2005, AT 10:00 A.M. (CALGARY TIME) IN THE VIKING ROOM AT THE CALGARY PETROLEUM CLUB, 319-5TH AVENUE S.W., CALGARY, ALBERTA.



Announcement - Conference Call for First Quarter:


- Please join us for a live webcast on the company's website scheduled
for Tuesday, May 17, 2005, at 11:00am ET, 9:00am MT.

- Live Conference Access information:
Local Access: 1-416-695-6120
Toll-Free Access: 1-800-769-8320

- Instant Replay Access information:
Local Access: 1-416-695-5275
Toll-Free Access: 1-888-509-0082


AQUEST ENERGY LTD.

MANAGEMENT'S DISCUSSION AND ANALYSIS

FOR THE PERIOD ENDING MARCH 31, 2005

Management's discussion and analysis (MD&A) as of May 11, 2005 should be read in conjunction with Aquest's unaudited consolidated financial statements for the three month periods ended March 31, 2005 and 2004 and the audited consolidated financial statements and related notes for the years ended December 31, 2004 and 2003 which have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and have been filed on sedar (www.sedar.com).

By its nature, MD&A requires the presentation of certain forward looking financial and operational information that involves known and unknown risks and uncertainties, some of which are beyond Aquest's control. These include, but are not limited to, general economic conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, government regulations, stock market volatility, and competition from other producers. Although assumptions used in the preparation of forward looking information are considered reasonable by management at the time, actual results could differ materially from those contained in such forward looking information.

Management's discussion and analysis contains the term "cash flow from operations", which should not be considered an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with GAAP as an indicator of the Company's performance. Aquest's determination of "cash flow from operations" may not be comparable to that reported by other companies. The reconciliation between net income and "cash flow from operations" can be found in the consolidated statements of cash flows. The Company also presents cash flow from operations per share whereby per share amounts are calculated using weighted average shares outstanding consistent with the calculation of income per share.

For the purposes of calculating unit costs, natural gas has been converted to a barrel equivalent ("boe") using a conversion rate of six thousand cubic feet equal to one barrel ("6:1"). This conversion is based upon energy equivalence at the burner tip and does not represent a value equivalency at the well head.

OVERVIEW

Petroleum and Natural Gas Sales

During the first quarter of 2005 Aquest's petroleum and natural gas revenues totaled $9,409,930, an increase of 62.4% from the first quarter of 2004. The increase was the result of increases in both production and prices received.

Production for the first quarter of 2005 increased by 38.6% to 2,113 boepd compared with production from the first quarter of 2004 of 1,524 boepd. Production was also up when compared with the fourth quarter of 2004 as production increased by 2.3% from the average of 2,066 boepd in the fourth quarter. Production was down from the 2004 exit rate of 2,250 boepd by 6.1% due to production problems in Edberg and natural declines. Successful drilling near the end of the first quarter was not tied in before breakup. Aquest expects to tie these wells in after break up and with improvements in production at Edberg should return production to approximately 2,200 boepd late in the second quarter.

The following tables outline our production volumes, sales and prices received for the three-month periods ended March 31, 2005 and 2004.



------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended March 31
------------------------------------------------------------------------
Petroleum and Natural Gas Sales 2005 2004
----------------------------
Natural Gas $ 6,302,117 $ 4,401,415

Oil 2,475,676 1,092,056
Liquids 374,338 286,257
Royalty and other 257,799 16,255
------------------------------------------------------------------------
Total $ 9,409,930 $ 5,795,983
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended March 31
------------------------------------------------------------------------
Production 2005 2004
----------------------------

Natural gas (mcf/d) 8,972 6,697
Oil (bbls/d) 530 322
Liquids (bbls/d) 88 86
------------------------------------------------------------------------
Total (boe/d) 2,113 1,524
------------------------------------------------------------------------
------------------------------------------------------------------------


Prices and Marketing

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended March 31
------------------------------------------------------------------------
Benchmark Prices 2005 2004
----------------------------

AECO gas ($/mcf) $ 6.89 $ 6.41
WTI oil (US $/bbl) $ 49.84 $ 35.14
CDN/US average exchange rate 0.815 0.767
Edmonton par (Cdn $/bbl) $ 61.45 $ 45.60
------------------------------------------------------------------------
Aquest's Average Selling Price
Natural gas ($/mcf) $ 7.80 $ 7.22
Oil ($/bbl) 51.93 37.24
Natural gas liquids ($/bbl) 47.26 36.59
------------------------------------------------------------------------
Total ($/boe) $ 48.13 $ 41.80
------------------------------------------------------------------------
------------------------------------------------------------------------


Aquest averaged a natural gas sales price of $7.80 per mcf for the first quarter of 2005, representing an increase of 8.0% when compared to the same period in 2004. This improvement was consistent with the increase in the Alberta daily spot price at AECO over the same period. Aquest's average sales price for the first quarter of 2005, exclusive of the impact of fixed price sales contracts, received a premium of 7.4% over the spot price at AECO representing favorable heat content adjustments for Aquest's gas. This premium is consistent with the premium received throughout 2004. Revenue in excess of spot prices, as the result of fixed price sales contracts, totaled $322,000 in the first quarter of 2005 which accounted for approximately $0.40/mcf of the total sales price received.

Aquest's oil sales price averaged $51.93/bbl during the first quarter of 2005, an increase of 39.4% over the 2004 first quarter average price of $37.24/bbl. The improvement is a direct result of the increase in the WTI price of oil between the periods. Fixed sales contracts had no effect on the price Aquest received during the first quarter.

Natural gas liquids price improved by 29.2% during the first quarter of 2005 when compared with the same period in 2004, increasing to $47.26/bbl compared to $36.59/bbl in 2004, consistent with increases in overall prices received by the Company.

Aquest currently has the following physical, fixed price forward sales contracts in place.



------------------------------------------------------------------------
------------------------------------------------------------------------
Volume/day Price
------------------------------------------------------------------------
Natural Gas
April 2005 - October 2005 1,000 GJ $7.15/GJ
------------------------------------------------------------------------
Crude Oil
January 2005 - December 2005 100 bbl $45.40 - $51.40 US/bbl
February 2005 - December 2005 100 bbl $46.80 US/bbl
------------------------------------------------------------------------
------------------------------------------------------------------------


Royalties
------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended March 31
------------------------------------------------------------------------
2005 2004
----------------------------
Crown $ 839,469 $ 514,946
Freehold & other 1,082,909 830,511
ARTC (73,730) (22,027)
------------------------------------------------------------------------
Total $ 1,848,648 $ 1,323,430
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended March 31
------------------------------------------------------------------------
Royalty Rates 2005 2004
----------------------------
(as a % of revenue)
Crown 9.5% 8.9%
Freehold & other 12.3% 14.4%
ARTC (0.8%) (0.4%)
------------------------------------------------------------------------
Total 21.0% 22.9%
------------------------------------------------------------------------
------------------------------------------------------------------------


Total royalties for the first quarter of 2005 increased by 39.7% to $1,848,648 compared to the same period in 2004, as a result of increases in petroleum and natural gas sales. As a percentage of revenue, royalties for the first quarter of 2005 were consistent with 2004 results, with declines in freehold royalties being offset by increases in Crown royalties. Aquest recognized a slightly better ARTC recovery as a result of new wells coming on production which are eligible for ARTC.



Production Expense

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended March 31
------------------------------------------------------------------------
2005 2004
----------------------------
Production expenses $ 1,312,178 $ 1,179,295
------------------------------------------------------------------------
Dollars Per BOE $ 6.90 $ 8.50
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating costs for the first quarter of 2005 totaled $1,312,178, representing an improvement of 18.8% from the first quarter of 2004 and an improvement of 6.4% from the fourth quarter of 2004. Reductions in operating costs are a result of Aquest eliminating rental expenses through the acquisition of field compression equipment and reducing crude oil trucking costs in the Bellshill area as a result of pipelining activities late in the fourth quarter of 2004.

Aquest expects to further improve operating costs through the reduction of water disposal costs in the Cooking Lake area during the second or third quarter of 2005.

Transportation

Transportation costs for the first quarter of 2005 increased to $1.49/boe compared to $1.09/boe throughout 2004. The increase is due primarily to increased transportation charges on both oil and gas production.



Operating Netbacks
------------------------------------------------------------------------
Three months ended March 31
------------------------------------------------------------------------
Per BOE 2005 2004
----------------------------
Sales Price $ 48.13 $ 41.80
Royalties 9.72 9.53
Operating costs 6.90 8.50
Transportation 1.49 1.09
------------------------------------------------------------------------
Total $ 30.02 $ 22.68
------------------------------------------------------------------------
------------------------------------------------------------------------


Aquest's operating netback per boe for the first quarter of 2005 increased by 32.3% compared with the first quarter of 2004 due to an increase of 15.1% in sales price and an 18.8% improvement in operating costs.

In comparison to the fourth quarter of 2004, the first quarter operating netback improved by $5.57 per boe or 22.8%. This increase was a result of a 5.0% improvement in price received, a 6.4% improvement in operating costs and 21.9% reduction in royalties per boe. The royalty improvement is a result of an adjustment relating to prior periods which increased royalties recorded in the fourth quarter of 2004.



General and Administrative
------------------------------------------------------------------------
Three months ended March 31
------------------------------------------------------------------------
2005 2004
----------------------------
G&A costs $ 992,617 $ 825,134
Capitalized (322,606) (181,200)
------------------------------------------------------------------------
Net G&A costs $ 670,011 $ 643,934
------------------------------------------------------------------------
Net G&A per BOE $ 3.52 $ 4.64
------------------------------------------------------------------------
------------------------------------------------------------------------


On a per boe basis, general and administrative costs for the first quarter of 2005 decreased by 24.1% to $3.52 per boe from $4.64 per boe in 2004. Reorganization costs incurred in relation to the Eravista merger early in 2004 have been offset by staff costs in 2005 as Aquest continued to add to its team throughout the second half of 2004. The result is that general and administrative costs have been held relatively constant with increases in production resulting in a lowered general and administrative cost per boe.

Capitalized general and administrative expenses as a percentage of gross general and administrative costs increased from 22.0% in the first quarter of 2004 to 32.5% in 2005. The increase was a result of Aquest employing a larger full time exploration staff and incurring more direct exploration expenditures during the first quarter of 2005 compared with that of 2004. As mentioned previously, the first quarter of 2004 contained reorganization costs related to the Eravista merger that were not capitalized resulting in higher gross general and administrative costs and a lower capitalization percentage.

Interest Expense

Interest expense for the three months ended March 31, 2005 totaled $296,491 compared with $215,581 for the same period of 2004. The increase is due to Aquest carrying a higher debt level for the first quarter of 2005 compare with that of 2004. The outstanding amount on the revolving production line averaged approximately $16.0 million in the first quarter of 2005 compared with $10.5 million in the first quarter of 2004.

Depletion, Depreciation and Accretion

Depletion and depreciation for the quarter totaled $4,339,000 or $22.82 per boe, compared to $15.84 per boe for the same period of 2004. The increase is a result of proven reserves from Clarke Lake being included in the depletion calculation for the first quarter of 2004 and subsequently not being included in the calculation for the first quarter of 2005. Depletion has also increased as the result of significant infrastructure investments made by Aquest in the second half of 2004 and the first quarter of 2005.

Accretion expense increased from $21,249 in the first quarter of 2004 to $37,000 for the first quarter of 2005 due to the Company accreting a larger asset retirement obligation in 2005 compared to 2004. Accretion expense is expected to continue to increase on a yearly basis as the Company continues to incur future obligations related to its exploration and development activities.

Income and Capital Taxes

During the first quarter of 2005, Aquest recorded a future income tax recovery of $16,348 compared with a recovery for the same period of 2004 of $188,504. The difference in the recoveries is due to Aquest realizing a more significant reduction in its effective income tax rate applied during 2004 compared to 2005.

Aquest had no current income taxes payable for 2004 and currently only requires a provision for Large Corporation's Tax. The Company does not anticipate being cash taxable during 2005.

Cash Flows from Operations and Net Income

Cash flows from operations totaled $4,993,602 for the three months ended March 31, 2005 compared to $2,288,050 for the same period in 2004. The increase in cash flows from operations is a direct result of a growing production base combined with a significant increase in operating netbacks compared to 2004 results.

Cash flows and net income per share are outlined in the table below as follows.



------------------------------------------------------------------------
Three months ended March 31
------------------------------------------------------------------------
2005 2004
----------------------------
Cash flows from operations $ 4,993,602 $ 2,288,050
Cash flows from operations per share
Basic $ 0.16 $ 0.09
Diluted $ 0.16 $ 0.09

Net income $ 456,184 $ 125,262
Net Income per share
Basic $ 0.01 $ 0.00
Diluted $ 0.01 $ 0.00
------------------------------------------------------------------------
------------------------------------------------------------------------


Capital Expenditures

During the first quarter of 2005 Aquest's incurred capital expenditures totaling $4,355,532 compared to expenditures, before dispositions, of $5,513,869 from the same quarter of 2004. The decrease is the result of Aquest not incurring pipeline expenditures due to suspended operations in North East B.C. During the quarter Aquest drilled a total of 12 (4.42 net) wells in the year resulting in 9 (2.90 net) gas wells, 2 (1.44 net) wells suspended pending additional drilling activity and 1 (0.075 net) dry and abandoned wells.



------------------------------------------------------------------------
Three months ended March 31
------------------------------------------------------------------------
2005 2004
----------------------------
Land acquisition and retention $ 1,672 $ 209,270
Geological and geophysical 16,610 607,690
Drilling and completions 4,473,320 1,802,850
Equipment and facilities (186,132) 2,855,320
Property dispositions - (4,054,035)
Other 50,062 38,739
------------------------------------------------------------------------
Total capital expenditure $ 4,355,532 $ 1,459,834
------------------------------------------------------------------------
------------------------------------------------------------------------


As at March 31, 2005, $3.4 million of costs incurred on operations in North East B.C. suspended due to winter access issues have been excluded form the depletion calculation pending completion of operations and establishing the presence of proved reserves.

Liquidity and Capital Resources

As at March 31, 2004 Aquest had drawn $17,219,684 on its credit facility, had an outstanding debenture totaling $2,500,000 and a working capital deficiency of $716,524 for total net debt of $20,436,208. Aquest's credit facility currently sits at a maximum of $20.0 million, which is exclusive of the outstanding debenture.



------------------------------------------------------------------------
Investment Program Funding Three months ended March 31
------------------------------------------------------------------------
2005 2004
---------------------------
Cash flow from operations $ 4,993,602 $ 2,288,050
Changes in non-cash operating working capital (3,078,195) (1,792,756)
Increase(decrease) in bank debt 2,440,125 (424,657)
Issuance of shares - 1,389,197
------------------------------------------------------------------------
Total $ 4,355,532 $ 1,459,834
------------------------------------------------------------------------
------------------------------------------------------------------------


Outstanding Share Data

There were no changes to Aquest's outstanding securities during the first quarter.

Contractual Obligations

Aquest's identified contractual obligations have not changed materially since December 31, 2004.

Critical Accounting Estimates

The significant accounting policies used by Aquest are disclosed in Note 2 of the December 31, 2004 consolidated financial statements. Certain accounting policies require management to make appropriate decisions in determining estimates and making assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management reviews its estimates regularly. The emergence of new information and changed circumstance may result in actual results or changes to estimated amounts that may differ materially from current estimates. The following discussion helps assess the accounting policies and practices of the Company as they relate to estimates and the likelihood of material differences occurring.

Proved Oil and Gas Reserves

Under National Instrument 51-101, "Proved" reserves are defined as those reserves that can be estimated with a high degree of certainty to be recoverable. In accordance with this definition, the level of certainty targeted by the reporting company should result in at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimated Proved reserves. In the case of "Probable" reserves it must be equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated Proved plus Probable reserves. With respect to the consideration of certainty, in order to report reserves as Proved plus Probable, the reporting company must believe that there is at least a 50 percent probability that the quantities actually recovered will equal or exceed the sum of the estimated Proved plus Probable reserves.

Reserve estimates are made using all available geological and reservoir data, as well as historical production information. Estimates are reviewed internally on a quarterly basis, and at least annually by external engineers, and are revised as appropriate. Revisions can occur as a result of various factors including: actual reservoir production, changes in commodity price forecasts and relevant operating costs or changes in the Company's plans. Changes in proved oil and gas reserves will impact financial results as reserves are used in the depletion calculation and are used to assess asset valuation and impairment. Reserve changes also affect other industry financial benchmarks such as finding and development costs, recycle ratios and net asset value calculations.

Depletion

The Company applies the full cost method of accounting for exploration and development activities. Under this method, all costs associated with the acquisition of, exploration for, and development of petroleum and natural gas reserves are capitalized whether or not the activities are successful. The aggregate of net capitalized costs and estimated future development costs, less undeveloped land, is depleted using the unit-of-production method based on production volumes in relation to estimated proven reserves. An increase in estimated proved oil and gas reserves would result in a corresponding reduction in depletion expense. A decrease in estimated future development costs would also result in a corresponding reduction in depletion expense.

Unproved Properties

Certain costs related to the acquisition and evaluation of unproved properties may be excluded from costs subject to depletion. These properties are reviewed quarterly to determine whether any impairment in value has occurred. When proved reserves are assigned or an unproved property is considered to be impaired, the cost of the unproved property, or the amount of the impairment will be added to the capitalized costs subject to depletion.

Ceiling Test

The Ceiling test is a two part cost recovery test to assess the valuation of the Company's petroleum and natural gas properties. The first part measures whether impairment has occurred based on undiscounted future cash flows using estimated future prices, costs and proved reserves. When the first part indicates impairment exists, the second part of the test measures the amount of impairment based on discounted future cash flows from proved and probable reserves. The Company reviews the related estimates when it performs its ceiling test on a quarterly basis. The impact of changes in the estimates of future prices, costs and proved and probable reserves on the financial statements could be material.

Asset Retirement Obligations

In recognizing its asset retirement obligation, the Company records a liability equal to the discounted fair value of the estimated costs to abandon petroleum and natural gas wells, dismantle and remove tangible equipment and return land to its original condition. Arriving at a discounted fair value requires the Company to make estimates relating to the projected timing of incurring costs, inflation rates and risk adjusted discount rates. These estimates will vary over time as new information becomes available and will impact both the liability recorded as well as the accretion expense. These estimates are reviewed by the Company on a quarterly basis to ensure circumstances supporting the estimates are still considered reasonable.

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 the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded by management.

Stock-based Compensation

The fair value of stock options granted is calculated using the Black-Scholes option pricing model and is recorded over the vesting period of the related options. The calculation involves estimates of the expected volatility in the trading value of Aquest's shares, the price of the underlying shares, the expected life of the option, expected dividends and the risk-free rate of interest. All of these estimates are subjective and are reviewed by management on a quarterly basis.

Goodwill

In the process of accounting for the purchase of a company goodwill is recognized as the excess of the purchase price over the fair value allocated to the other assets and liabilities. Since goodwill is a residual value, changes in the estimates used to determine the value of other items in the purchase equation could have a material effect on the value allocated to goodwill. Goodwill is not amortized but is assessed annually for impairment, unless events occur or circumstances change since the most recent valuation which could result in the fair value being less than the current carrying value of the business, in which case a valuation will be performed at that time.



AQUEST ENERGY LTD.
Quarterly Information

2005 2004
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------
Financial
($ thousands except per share data)

Petroleum and natural
gas sales $ 9,410 $ 8,966 $ 7,314 $ 7,387 $ 5,796
Royalties 1,849 2,363 993 1,479 1,323
Production expenses 1,312 1,402 1,219 1,355 1,179
Net backs $ 6,249 $ 5,201 $ 5,102 $ 4,553 $ 3,294
Cash flow from
operations $ 4,994 $ 4,498 $ 4,105 $ 3,374 $ 2,288
Per Share - Basic 0.16 0.15 0.13 .12 .09
- Diluted 0.16 0.15 0.13 .12 .09
Net income (loss) 456 124 536 180 125
Per Share - Basic 0.01 0.00 .02 .01 .00
- Diluted 0.01 0.00 .02 .01 .00
Additions to capital
assets $ 4,356 $ 9,684 $ 5,247 $ 3,395 $ 5,514
Net debt $ 20,436 $ 20,939 $ 16,049 $ 14,969 $ 20,782
Shares outstanding
Basic 30,893 30,892 30,874 28,969 25,327
Diluted 30,995 31,075 30,983 29,194 25,572
-------------------------------------------------

2005 2004
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------
Operations

Average daily production
Natural gas (mcfpd) 8,972 7,187 7,677 8,480 6,697
Liquids & crude oil
(bblspd) 618 868 542 537 408
Combined (boepd) 2,113 2,066 1,822 1,950 1,524
Average prices received
Natural gas ($/mcf) $ 7.80 $ 7.17 $ 6.45 $ 6.99 $ 7.22
Liquids & crude oil
($/bbl) 51.93 49.72 50.08 40.84 37.24
Combined ($/boe) $ 48.13 $ 45.85 $ 41.95 $ 40.30 $ 41.80
Royalties ($/boe) 9.72 12.44 5.92 8.33 9.53
Production expenses
($/boe) 6.90 7.37 7.27 7.63 8.50
Transportation
expenses ($/boe) 1.49 1.09 1.09 1.09 1.09
Netback received
($/boe) $ 30.02 $ 24.95 $ 27.67 $ 23.25 $ 22.68


2003
Q4(1) Q3(1) Q2(1)
-----------------------------
Financial
($ thousands except per share data)

Petroleum and natural gas sales $ 3,922 $ 4,175 $ 5,094
Royalties 942 1,000 1,024
Production expenses 1,439 1,120 1,092
Net backs $ 1,541 $ 2,055 $ 2,978
Cash flow from operations $ 965 $ 1,969 $ 2,292
Per Share - Basic .06 .12 .14
- Diluted .06 .11 .13
Net income (loss) (481) 724 1,203
Per Share - Basic (.03) .04 .07
- Diluted (.03) .04 .07
Additions to capital assets $ 1,633 $ 3,892 $ 1,514
Net debt $ 10,131 $ 8,921 $ 7,416
Shares outstanding
Basic 16,333 16,333 16,333
Diluted 17,371 17,371 17,371
-----------------------------

2003
Q4(1) Q3(1) Q2(1)
-----------------------------
Operations

Average daily production
Natural gas (mcfpd) 4,022 4,584 4,589
Liquids & crude oil (bblspd) 527 450 606
Combined (boepd) 1,197 1,214 1,371
Average prices received
Natural gas ($/mcf) $ 6.21 $ 6.66 $ 7.36
Liquids & crude oil ($/bbl) 28.20 29.78 30.77
Combined ($/boe) $ 33.67 $ 36.27 $ 38.98
Royalties ($/boe) 8.55 8.95 8.20
Production expenses ($/boe) 13.75 9.35 8.76
Transportation expenses ($/boe) 0.70 0.70 0.70
Netback received ($/boe) $ 10.67 $ 17.27 $ 21.32


AQUEST ENERGY LTD.

CONSOLIDATED BALANCE SHEETS

March 31, December 31,
2005 2004
------------------------------------------------------------------------
(unaudited)

Assets

Current assets:
Accounts receivable $ 8,722,309 $ 12,285,577
Prepaid expenses 761,863 644,546
------------------------------------------------------------------------
9,484,172 12,930,123

Property, plant and equipment (note 2) 64,263,004 64,078,964

Goodwill 16,613,598 16,613,598

------------------------------------------------------------------------
$ 90,360,774 $ 93,622,685
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Bank indebtedness $ 17,219,684 $ 14,779,559
Accounts payable and accrued liabilities 10,200,696 16,724,844
------------------------------------------------------------------------
27,420,380 31,504,403

Long term debt 2,500,000 2,500,000

Asset retirement obligations 2,566,962 2,480,962

Future income taxes 8,345,944 8,362,292
------------------------------------------------------------------------
40,833,286 44,847,657
------------------------------------------------------------------------

Shareholders' equity:
Share capital 38,721,268 38,721,268
Contributed surplus (note 3) 2,267,842 1,971,566
Retained earnings 8,538,378 8,082,194
------------------------------------------------------------------------
49,527,488 48,775,028

------------------------------------------------------------------------
$ 90,360,774 $ 93,622,685
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


Approved by the Board:

Director Director


AQUEST ENERGY LTD.

CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

Three Months Ended March 31, 2005 and 2004

2005 2004
------------------------------------------------------------------------
(Unaudited) (Unaudited)

Revenues
Petroleum and natural gas sales $ 9,409,930 $ 5,795,983
Less royalties (net of Alberta Royalty
Tax Credit) (1,848,648) (1,323,430)
------------------------------------------------------------------------
7,561,282 4,472,553
------------------------------------------------------------------------

Expenses
Operating 1,312,178 1,179,295
Transportation 282,664 137,239
General and administrative 670,011 643,934
Stock-based compensation 177,766 153,000
Interest 296,491 215,581
Accretion 37,000 21,249
Depletion, depreciation and amortization 4,339,000 2,177,043
------------------------------------------------------------------------
7,115,110 4,527,341
------------------------------------------------------------------------

Income (loss) before taxes 446,172 (54,788)
------------------------------------------------------------------------

Taxes
Capital taxes 6,336 8,454
Future income tax recovery (16,348) (188,504)
------------------------------------------------------------------------
(10,012) (180,050)
------------------------------------------------------------------------

------------------------------------------------------------------------
Net income $ 456,184 $ 125,262
------------------------------------------------------------------------

Retained earnings, beginning of period as
previously reported $ 8,082,194 $ 6,906,563
Change in accounting policy 210,715
------------------------------------------------------------------------
Retained earnings, beginning of period as
restated 8,082,194 7,117,278
------------------------------------------------------------------------
Retained earnings, end of period $ 8,538,378 $ 7,242,540
------------------------------------------------------------------------
------------------------------------------------------------------------

Net income per share (note 5)
Basic $ 0.01 $ 0.00
Diluted $ 0.01 $ 0.00
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



AQUEST ENERGY LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2005 and 2004

2005 2004
------------------------------------------------------------------------
(Unaudited) (Unaudited)

Cash provided by (used for):

Operations:
Net income $ 456,184 $ 125,262
Items not affecting cash: -
Depletion, depreciation and amortization 4,339,000 2,177,043
Stock-based compensation 177,766 153,000
Accretion 37,000 21,249
Future income tax recovery (16,348) (188,504)
------------------------------------------------------------------------
4,993,602 2,288,050

Changes in non-cash working capital 737,053 (2,440,805)
------------------------------------------------------------------------
5,730,655 (152,755)
------------------------------------------------------------------------

Financing:
Increase (decrease) in bank indebtedness 2,440,125 (424,657)
Issue of common shares, net of issue costs - 1,389,197
Net change in non-cash working capital items 14,814 -
------------------------------------------------------------------------
------------------------------------------------------------------------
2,454,939 964,540
------------------------------------------------------------------------
------------------------------------------------------------------------

Investments:
Property, plant and equipment expenditures (4,355,532) (5,513,869)
Proceeds on disposal of property, plant and
equipment - 4,054,035
Net change in non-cash working capital
items (3,830,062) 648,049
------------------------------------------------------------------------
(8,185,594) (811,785)
------------------------------------------------------------------------

Change in cash $ 0.00 $ 0.00

Cash, beginning and end of period $ 0.00 $ 0.00
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


1. Basis of Presentation

The interim consolidated financial statements of Aquest Energy Ltd. ("Aquest") have been prepared in accordance with Canadian generally accepted accounting principles and are consistent with the presentation and disclosure in the audited consolidated financial statements and notes thereto for the year ended December 31, 2004. The interim financial statements contain disclosures which are incremental to Aquest's annual financial statements. Certain disclosures, which are normally required to be included in the notes to the financial statements have been condensed or omitted. The interim financial statements should be read in conjunction with Aquest's audited consolidated financial statements and notes thereto for the year ended December 31, 2004.

2. Property, plant and equipment:



------------------------------------------------------------------------
Accumulated
Depletion and Net
Cost Depreciation Book Value
------------------------------------------------------------------------

Petroleum and natural
gas properties $ 92,844,121 $ 28,777,690 $ 64,066,431

Other 351,785 155,212 196,573
------------------------------------------------------------------------

$ 93,195,906 $ 28,932,902 $ 64,263,004
------------------------------------------------------------------------


As at March 31, 2005, $3.4 million of costs incurred on operations suspended due to winter access issues have been excluded from the calculation of depletion pending completion of the operations.

The Company performed a ceiling test calculation at March 31, 2005 to assess the recoverable value of the property, plant and equipment. The oil and gas prices used in the calculation are based on the April 1, 2005 bench mark commodity price forecast of our independent reserve evaluators as follows:



------------------------------------------------------------------------
Petroleum Natural Gas
WTI Company Average AECO-C Spot Price Company Average
(US$/bbl) (Cdn$/bbl) (Cdn$/mcf) (Cdn$/mcf)
------------------------------------------------------------------------
2005 53.00 54.47 7.93 7.80
2006 50.00 51.97 7.67 7.77
2007 45.00 46.75 7.03 7.05
2008 40.00 42.20 6.30 6.34
2009 37.90 39.73 5.93 5.93
2010 38.60 40.77 6.04 6.05
------------------------------------------------------------------------


Prices increase at rates of 1.5 to 3.0 percent per year after 2010. In this price forecast, US dollars have been converted to Canadian dollars at an exchange rate of 0.825.

Based on these assumptions, the undiscounted value of future net revenues from Aquest's proved reserves exceeded the carrying value of property, plant and equipment as at March 31, 2005.

3. Contributed Surplus

A summary of the change in the Company's contributed surplus balance for the three month period ended March 31, 2005 is as follows:



------------------------------------------------------------------------
Amount
------------------------------------------------------------------------
Balance, January 1, 2005 $ 1,971,566
Stock based compensation related to options granted 296,276
------------------------------------------------------------------------
Balance, March 31, 2005 $ 2,267,842
------------------------------------------------------------------------
------------------------------------------------------------------------


4. Stock options:

The Company has a stock option plan that provides for the issuance of options to employees, officers, directors and consultants. Under the plan, the exercise price of options granted cannot be less than the closing market price on the day immediately preceding the date of grant. Options typically vest over a three-year period and expire five years from the date of grant. The aggregate number of shares to be issued upon exercise of all options granted under the plan may not exceed the maximum number of shares permitted under the rules of any stock exchange on which the Company's common shares are listed. A summary of the Company's options outstanding as at March 31, 2005 and for the three month period then ended is presented below:



Weighted-average
Number of Options exercise price
------------------------------------------------------------------------
Outstanding - January 1, 2005 3,181,700 $ 2.43
Granted 10,000 2.14
Cancelled (81,250) 2.48
------------------------------------------------------------------------
Outstanding - March 31, 2005 3,110,450 $ 2.43
------------------------------------------------------------------------
------------------------------------------------------------------------
Exercisable - March 31, 2005 828,750 $ 2.47
------------------------------------------------------------------------
------------------------------------------------------------------------


The following table summarizes information about the stock options
outstanding at March 31, 2005:


Weighted average Weighted
remaining average
Outstanding contractual life exercise
Exercise Price options in years price
------------------------------------------------------------------------
$1.20 - $1.99 230,450 4.4 $ 1.90
$2.00 - $2.55 2,880,000 4.0 $ 2.47
------------------------------------------------------------------------
3,110,450 4.0 $ 2.43
------------------------------------------------------------------------
------------------------------------------------------------------------


5. Per share amounts:
------------------------------------------------------------------------
March 31, March 31,
2005 2004
------------------------------------------------------------------------
Earnings per share
Basic 0.01 0.00
Diluted 0.01 0.00
Weighted average number of shares outstanding
Basic 30,892,574 25,326,724
Diluted 30,994,701 25,571,899
------------------------------------------------------------------------


For the period ended March 31, 2005, 102,127 shares (2003 - 245,175) were added to the weighted average number of common shares outstanding for the dilutive effect of stock options and warrants.

6. Related party transactions:

At March 31, 2005, accounts payable include $55,488 due to companies controlled by an officer and two directors of the Company. These amounts arise as a result of common Eravista joint venture interests held by the officer and two directors.

These transactions have been recorded under the same terms and conditions as transactions with unrelated parties.

7. Financial instruments:

Commodity price risk management:

The Company uses various types of financial and physical sales contracts to manage risk related to fluctuating commodity prices. At March 31, 2005, the Company had the following fixed price physical and costless collar arrangements:



------------------------------------------------------------------------
Volume Price
------------------------------------------------------------------------
Natural Gas
April 2005 to October 2005 1,000 GJ/d $7.15/GJ
Crude Oil
January to December 2005 100 bbl/d $45.40US to $51.40US/bbl
February to December 2005 100 bbl/d $46.80US/bbl
------------------------------------------------------------------------
------------------------------------------------------------------------

8. Supplemental cash flow information:

------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
Changes in non-cash working capital
Accounts receivable $ 3,563,268 $ (2,777,388)
Accounts payable and accrued liabilities (6,524,145) 5,736,588
Prepaid expenses and deposits (117,318) 550,704
------------------------------------------------------------------------

------------------------------------------------------------------------
Payments included in the statement of cash flows
Taxes $ 6,336 $ 6,300
Interest and financing charges 590,463 318,000
------------------------------------------------------------------------


The Corporation's common shares are listed on the TSX under the trading symbol "AEX".

Forward-Looking Statements

This press release may include forward-looking statements including opinions, assumptions, estimates and expectations of future production, cash flow and earnings. When used in this document, the words "anticipate," "believe," "estimate," "expect," "intent," "may," "project," "plan", "should" and similar expressions are intended to be among the statements that identify forward-looking statements. Forward-looking statements are subject to a wide range of risks and uncertainties, and although the Company believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will be realized. Any number of important factors could cause actual results to differ materially from those in the forward-looking statements including, but not limited to, the volatility of oil and gas prices, the ability to implement corporate strategies, the state of domestic capital markets, the ability to obtain financing, changes in oil and gas acquisition and drilling programs, operating risks, production rates, reserve estimates, changes in general economic conditions and other factors more fully described from time to time in the reports and filings made by Aquest with securities regulatory authorities.



CORPORATE INFORMATION

Directors

Daryl H. Connolly
President and Chief Executive Officer
Aquest Energy Ltd.
Mr. Connolly has been the President & CEO of the Corporation since
January 2003. Prior to that, Mr. Connolly was the Chairman and CEO of
Aquest. Mr. Connolly is also the Chairman of Rock Creek Resources Ltd.
and prior to that, President and Chief Executive Officer of Tikal
Resources Corp., and previous to Tikal, Mr. Connolly founded HCO Energy
Ltd.

Glenn D. Hockley (1) (2) (3)
Chairman of the Board
Aquest Energy Ltd.
Mr. Hockley assumed the role of Chairman of Aquest Energy subsequent to
the Eravista merger. Prior to his role with Aquest, Mr. Hockley was the
Chairman, President and Chief Executive Officer of Eravista Energy Corp.
since November 1998 and prior to that, he was the Chairman and Chief
Executive Officer of Torrington Resources Ltd.

Robert L. Phillips (1)
Director
Mr. Phillips is President of RL Phillips Investments, a private
investment capital corporation prior to which, Mr. Phillips was the
President and Chief Executive Officer of the BCR Group of Companies, a
commercial Crown corporation of the Province of British Columbia.
Previous to that, Mr. Phillips was the Executive Vice-President,
Business Development and Strategy with MacMillan Bloedel Limited and
prior to that, was the President and Chief Executive Officer of Dreco
Energy Services Ltd.

James H. Rawls (2) (3)
Director
Mr. Rawls is the President of Rawls Resources Inc., a private oil and
gas exploration company based in Jackson, Mississippi. Prior thereto,
Mr. Rawls was the President of Hughes-Rawls Corporation, a private oil
and gas exploration company.

Christopher J. Robb (1) (2) (3)
Director
Mr. Robb is the Managing Director of Traction Capital Ltd., a private
investment capital corporation based in Calgary.

Harley L. Winger
Corporate Secretary and Director
Mr. Winger is a Partner with Burstall Winger LLP here in Calgary.

(1) Audit Committee
(2) Compensation Committee
(3) Reserve Committee

Officers

Daryl H. Connolly Brian A. Baker A. Lee Anderson
Chairman & CEO VP Finance & CFO Vice President, Operations

Bruce G. Hall William W. McKenzie Harley L. Winger
VP Land Vice President, Corporate Secretary
Exploration

Head Office Legal Counsel Transfer Agent

Suite 1000, Life Plaza Burstall Winger LLP Valiant Trust Company
734 - 7th Avenue SW 3100, 324 - 8th 403-233-2801
Calgary, AB T2P 3P8 Avenue SW
Calgary, AB T2P 2Z2

Auditors Bank Engineers

KPMG LLP Alberta Treasury McDaniel & Associates
1205, 205 - 5th Branches Consultants Ltd.
Avenue SW 239-8th Avenue SW 2200, 255 - 5th
Calgary, AB T2P 4B9 Calgary, AB T2P 1B9 Avenue SW
Calgary, AB T2P 3G6

Stock Exchange
TSX Exchange
Trading Symbol: AEX



The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of this Press Release.

Contact Information