Birchcliff Energy Ltd.
TSX : BIR

Birchcliff Energy Ltd.

May 15, 2006 00:01 ET

Birchcliff Energy Ltd. Announces 2006 First Quarter Results and Operations Update

CALGARY, ALBERTA--(CCNMatthews - May 15, 2006) -

This press release is not for distribution to United States Newswire Services or for dissemination in the United States.

Birchcliff Energy Ltd. ("Birchcliff") (TSX:BIR) is pleased to announce its financial results for the first quarter of 2006. The full text of the Financial Statements for the three month period ended March 31, 2006 and the related Management's Discussion and Analysis are set forth below and are available on SEDAR at www.sedar.com.

First Quarter 2006 Highlights

- During the first quarter Birchcliff drilled 15 gross (13.5 net) wells of which 14 gross (12.5 net) wells were cased. Of these wells, 8 gross (7.6 net) wells were classified as New Pool Wildcat wells that resulted in six exploration successes that are likely to be new pool discoveries.

- The most significant new pool discovery well was drilled just before breakup and had an open hole test of 6 mmcf/day of raw gas. This well should be on production late in the second quarter and it is expected to initially produce somewhere between 2 to 4 mmcf/day (300 to 650 BOE/day).

- Q1 production averaged 5,271 BOE per day (81% natural gas), a 5% increase from 2005 Q4 average production, and a 21% increase from June 2005, our first operating month.

- First quarter cash flow was $13,296,000 or $0.23 per share, and earnings were $1,581,000 or $0.03 per share.

- Birchcliff has 12.8 net wells with productive capacity which are in various stages of testing, completion and/or tie in. These wells will be brought on production as soon as possible after spring breakup.

- Birchcliff continued to expand its high impact exploration portfolio, expanded two resource plays and initiated technical work on coal bed methane and fractured shale natural gas potential on its lands.

- Birchcliff successfully added 28,876 gross acres of land bringing its undeveloped land holdings at March 31, 2006 to 186,125 acres (142,130 net). As of May 8, 2006 Birchcliff had further increased its undeveloped land holdings to 196,227 gross acres (152,521 net).

- Total capital expenditures in the first quarter were $39.7 million. This amount included expenditures of $20.6 million on drilling and completions, $6.3 million on well equipment and facilities, $9.1 million on land, $1.9 million on seismic and $1.4 million on minor acquisitions.

2006 Outlook

The Corporation expects that average production for second quarter of 2006 will
be approximately the same as the first quarter due to facility turnarounds at
both operated and non-operated facilities, spring breakup which precludes workovers and other operations to add production volumes, and natural production declines.

Birchcliff is continuing with its planned $128 million capital program for 2006 and accordingly, expects to exit 2006 with approximately 8,000 boe/day of production.

First Quarter 2006 Quarterly Report

The full text of the 2006 Quarterly Report follows.

President's Message

Dear Shareholder:

On behalf of the Management Team at Birchcliff, I am pleased to provide you with our first quarter 2006 results. Birchcliff's results continue to be strong notwithstanding lower commodity prices, rising costs and delays in most aspects of our day to day operations. We believe that the location of our assets, in the Peace River Arch area of Alberta, with their multi-zone drilling potential, our ownership, control and/or access to infrastructure together with our ever-growing undeveloped land base, in close proximity to our infrastructure continues to provide Birchcliff with the ability to grow with the drill bit through internally generated prospects. Accordingly, we are very excited about the potential for our future production and reserve growth.

Our first quarter production averaged 5,271 BOE per day (81% natural gas), a 5% increase from our 2005 fourth quarter average production, and a 21% increase from June 2005, our first operating month. First quarter cash flow was $13,296,000 or $0.23 per share, and earnings were $1,581,000 or $0.03 per share.

During the first quarter, Birchcliff drilled 15 gross (13.5 net) wells of which 14 gross (12.5 net) wells were cased. Of these wells, 8 gross (7.6 net) wells were classified as New Pool Wildcat wells that resulted in six exploration successes that are likely to be new pool discoveries. Our most significant new pool discovery well was drilled just before breakup and had an open hole test of 6 mmcf/day of raw gas. This particular well should be on production late in the second quarter and we expect that it will initially produce somewhere between 2 to 4 mmcf/day (300 to 650 BOE/day). This well is a good example of the multi-zone potential of the Peace River Arch in that it also contains several other productive zones that provide significant follow-up opportunities.

Currently, Birchcliff has at least 12.8 net wells with productive capacity which are in various stages of testing, completion and/or tie in. These wells will be brought on production as soon as possible after breakup.

Total capital expenditures in the first quarter were $39.7 million. This amount included expenditures of $20.6 million on drilling and completions, $6.3 million on well equipment and facilities, $9.1 million on land, $1.9 million on seismic and $1.4 million on minor acquisitions.

Consistent with our strategy of buying undeveloped land, Birchcliff spent approximately $9.1 million in the first quarter on land, successfully adding 28,876 gross acres and bringing our undeveloped land holdings to 186,125 acres (142,130 net). As of May 8, 2006 Birchcliff had further increased its land holdings to 196,227 gross acres (152,521 net).

The first quarter was extremely active with Birchcliff outspending its cash flow by approximately $26.4 million which was funded out of debt. Total debt at the end of the first quarter was $86.7 million consisting of $20.1 million in working capital deficiency and $66.6 million drawn on our revolving credit facility. Our current debt facilities are in the process of being increased and syndicated. We have received verbal approval in principle from our banking syndicate subject to final credit approval and we expect our debt facilities will be increased to $120 million in the very near future.

OUTLOOK

Birchcliff's current strategy is to maintain the full amount of its planned $128 million capital program for 2006 in the expectation of higher future natural gas prices as evidenced by the forward commodity price curves. As a result Birchcliff expects to increase its debt during 2006. Birchcliff monitors commodity prices on an ongoing basis and currently does not see the need to reduce its capital spending. Accordingly, we continue to expect to exit 2006 with approximately 8,000 BOE/day of production.

Obviously, with the decline in natural gas prices our cash flows have been reduced and our debt has increased. However, after a successful winter drilling program we are comfortable that we have spent our money wisely and that Birchcliff will have the production and reserves to carry our higher debt levels.

We expect to spend significantly less capital in the second quarter as a result of spring breakup. However, natural declines, plant turnarounds and the obvious inability, resulting from spring breakup, to do workovers or other operations that result in production additions, will have the result that production in the second quarter will remain approximately the same as the first quarter.

Currently, we have one drilling rig working in our Rycroft area. When breakup is over we intend to commence our aggressive summer drilling program, with two and then three rigs working full time later in the summer. Birchcliff expects to drill approximately 70 gross (50.5 net) further wells before year end for a total of 85 gross (65.0 net) wells during 2006. We have a number of service and pipeline crews ready to commence work and we expect to complete two new compression facilities and two plant compressor upgrades in the second half of 2006.

In summary, we look forward to a very aggressive drilling and development schedule during the second half of 2006. I continue to be impressed with the caliber of our employees who, like you, are shareholders of our company with substantial investments. I look forward to the coming months as the drilling rigs commence their programs and our new production comes on stream.




On behalf of the Board of Directors and our Management Team,


A. Jeffery Tonken
President and Chief Executive Officer


FINANCIAL AND OPERATIONAL HIGHLIGHTS

Three months Three months
ended ended
March 31, December 31,
2006 2005 (1) % change
------------------------------------------------------------------------
------------------------------------------------------------------------

OPERATING
Daily Average Production
Light Oil - barrels 770 808 -5%
Natural Gas - thousands of cubic feet 25,853 24,033 8%
NGLs - barrels 191 196 -3%
Total - barrels of oil equivalent (6:1) 5,271 5,009 5%
------------------------------------------------------------------------
Average Sales Price ($ Canadian)
Light Oil - per barrel 62.27 69.91 -11%
Natural Gas - per thousand cubic feet 8.09 12.23 -34%
NGLs - per barrel 67.74 69.23 -2%
Total - per barrel of oil equivalent
(6:1) 51.24 72.65 -29%
------------------------------------------------------------------------
Undeveloped Land
Gross (acres) 186,125 157,249 18%
Net (acres) 142,130 112,938 26%
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NETBACK AND COST
($ per barrel of oil equivalent at 6:1)
Petroleum & natural gas revenue 52.61 74.15 -29%
Royalties, net of ARTC (10.27) (17.94) -43%
Operating expense (8.29) (8.38) -1%
Transportation and marketing expense (1.62) (1.66) -2%
------------------------------------------------------------------------
Netback 32.43 46.17 -30%
General & administrative expense (2.87) (5.57) -48%
Stock-based compensation expense (0.10) -
Interest expense (1.27) (1.09) 17%
Other income 0.01 -
Taxes (0.17) (0.22) -23%
------------------------------------------------------------------------
Cash Flow Netback 28.03 39.29 -29%
Depletion and depreciation (19.41) (19.23) 1%
Accretion (0.40) (0.25) 60%
Stock-based compensation expense (1.31) (12.10) -89%
Future income tax expense (3.57) (7.45) -52%
------------------------------------------------------------------------
Net Earnings 3.34 0.26 1,185%
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------------------------------------------------------------------------

FINANCIAL
Petroleum & Natural Gas Revenue ($000) 24,958 34,175 -27%
------------------------------------------------------------------------
Cash Flow from Operations ($000) 13,296 18,112 -27%
Per share - basic ($) 0.23 0.32 -28%
Per share - diluted ($) 0.22 0.30 -27%
------------------------------------------------------------------------
Net Earnings ($000) 1,581 124 1,175%
Per share - basic ($) 0.03 -
Per share - diluted ($) 0.03 -
------------------------------------------------------------------------
Common Shares Outstanding
End of Period - Basic 58,167,747 58,147,747 0%
End of Period - Diluted 66,292,746 65,091,912 2%
Weighted Average for Period
- Basic 58,163,525 56,614,330 3%
Weighted Average for Period
- Diluted 61,827,830 59,964,046 3%
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Capital Expenditures ($000) 39,677 38,485 3%
Working Capital (Deficiency) ($000) (20,107) (23,730) -15%
Revolving Credit Facility ($000) 66,601 36,614 82%
Total Debt ($000) 86,708 60,344 44%
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(1) Comparatives for the three months ended March 31, 2005 have not been
presented as they do not provide a meaningful comparison. During
that time period, Birchcliff did not have petroleum and natural gas
production.


MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") in respect of the three month period ended March 31, 2006 (the "Reporting Period") as compared to the three month period ended March 31, 2005 (the "Comparable Prior Period") and as compared to the three month period ended December 31, 2005 (the "Prior Period") is dated May 12, 2006.

The following discussion and analysis is management's assessment of the historical financial and operating results of Birchcliff Energy Ltd. (the "Corporation" or "Birchcliff") and should be read in conjunction with the unaudited financial statements of the Corporation for the Reporting Period and the audited financial statements for the year ended December 31, 2005 together with the notes thereto, all of which has been prepared in accordance with Canadian Generally Accepted Accounting Principles. Readers should be aware that during the Comparable Prior Period, the Company did not have any petroleum and natural gas production.

Additional information relating to the Corporation is available on SEDAR at www.sedar.com. Birchcliff is listed for trading on the Toronto Stock Exchange under the symbol "BIR".

FORWARD LOOKING STATEMENTS

This disclosure includes forward-looking statements and assumptions respecting the Corporation's strategies, future operations, expected financial results, financing sources, commodity prices, costs of production and quantum of petroleum and natural gas reserves and discusses certain issues, risks and uncertainties that can be expected to impact on any of such matters.

By their nature, forward-looking statements are subject to numerous risks and uncertainties that can significantly affect future results. Actual future results may differ materially from those assumed or described in such forward-looking statements as a result of the impact of issues, risks and uncertainties whether described herein or not, which the Corporation may not be able to control. The reader is therefore cautioned not to place undue reliance on such forward-looking statements.

The Corporation disclaims any intention or obligation to update or revise these forward-looking statements as a result of new information, future events or otherwise.

NON-GAAP MEASURES

Included in this MD&A for the Reporting Period are references to terms commonly used in the petroleum and natural gas industry, such as cash flow or cash generated from operations, cash flow per share, operating netback and cash flow netback.

Cash flow, as discussed in this MD&A for the Reporting Period, appears as a separate caption on the Corporation's statements of cash flows as "cash generated by operations" and is reconciled to net earnings or loss. In the Corporation's financial disclosure documents, operating netback denotes petroleum and natural gas revenue less royalties (net of ARTC), less operating expenses and less transportation and marketing expenses. Cash flow netback as used herein denotes net earnings plus future income tax expense, depletion, depreciation and accretion expense and non-cash stock-based compensation expense.

These terms are not defined by Generally Accepted Accounting Principles and consequently, they are referred to as non-GAAP measures. The reader should be cautioned that these amounts may not be directly comparable to measures for other companies where similar terminology is used.

BOE CONVERSIONS

Barrel of oil equivalent ("BOE") amounts may be misleading, particularly if used in isolation. A BOE conversion ratio has been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel and is based on an energy equivalent conversion method primarily applicable at the burner tip and does not necessarily represent an economic value equivalency at the wellhead.

OVERALL PERFORMANCE

In the first quarter of 2006, Birchcliff continued to focus on adding reserves and production through the drill bit, identifying and completing only one minor acquisition during January 2006. Average production increased 5% from 5,009 BOE/d in the Prior Period to 5,271 BOE/d for the Reporting Period as a result of drilling successes.

Total debt grew by 44% or $26.4 million, rising to $86.7 million at March 31, 2006 compared to $60.3 million at December 31, 2005. The prime reason for this large increase was capital spending of $39.7 million during the Reporting Period which exceeded the cash flow of only $13.3 million. Just over $11 million or 28% of the capital expended during the Reporting Period was spent on land sales and seismic as Birchcliff continues to build its inventory of potential drilling locations for the future.

Warm temperatures in the United States of America during the Reporting Period reduced the demand for natural gas and resulted in a decrease in commodity price from the Prior Period to the Reporting Period. To some extent, this also contributed to the increase in debt. The cash flow netback for the Prior Period was $39.29 per BOE as compared to $28.03 per BOE in the Reporting Period. The $11.26 per BOE difference translates into a reduction of $5.3 million in cash flow based on the 474,361 BOE produced in the Reporting Period.

The Corporation is always reviewing potential property acquisitions, joint venture opportunities and corporate acquisitions with the intention of completing such a transaction if acceptable terms can be negotiated. As a result, Birchcliff is continuously involved in negotiations with other parties in respect of property and corporate acquisition opportunities. Management is confident that in the current environment, the Corporation is capable of raising sufficient equity and/or debt financing to fund one or more of these transactions should it be necessary.

MAJOR TRANSACTIONS AFFECTING FINANCIAL RESULTS

There were no major transactions to report during the Reporting Period.

Birchcliff anticipates an increase to its credit facility to $120 million from the current $80 million limit. Concurrently, the credit facility is being syndicated to include a second bank. Verbal approval in principle has been received from both lenders and Birchcliff expects the increase in its credit facility to be completed in May 2006, subject to completion of documentation and final approvals.

LIQUIDITY AND BANK DEBT

As a result of its capital program, the Corporation had a working capital deficit of $20.1 million at March 31, 2006, as compared to a working capital surplus of $29.2 million on March 31, 2005. The working capital surplus in the Comparable Prior Period was due to proceeds of Birchcliff's first equity financing which closed in January 2005. At March 31, 2006 the largest component of Birchcliff's current assets (56%) is the cash to be received from its marketers in respect of March 2006 production which was subsequently received in April 2006. In contrast, the current liabilities consist of trade payables (52%), accrued capital, royalties and operating costs (29%) and other minor amounts. Management expects this working capital deficit to continue into the foreseeable future as Birchcliff continues its aggressive capital program in the Peace River Arch area.

The Corporation's bank debt or revolving credit facility of $80 million was drawn to $66.6 million at March 31, 2006. The Corporation treats this revolving credit facility as long-term debt because the credit agreement provides that, should the lender decide to not renew the revolving credit facility at the end of its one year period (May 31, 2006), the Corporation has the option to cause the outstanding loan to become repayable on a date that is two years from the date the revolving credit facility terminates. Currently, Birchcliff's lender has indicated that it will renew the revolving credit facility.

Overall, the Corporation did not have any liquidity issues with respect to the operations of its petroleum and natural gas business in the Reporting Period nor does it anticipate a liquidity issue in the foreseeable future.

The Corporation intends to finance its oil and natural gas business primarily through cash generated from operations, proceeds from bank debt, and equity financings to the extent required. Management expects to be able to continue to raise additional equity and debt financing sufficient to meet both its short-term and long-term growth requirements in the current environment. Birchcliff is now at such a size that it anticipates it will not require additional equity except in significant acquisition situations or to increase its exploratory spending.

The major risk factors affecting the Corporation's liquidity are a further decline in commodity prices for natural gas since Birchcliff is 81% weighted to natural gas; the risk of natural production declines being greater than the Corporation anticipates; and the risk that future production increases will be less than anticipated.

The success of the Corporation's business is highly dependent on its ability to acquire and/or discover new reserves in a cost efficient manner. Substantially all of the Corporation's cash flow will be derived from the sale of the petroleum and natural gas reserves it accumulates and develops. In order to remain financially viable, the Corporation must be able to replace reserves on a per unit basis for less than its cash flow on a per unit basis over time. The reserves and costs used in this determination are estimated each year based on numerous assumptions and these estimates and costs may vary materially from the actual reserves produced or from the costs required to produce those reserves. In order to mitigate this risk, the Corporation employs a competent and experienced team of petroleum and natural gas professionals and closely monitors the capital expenditures made for the purposes of increasing its petroleum and natural gas reserves.

Cash Generated by Operations

Cash generated by the Corporation was $13.3 million for the Reporting Period. The Corporation did not have positive cash flow in the Comparable Prior Period as it did not have any petroleum or natural gas production during that period. Future cash flow will be dependent primarily on production increases and commodity prices for natural gas.

OUTSTANDING SHARE DATA

The common shares of Birchcliff began trading on the TSX Exchange on July 21, 2005 under the symbol "BIR" and were at the same time de-listed from the TSX Venture Exchange where they were trading under the same symbol prior to such time. The following table summarizes the common shares issued from December 31, 2004 to March 31, 2006 which are the only class of shares outstanding:



------------------------------------------------------------------------
Common Shares
------------------------------------------------------------------------
Balance at December 31, 2004 1
Exercise of Options and Warrants -
Private Placements 5,225,900
Issue of Common Shares for Subscription Receipts 13,966,000
Issue of Common Shares for Common Shares of Scout 1,056,436
------------------------------------------------------------------------
------------------------------------------------------------------------
Balance at March 31, 2005 20,248,337
Exercise of Options and Warrants -

Issue of Common Shares for Veracel Subscription
Receipts and/or Class B Common Shares 34,000,000
Issue of Common Shares for Common Shares of
Veracel 117,010
Issue of Flow-Through Common Shares 2,000,000
------------------------------------------------------------------------
------------------------------------------------------------------------
Balance at June 30, 2005 56,365,347
Issue of Common Shares and Exercise of Options
and Warrants -
------------------------------------------------------------------------
------------------------------------------------------------------------
Balance at September 30, 2005 56,365,347
Issue of Common Shares upon Exercise of Warrants 300,000
Issue of Flow-Through Common Shares 1,482,400
------------------------------------------------------------------------
------------------------------------------------------------------------
Balance at December 31, 2005 58,147,747
------------------------------------------------------------------------
------------------------------------------------------------------------
Issue of Common Shares upon Exercise of Options 20,000
------------------------------------------------------------------------
------------------------------------------------------------------------
Balance at March 31, 2006 58,167,747
------------------------------------------------------------------------
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RESULTS OF OPERATIONS

Petroleum and Natural Gas Revenue

Petroleum and natural gas revenues totaled $25.0 million for the Reporting Period as compared to NIL in the Comparable Prior Period as there was no petroleum or natural gas production during that period. The following table details Birchcliff's petroleum and natural gas revenue, production and sales prices by category for the three month Reporting Period and the three month Prior Period:



------------------------------------------------------------------------
Three months ended March 31,
2006
------------------------------------------------------------------------
Total Average
Revenue Daily Average
(All in Canadian $) ($000's) Production % ($/unit)
------------------------------------------------------------------------
Natural Gas (mcf) 18,822 25,853 81 8.09
Light oil (bbls) 4,317 770 15 62.27
Natural gas liquids (bbls) 1,168 191 4 67.74
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------------------------------------------------------------------------
Total petroleum and natural
gas sales (BOE) 24,307 5,271
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Royalty revenue 651
------------------------------------------------------------------------
------------------------------------------------------------------------
Total petroleum and natural
gas revenue 24,958
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------------------------------------------------------------------------

------------------------------------------------------------------------
Three months ended March 31,
2006
------------------------------------------------------------------------
Total Average
Revenue Daily Average
(All in Canadian $) ($000's) Production % ($/unit)
------------------------------------------------------------------------
Natural Gas (mcf) 27,039 24,033 80 12.23
Light oil (bbls) 5,195 808 16 69.91
Natural gas liquids (bbls) 1,250 196 4 69.23
------------------------------------------------------------------------
------------------------------------------------------------------------
Total petroleum and natural
gas sales (BOE) 33,484 5,009
------------------------------------------------------------------------
Royalty revenue 691
------------------------------------------------------------------------
------------------------------------------------------------------------
Total petroleum and natural
gas revenue 34,175
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------------------------------------------------------------------------


In the Comparable Prior Period, the Corporation did not have any petroleum and natural gas revenue since it did not yet have any production at that time. However, comparing the Prior Period results to the Reporting Period shows that despite a 5% increase in sales volumes, total petroleum and natural gas sales decreased by 27%, all attributable to the decline in natural gas prices, which dropped 34%.

Commodity Prices

The price the Corporation receives for its production depends on a number of factors, including AECO Canadian dollar spot market prices for natural gas, U.S. dollar oil prices, the U.S./Canadian dollar exchange rate, and transportation and product quality differentials. Birchcliff regularly considers managing the risk associated with fluctuating spot market prices for natural gas and U.S. dollar oil prices and the U.S./Canadian dollar exchange rate. Birchcliff currently has no fixed commodity price contracts or other hedge type contracts and no current plans to enter into such contracts.

Royalties and ARTC

Oil and natural gas royalties, net of ARTC totaled $4.9 million ($10.27 per BOE) during the Reporting Period. The overall effective royalty rate was 20% of the Corporation's total revenue from the sale of oil and natural gas. Of the total amount of royalties, 96% were Crown royalties and the remaining 4% was mostly gross overriding royalties as Birchcliff has insignificant freehold royalties.

In November 2005, Birchcliff became eligible for ARTC when the first of the wells it drilled were brought on production. The Corporation is eligible for approximately $400,000 of ARTC for the period from June 2005 to March 2006. The Corporation expects to maximize its ARTC claim in the second quarter of 2006. The royalty rate is expected to remain relatively constant in the near future.

Since Birchcliff is primarily a gas producer, any capital it spends for gathering and processing is eligible for gas cost allowance ("GCA") which reduces the amount of Crown royalties paid. The Corporation expects that over the long term its properties will obtain increased GCA credits due to its capital spending program.

Operating Costs

Operating expenses were $3.9 million ($8.29 per BOE) for the Reporting Period as compared to NIL for the Comparable Prior Period since the Corporation did not have any petroleum and natural gas properties at that time. The following table compares the Reporting Period to the Prior Period:



------------------------------------------------------------------------
------------------------------------------------------------------------
Operating Costs Three Months Ended Three Months Ended
($000's) March 31, 2006 December 31, 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Total ($000's) $/BOE Total ($000's) $/BOE
------------------------------------------------------------------------
Field operating costs 3,573 7.53 3,763 8.17
Expensed workovers 359 0.76 98 0.21
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------------------------------------------------------------------------
Total operating costs 3,932 8.29 3,861 8.38
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Operating costs are mitigated by the impact of third party revenues Birchcliff receives for processing, treating and transporting other companies' production, water disposal fees, road use fees and other minor recoveries. One of Birchcliff's strategic objectives is to maximize the use of its underutilized facilities in order to bring unit production costs down.

The Corporation recognizes that optimizing production expenses is critical to effective exploitation of reserves. It is committed to reducing operating costs on a per BOE basis as it develops economies of scale and continues to implement cost reduction programs. Birchcliff expects to lower its operating costs on a per BOE basis with higher utilization of capacity at its natural gas facilities, but these decreases will be somewhat offset by rising processing fees at third party plants.

Transportation and Marketing Expenses

Transportation and marketing expenses were $770,000 ($1.62 per BOE) for the Reporting Period. These costs consist primarily of transportation costs. Although the aggregate amount of these costs will increase with increased production volumes, Birchcliff does not expect these costs to increase significantly on a per BOE basis.

General and Administrative Expense

Net general and administrative costs in the Reporting Period were $1.4 million ($2.87 per BOE) as compared to the Comparable Prior Period of $786,000 for which there was no production and thus no comparable per BOE figure. In the Comparable Prior Period, Birchcliff did not have a full complement of technical staff since it did not have any petroleum and natural gas production at that time. Gross general and administrative costs in the Reporting Period were just over $2 million. The components of G&A are as follows:



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------------------------------------------------------------------------

General and Administrative Three Months Three Months
Expense Ended Ended
($000's) March 31, 2006 March 31, 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Salaries, benefits and
consultants 1,252 61% 566 72%
Other 794 39% 220 28%
------------------------------------------------------------------------
G & A expense, gross 2,046 100% 786 100%
Overhead recoveries (463) -23% - -%
Capitalized overhead (223) -11% (121) -15%
------------------------------------------------------------------------
G & A expense, net 1,360 66% 665 85%
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------------------------------------------------------------------------
G & A expense, net per BOE $2.87 n/a
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The Corporation expects that as it grows its production its G&A cost per BOE will be reduced because the Corporation is currently staffed for further growth. However, Birchcliff believes the market for qualified staff continues to be competitive and therefore staffing costs are likely to continue to rise which will somewhat mitigate the per BOE G&A reduction.

Interest Expense

Interest expense for the Reporting Period was $604,000 ($1.27 per BOE). In the Comparable Prior Period, interest expense was insignificant and related to promissory notes to a shareholder and an independent businessman. The Corporation expects interest expense to increase on a monthly basis in aggregate over time as the amount drawn on the revolving credit facility increases to fund its capital program, but it should remain relatively constant on a per BOE basis, unless the debt structure is altered substantially from its current form.

Depletion, Depreciation and Accretion Expense

The provision for depletion, depreciation and accretion for the Reporting Period was $9.4 million ($19.81 per BOE). Depletion and depreciation expense was $9.2 million ($19.41 per BOE), leaving the remaining $191,000 ($0.40 per BOE) as accretion in relation to the Corporation's asset retirement obligations. In the Comparable Prior Period, the Corporation had only a small amount of office furniture and computer equipment and consequently, depreciation expense was immaterial.

Depletion and depreciation expense is primarily a function of both the proved reserve additions and the cost of petroleum and natural gas properties in the full cost pool attributable to those proved reserves. At March 31, 2006, Birchcliff has excluded from its full cost pool $67 million of costs for undeveloped land acquired by Birchcliff and for unproved properties acquired in the Southwest Peace River Arch asset acquisition which closed May 31, 2005 ("the Acquisition") relating to opportunities in the probable reserve category and the potential drilling, recompletion and workover opportunities which have not yet been assigned any reserves. The Corporation intends that over time it will, for depletion calculation purposes, reduce the cost amount excluded from the full cost pool in respect of unproved properties as those unproved properties are drilled, developed, or have their value impaired by new information or circumstances.

Petroleum and Natural Gas Properties Impairment Test

The Corporation follows the full cost method of accounting which requires periodic review of capitalized costs to ensure that they do not exceed the recoverable value of the petroleum and natural gas properties and that they do not exceed the fair value of the assets.

Birchcliff performed an impairment (ceiling) test review at March 31, 2006 on its petroleum and natural gas assets. Based on this review, there is no impairment of Birchcliff's petroleum and natural gas assets.

Taxes

The Corporation's current tax expense for the Reporting Period was $83,000 ($0.17 per BOE) representing Large Corporation Tax ("LCT") expense. In the Comparable Prior Period, prior to the major funding of the Acquisition, the LCT was $4,500. The May 2, 2006 federal budget provides for LCT to be repealed effective January 1, 2006; when the budget is passed, the Corporation will record a current tax recovery and cease accruing for LCT.

For the Reporting Period, Birchcliff recorded a future income tax expense of $1.7 million ($3.57 per BOE). The Corporation will record future income tax expense in future periods, as it expects to utilize the tax basis of its assets at a rate greater than the book rate of depletion and depreciation, in order to remain non-taxable in the current commodity price environment. In the Comparable Prior period, no future tax expense was recorded because the Corporation did not any have oil and natural gas production and consequently did not have significant income during that period of time.

Stock-Based Compensation

Birchcliff accounts for its stock-based compensation programs, including performance warrants and stock options, using the fair value method. Under this method, the Corporation records compensation expense related to the stock-based compensation programs in the income statement over the vesting period.
In total, 555,000 of outstanding stock options vested during the Reporting Period. The Corporation recorded $669,000 ($1.41 per BOE) of stock-based compensation expense relating to stock options in the Reporting Period as compared to $319,000 during the Comparable Prior Period, which included both stock options and performance warrants. Although there is no compensation expense relating to the warrants included in the Reporting Period amount, the total expense has increased due to the increase in the number of options issued subsequent to the Comparable Reporting Period. This amount is expected to remain relatively consistent going forward on an absolute value basis since the performance warrants fully vested during the Prior Period and only stock options are now affecting the expense amount.

Birchcliff cancelled 16,666 vested stock options during the Reporting Period, resulting in a cash-paid stock-based compensation expense of $46,000 which is included in total stock-based compensation expense.

CAPITAL EXPENDITURES AND CAPITAL RESOURCES

Capital expenditures amounted to $39.7 million during the Reporting Period. In the Comparable Prior Period $2.4 million of capital expenditures were incurred relating to capitalization of exploration and development activities, seismic and land acquisitions, the drilling of one well at a 30% working interest and administrative assets. Birchcliff did not have significant oil and gas operations in the Comparable Prior Period.

The following table sets forth a summary of the capital expenditures incurred for the Reporting Period and the Comparable Prior Period:



Capital Expenditures

------------------------------------------------------------------------
Three Months Ended March 31 ($000's) 2006 2005
------------------------------------------------------------------------
Acquisitions 1,365 134
Land 9,128 454
Exploration - drilling and completions 6,322 525
Exploration - seismic 1,926 918
Exploration - other 157 187
Development - drilling and completions 14,254 -
Development - other 5 -
Well equipment and facilities 6,250 -
Capitalized general and administrative expenses 235 121
Total finding and on-stream costs 39,642 2,339
Corporate acquisitions - non oil and
natural gas related - 36
Administrative assets 35 12
------------------------------------------------------------------------
Total Capital Expenditures 39,677 2,387
------------------------------------------------------------------------

The following table sets forth a summary of the Corporation's capital
resources for the Reporting Period and the Comparable Prior Period:


Capital Resources

------------------------------------------------------------------------
Three Months Ended March 31 ($000's) 2006 2005
------------------------------------------------------------------------
Cash generated by (used in) operations 13,296 (342)
Changes in working capital from operations 1,367 378
Loans payable - (708)
Equity issues, net of issue costs 17 15,618
Deposit on petroleum and natural gas properties - (25,000)
Increase in revolving credit facility 29,987 -
Changes in working capital from investing (4,990) 180
------------------------------------------------------------------------
Total capital resources 39,677 (9,874)
------------------------------------------------------------------------


SELECTED QUARTERLY INFORMATION

------------------------------------------------------------------------
Quarter Ended
($000's, except share March 31, December 31, September 30,
and per share amounts) 2006 2005 2005
------------------------------------------------------------------------

Petroleum and natural gas
production (BOE per day) 5,271 5,009 4,626
Petroleum and natural gas
commodity price ($ per BOE) $51.24 $ 72.65 $ 62.20

Total petroleum and natural gas
revenue 24,958 34,175 26,843
Total royalties, net of ARTC (4,871) (8,269) (5,711)
Total interest and other revenue 3 1 2
Total revenues, net 20,090 25,907 21,134

Net income 1,581 124 4,336
Per share basic 0.03 - 0.08
Per share diluted 0.03 - 0.07

Cash generated by operations 13,296 18,112 15,303
Per share basic 0.23 0.32 0.27
Per share diluted 0.22 0.30 0.26

Book value of total assets 329,632 311,364 276,961
Loans - - -
Revolving credit facility (66,601) (36,614) (47,945)
Total (debt) / working capital (86,708) (60,344) (53,748)
Shareholder's equity (deficit) 218,124 223,894 204,198

Common shares outstanding
- end of period
Basic 58,167,747 58,147,747 56,365,347
Diluted 66,292,746 65,091,912 63,259,512
Weighted average common
shares outstanding
Basic 58,163,525 56,614,330 56,365,347
Diluted 61,827,830 59,964,046 58,842,965
------------------------------------------------------------------------


------------------------------------------------------------------------
Quarter Ended
($000's, except
share and per June 30, March 31, December 31, September 30,
share amounts) 2005 2005 2004 2004
------------------------------------------------------------------------

Petroleum and natural
gas production
(BOE per day) 1,460(1) - - -
Petroleum and natural
gas commodity price
($ per BOE) $ 50.16 - - -

Total petroleum and
natural gas revenue 6,772 - - -
Total royalties (1,441) - - -
Total interest and
other revenue 365 329 66 -
Total revenues 5,696 329 66 -

Net income (loss) (601) (672) (631) (87)
Per share basic (0.02) (0.04) (631) (87)
Per share diluted (0.02) (0.04) (631) (87)

Cash generated by
(used in) operations 3,109 (342) (558) (79)
Per share basic $0.10 (0.02) (558) (79)
Per share diluted $0.09 (0.02) (558) (79)

Book value of total
assets 266,655 57,658 42,983 337
Loans - - (708) (300)
Revolving credit
facility (55,155) - - -
Total (debt) /
working capital (54,244) 29,232 41,343 (205)
Shareholder's equity
(deficit) 199,193 56,923 41,694 (87)

Common shares
outstanding
- end of period
Basic 56,365,347 20,248,337 1 1
Diluted 63,143,512 25,963,002 1,665,001 1
Weighted average
common shares
outstanding
Basic 32,507,978 16,423,651 1 1
Diluted 34,012,050 17,862,366 1 1
------------------------------------------------------------------------

(1) Average is based on production for June 2005 only, which is the
period during which Birchcliff recorded petroleum and natural gas
production and associated revenues and expenses following the
acquisition of properties in the SWPRA area of Alberta.



Discussion of Quarterly Results

The Corporation increased production by 5% from the Prior Period to the Reporting Period as a result of the wells it tied in during December 2005 and the Reporting Period. Commodity prices decreased from $72.65 per BOE in the Prior Period to $51.24 per BOE in the Reporting Period. This is a 29% decrease, which when combined with the 5% production increase, resulted in a 27% decrease in cash flow from the Prior Period to the Reporting Period. The Corporation continues to focus on its drilling opportunities and continues to aggressively acquire land in its core areas. As such, debt in the Reporting Period has increased 44% from the Prior Period, but it is still within the Corporation's current credit facility limits. The book value of total assets increased by 6% due to the capital invested in Birchcliff's development and exploration program. The number of basic common shares outstanding increased by 20,000 shares due to the exercise of stock options in respect of 20,000 common shares during the Reporting Period.

OUTLOOK

The Corporation expects that average production for the second quarter of 2006 will be approximately the same as the Reporting Period due to facility turnarounds at both operated and non-operated facilities, spring breakup which precludes workovers and other operations to add production volumes, and natural production declines. Birchcliff now has 12.8 net wells standing cased which are in various stages of completion and tie-in. These wells will be tied in and brought on production as soon as possible following spring breakup.

Although the Corporation continues to face a general scarcity of necessary oilfield services, Birchcliff remains confident about its potential for production growth from its behind pipe production additions and its upcoming summer and fall drilling programs.

Birchcliff's current strategy is maintain the full amount of its planned $128 million capital program for 2006 in the expectation of higher natural gas prices in the fall and winter months and as a result it expects to increase its debt during 2006. Consistent with this strategy, the Corporation has syndicated and substantially increased its credit facility. Birchcliff monitors commodity prices on an ongoing basis and currently does not see the need to reduce its capital spending.



INTERIM FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)

BIRCHCLIFF ENERGY LTD.
Balance Sheets
(Unaudited) ($000's)
------------------------------------------------------------------------
------------------------------------------------------------------------
March 31, December 31,
2006 2005
-------------------------

ASSETS

CURRENT
Cash and cash equivalents 64 64
Accounts receivable 12,940 16,385
Prepaid and other 1,420 1,426
-------------------------
14,424 17,875

Future income tax asset 5,050 14,735

Petroleum and natural gas properties and
equipment (Note 4) 310,158 278,754
-------------------------
329,632 311,364
-------------------------
-------------------------

LIABILITIES

CURRENT
Accounts payable and accrued liabilities 34,531 41,605
-------------------------
34,531 41,605
-------------------------

Revolving credit facility (Note 5) 66,601 36,614
Asset retirement obligations (Note 6) 10,376 9,251

SHAREHOLDERS' EQUITY
Share capital (Note 7) 207,030 214,951

Contributed surplus (Note 7) 7,149 6,579
Retained earnings 3,945 2,364
-------------------------
218,124 223,894
-------------------------
329,632 311,364
-------------------------
-------------------------

See accompanying notes to the financial statements.



APPROVED BY THE BOARD

"Larry A. Shaw"
Larry A. Shaw, Director

"A. Jeffery Tonken"
A. Jeffery Tonken, Director



BIRCHCLIFF ENERGY LTD.
Statement of Net Income (Loss) and Retained Earnings (Deficit)
(Unaudited) ($000's)
------------------------------------------------------------------------
Three months ended Three months ended
March 31, 2006 March 31, 2005
-----------------------------------------

REVENUE
Petroleum and natural gas 24,958 -
Royalties (4,871) -
Interest and other 3 330
-----------------------------------------
20,090 330
-----------------------------------------
EXPENSES
Production 3,931 -
Transportation 770 -
General and administrative 1,360 665
Stock-based compensation
(Note 8) 669 319
Depletion, depreciation and
accretion 9,397 11
Interest 604 2
-----------------------------------------
16,731 997
-----------------------------------------
INCOME (LOSS) BEFORE TAXES 3,359 (667)

TAXES
Capital taxes 83 5
Future income taxes 1,695 -
-----------------------------------------
1,778 5
-----------------------------------------
NET INCOME (LOSS) 1,581 (672)

RETAINED EARNINGS (DEFICIT),
BEGINNING OF PERIOD 2,364 (789)

PLAN OF ARRANGEMENT COSTS
(Note 2) - (36)
-----------------------------------------

RETAINED EARNINGS (DEFICIT),
END OF PERIOD 3,945 (1,497)
-----------------------------------------
-----------------------------------------

Net income (loss) per common
share
basic and diluted $0.03 ($0.04)
Weighted average common shares
basic 58,163,525 16,423,651
diluted 61,827,830 17,862,366

See accompanying notes to the financial statements.



BIRCHCLIFF ENERGY LTD.
Statement of Cash Flows
(Unaudited) ($000's)
------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended Three months ended
March 31, 2006 March 31, 2005
-------------------------------------------
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:

OPERATING

Net income (loss) 1,581 (672)
Adjustments for items not
affecting cash:
Depletion, depreciation
and accretion 9,397 11
Stock-based compensation -
non cash portion (Note 8) 623 319
Future income tax 1,695 -
-------------------------------------------

Cash generated by operations 13,296 (342)
Changes in non-cash working
capital (Note 10) 1,367 378
-------------------------------------------
14,663 36
-------------------------------------------

FINANCING

Increase in revolving credit
facility 29,987 -
Decrease in loans payable - (708)
Issuance of share capital,
net of issue costs (Note 7) 17 15,618
-------------------------------------------
30,004 14,910
-------------------------------------------

INVESTING

Scout arrangement costs
(Note 2) - (36)
Purchase of petroleum and
natural gas properties and
equipment (1,365) (25,000)
Development of petroleum and
natural gas properties and
equipment (38,312) (2,351)
Changes in non-cash investing
working capital (Note 10) (4,990) 180
-------------------------------------------
(44,667) (27,207)
-------------------------------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS - (12,261)

CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 64 42,031
-------------------------------------------

CASH AND CASH EQUIVALENTS,
END OF PERIOD 64 29,770
-------------------------------------------
-------------------------------------------

Cash interest paid 604 2
Cash taxes paid 60 -

See accompanying notes to the financial statements


BIRCHCLIFF ENERGY LTD.
Notes to the Financial Statements
For the Three Months Ended March 31, 2006
(Unaudited)


1. BASIS OF PRESENTATION

Birchcliff Energy Ltd. ("Birchcliff" or the "Corporation") was a private company, incorporated under the Business Corporations Act (Alberta) on July 6, 2004 as 1116463 Alberta Ltd. It changed its name from 1116463 Alberta Ltd. to Birchcliff Energy Ltd. on September 10, 2004. The Corporation is engaged in the exploration for and the development, production and acquisition of, petroleum and natural gas reserves in Western Canada. Birchcliff's financial year end is December 31.

On January 18, 2005, the Corporation completed a merger arrangement ("Scout Arrangement") involving the Corporation and Scout Capital Corp. ("Scout"), a publicly traded corporation. The newly amalgamated entity, Birchcliff Energy Ltd., became a publicly traded corporation on the TSX Venture Exchange on January 20, 2005. This transaction was accounted for using reverse takeover accounting principles.

On May 31, 2005, the Corporation completed a merger arrangement ("Veracel Arrangement") involving the Corporation and Veracel Inc. ("Veracel"), a privately held corporation that sought to reorganize and enter the oil and gas business. As Birchcliff is treated as the deemed acquirer, the comparative financial statements are those of Birchcliff, which presents all of the historical financial results relating to the oil and natural gas business in which the Corporation is continuing. Concurrent with the Veracel Arrangement, Birchcliff completed the purchase of certain properties in the South West Peace River Arch area of Alberta (the "Acquisition"). The Acquisition and the Veracel Arrangement were completed together so as to create a business combination to be operated by the amalgamated corporation resulting from the Veracel Arrangement.

The interim financial statements of Birchcliff Energy Ltd. have been prepared by management in accordance with accounting principles generally accepted in Canada. The interim financial statements have been prepared following the same accounting policies and methods of computation as the financial statements for the period ended December 31, 2005. The disclosure which follows does not include all disclosures required for the annual financial statements. These interim financial statements should be read in conjunction with the financial statements and notes thereto for the period ended December 31, 2005.

2. SCOUT ARRANGEMENT

Pursuant to an arrangement agreement dated November 8, 2004, as amended on December 1, 2004, the Corporation implemented a Plan of Arrangement with Scout that was completed on January 18, 2005. The Corporation has accounted for this transaction as a reverse takeover of Scout by Birchcliff. Costs incurred to December 31, 2005 of $36,000 relating to the transaction were charged directly to the deficit in 2005 ($70,000 in 2004).

The acquisition has been accounted for by the purchase method. Details of the acquisition are as follows:



------------------------------------------------------------------------
------------------------------------------------------------------------
Net assets acquired: $000's
------------------------------------------------------------------------
Cash and short-term investments 3,411
Marketable securities, accounts receivable and other 18
Current liabilities, including Scout transaction costs (260)
------------------------------------------------------------------------
3,169
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
------------------------------------------------------------------------
Consideration: $000's
------------------------------------------------------------------------
Common shares of the Corporation (1,056,436) 3,169
------------------------------------------------------------------------
------------------------------------------------------------------------


3. VERACEL ARRANGEMENT AND ACQUISITION OF PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT

On March 29, 2005, the Corporation signed a purchase and sale agreement relating to the purchase of certain properties in the South West Peace River Arch area of Alberta (the "Acquisition"), effective January 1, 2005, for $255 million before closing adjustments and related costs. The Acquisition closed on May 31, 2005, immediately after the completion of the Veracel Arrangement. Pursuant to an arrangement agreement, the Corporation implemented a Plan of Arrangement with Veracel which was completed on May 31, 2005. Veracel was in the process of re-organizing itself.



The following table details the purchase price allocation for the
Veracel Arrangement and the Acquisition:

------------------------------------------------------------------------
------------------------------------------------------------------------
Net assets acquired: $000's
------------------------------------------------------------------------
Petroleum and natural gas properties and equipment 233,921
Asset retirement costs (8,357)
Future tax benefit 17,248
------------------------------------------------------------------------
242,812
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
------------------------------------------------------------------------
Consideration: $000's
------------------------------------------------------------------------
Purchase price, net of adjustments, paid in cash 238,564
Costs related to the Veracel Arrangement 2,119
Costs related to the Acquisition 2,129
------------------------------------------------------------------------
242,812
------------------------------------------------------------------------
------------------------------------------------------------------------


The Corporation has made its best estimate as to the net assets acquired and the consideration given. The final purchase price adjustment has been determined by the Corporation and the vendor but not all costs have yet been finalized, such as annual through-put adjustments. The Corporation has made its best estimate for theses costs but, the above amount may be subject to adjustment.



4. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT

March 31, 2006
------------------------------------------------------------------------
Accumulated
Depletion and Net
Depreciation Book Value
Cost $000's $000's $000's
------------------------------------------------------------------------
Petroleum and natural
gas properties and
equipment 338,331 (28,947) 309,384
Office and other equipment 1,002 (228) 774
------------------------------------------------------------------------
339,333 (29,175) 310,158
------------------------------------------------------------------------
------------------------------------------------------------------------


December 31, 2005
------------------------------------------------------------------------
Accumulated
Depletion and Net
Depreciation Book Value
Cost $000's $000's $000's
------------------------------------------------------------------------

Petroleum and natural
gas properties and
equipment 297,756 (19,804) 277,952
Office and other equipment 967 (165) 802
------------------------------------------------------------------------
298,723 (19,969) 278,754
------------------------------------------------------------------------
------------------------------------------------------------------------


As at March 31, 2006, the cost of petroleum and natural gas properties includes $67.1 million (as at December 31, 2005 - $64.4 million) relating to unproved properties which have been excluded from costs subject to depletion and depreciation. Most of these costs relate to unproved properties acquired in the Acquisition.

Birchcliff capitalized general and administrative costs of $223,000 in the three month period ended March 31, 2006 (as at December 31, 2005 - $893,000) related to exploration and development activities.

The Corporation performed an impairment (ceiling) test review at March 31, 2006 to assess the recoverable value of the petroleum and natural gas properties and equipment and to assess that it does not exceed its fair value. Management's assessment is that there is no impairment of petroleum and natural gas properties and equipment as at March 31, 2006.

5. REVOLVING CREDIT FACILITY

The Corporation has available to it a revolving credit facility with an authorized amount of up to $80 million which is provided by a Canadian chartered bank (the "Lender"). As at March 31, 2006, Birchcliff had drawn $66.6 million on the credit facility. At March 31, 2006 the prime rate was 5.5%.

The credit facility allows for prime rate loans, US base rate loans, bankers' acceptances, letters of credit and LIBOR loans. The credit facility bears interest at varying rates depending on the instrument utilized and the debt to EBITDA ratio, where EBITDA equals net earnings after income taxes (but excluding extraordinary items), plus interest expense, income taxes and non-cash items deducted in determining net earnings. The credit facility is revolving and will continue to revolve until the conversion date of May 30, 2006. Not more than 90 days and not less than 60 days prior to the conversion date, Birchcliff may request an extension of the conversion date with such extension not exceeding 364 days. If the Lender does not grant an extension of the conversion date then the credit facility will convert to a non-revolving two year term loan from the conversion date which will then have a maturity date set at two years from the conversion date.

All obligations under the credit facility become due and payable and must be paid in their entirety on the maturity date. The credit facility is subject to the Lender's mid-year redetermination of the borrowing base as of October 31 of each year. Upon any change in or redetermination of the borrowing base limit which results in a borrowing base shortfall, the Corporation shall eliminate the borrowing base shortfall amount. The facility is secured by a general security agreement encompassing all of the Corporation's assets.

6. ASSET RETIREMENT OBLIGATIONS

The Corporation's asset retirement obligations result from net ownership interests in petroleum and natural gas properties including well sites, gathering systems and processing facilities. Birchcliff estimates the total undiscounted amount of cash flows required to settle its asset retirement obligation as at March 31, 2006 to be approximately $29.7 million which will be incurred between 2006 and 2056. A credit-adjusted risk-free interest rate of 8% and an inflation rate of 2% were used to calculate the fair value of the asset retirement obligation.



A reconciliation of the asset retirement obligations is provided below:

------------------------------------------------------------------------
------------------------------------------------------------------------
($000's) 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Balance, January 1 9,251 -
Change in estimates 497 -
Obligations incurred 437 21
Accretion expense 191 -
------------------------------------------------------------------------
Balance, March 31 10,376 21
------------------------------------------------------------------------
------------------------------------------------------------------------


7. SHARE CAPITAL

(a) Authorized

Unlimited number of voting common shares

Unlimited number of non-voting first preferred shares

The preferred shares may be issued in one or more series and the directors are authorized to fix the number of shares in each series and to determine the designation, rights, privileges, restrictions and conditions attached to the shares of each series.

A series of 25,129,885 Series 1 Preferred Shares were designated by the Directors of the Corporation on May 30, 2005 for issuance pursuant to the Veracel Arrangement. On May 31, 2005, 17,287,432 Series 1 Preferred Shares were issued under the Veracel Arrangement in exchange for 9,988,008 common shares of Veracel and 7,299,424 Class A Preferred Shares of Veracel. All of the Series 1 Preferred Shares that were issued have been redeemed for cash.



(b) Issued

---------------------------------
Number of
Common Shares Amount $
---------------------------------
Incorporation on July 6, 2004 1 3
---------------------------------
Balance, December 31, 2004 1 3

Issued (Note (c)(i)) 383,800 575,700
Issued, net of costs (Note (c)
(ii through iv)) 19,864,536 57,462,253
Issued (Note (d)(i)) 117,010 468,040
Issued, net of costs (Note (d)(ii)) 34,000,000 129,422,500
Issued, net of costs (Note (e)) 2,000,000 9,473,920
Issued upon exercise of warrants
(Note (f)) 300,000 1,332,000
Issued, net of costs (Note (g)) 1,482,400 12,876,768
Tax effect of share issue costs (Note (h)) - 3,340,160
---------------------------------
Balance, December 31, 2005 58,147,747 214,951,344

Issued upon exercise of stock options 20,000 88,800
Share issue costs (Note (i)) - (19,321)
Tax effect of share issue costs (Note (i)) - 6,500
Tax effect of flow-through shares
(Note (e) and (g)) - (7,997,000)
---------------------------------
Balance, March 31, 2006 58,167,747 207,030,323
---------------------------------
---------------------------------


(c) On January 18, 2005, as a result of the exchange of shares pursuant to the successful completion of the Scout Arrangement, the following shares were issued:

(i) 383,800 common shares of Birchcliff were issued to employees and consultants (not management), for which gross proceeds of $575,700 were collected on January 18, 2005, as a result of subscription agreements entered into in November 2004. These shares are held by a trustee and are subject to an option granted to Birchcliff to repurchase the shares if the holder ceases to be employed by Birchcliff (or any successor thereto) prior to January 1, 2008 at a purchase price per share equal to the lesser of $1.50 and the weighted average trading price of Birchcliff shares on a recognized stock exchange during the five trading days immediately prior to the date of which such holder ceases to be employed by Birchcliff or any successor thereto;

(ii) 13,966,000 subscription receipts issued by Birchcliff, as a private corporation, were exchanged for 13,966,000 common shares of Birchcliff for net proceeds of $39,766,677;

(iii) 4,842,100 common shares of Birchcliff were issued to management, directors and associates at a price of $3.00 per common share for net proceeds of $14,526,300;

(iv) 1,056,436 common shares of Birchcliff were issued to shareholders of Scout for net consideration of $3,169,276.

(d) On May 31, 2005, as a result of the successful completion of the Veracel Arrangement, the following shares were issued:

(i) 117,010 common shares of Birchcliff, at a price of $4.00 per common shares, were issued to Veracel shareholders who elected to receive shares rather than cash;

(ii) 34,000,000 common shares of Birchcliff were issued in exchange for 34,000,000 subscription receipts and/or Veracel class B common shares, previously issued by Veracel for net proceeds of $129,422,500;

(iii) 17,287,432 of Series 1 Preferred Shares of Birchcliff were issued in exchange for 9,988,008 common shares of Veracel and 7,299,424 Class A Preferred Shares of Veracel. All of the Series 1 Preferred Shares that were issued were redeemed for cash.

(e) On June 2, 2005, Birchcliff issued 2,000,000 flow-through shares at $5.00 per common share in exchange for flow-through share commitments made by Veracel prior to completion of the Veracel Arrangement, for net proceeds of $9,473,920. As at December 31, 2005 the commitment to spend and renounce $10,000,000 of qualified 100% deductible tax pools with respect to these flow-through shares was fulfilled.

(f) On December 2, 2005, 300,000 common shares were issued in exchange for 300,000 performance warrants with an exercise price of $3.00 per common share for gross proceeds of $900,000; in addition, $432,000 of compensation costs previously recorded to contributed surplus for these performance warrants was removed from contributed surplus and added to share capital.

(g) On December 20, 2005, Birchcliff issued 1,482,400 flow-through shares at a price of $9.12 per share for net proceeds of $12,876,768. As at December 31, 2005 Birchcliff renounced $13,519,488 of qualified 100% deductible tax pools with respect to these flow-through shares. To March 31, 2006 the Corporation has incurred approximately $3.5 million of these expenditures.

(h) Birchcliff recognized a future tax benefit of $3,340,160 in respect of total share issue costs of $9,823,320 incurred to December 31, 2005.

(i) Birchcliff has recognized a future tax benefit of $6,500 in respect of total share issue costs of $19,321 relating to the issuance of flow-through shares on December 20, 2005.

8. STOCK-BASED COMPENSATION

The Corporation has established a stock-based compensation plan whereby officers, employees, directors and consultants may be granted options or performance warrants to purchase one common share for each option or performance warrant granted, at a fixed price not less than the fair market value of the stock at the time of grant, subject to certain conditions being met. Stock options granted under this plan vest over a three year period at the rate of one-third on each anniversary date of the stock option grant. All stock options granted are for a five year term.

In order to calculate the compensation expense, the fair value of the stock options or performance warrants is estimated using the Black-Scholes option-pricing model that takes into account, as of the grant date: exercise price, expected life, current price, expected volatility, expected dividends, and risk-free interest rates.

Stock Options

For the three months ended March 31, 2006, the Corporation recorded $623,000 (2005 - $319,000) of compensation expense and a corresponding increase to contributed surplus related to the issuance of stock options during the period. The Corporation also recorded stock-based compensation expense of $46,000 (2005 - $NIL) and paid out cash relating to the cancellation of vested stock options during the period. Using the fair value method the weighted average fair value of stock options granted during the three months ended March 31, 2006 was $2.92 per option.

At March 31, 2006 the Corporation has authorized for issuance options in respect of 4,375,334 common shares. At March 31, 2006, there remained available for issuance options in respect of 1,441,440 common shares.

A summary of the changes during the three months ended March 31, 2006 and the Corporation's outstanding stock options as at March 31, 2006 is presented below:



---------------------------------
Weighted
Average
Exercise
Number Price $
---------------------------------

Outstanding, December 31, 2004 1,665,000 3.00

Granted 1,529,500 4.40
Exercised - -
Cancelled - -
---------------------------------
Outstanding, December 31, 2005 3,194,500 3.67

Granted 1,217,500 7.11
Exercised (20,000) (3.00)
Cancelled (16,666) (3.00)
---------------------------------
Outstanding, March 31, 2006 4,375,334 4.63
---------------------------------
---------------------------------


------------------------------------------------------------------------
Number Number
Outstanding Exercisable
at March Date of Exercise at March
Date of Grant 31, 2006 Expiry Price $ 31, 2006
------------------------------------------------------------------------
December 3, January 21, 518,334
2004 (1) 1,628,334 2010 3.00 (1)(2)
Apr 20 to Apr 20 to
Jun 22, 2005 1,063,500 Jun 22, 2010 3.50 to 4.09 -
Jul 4 to July 4 to
Sep 7, 2005 116,000 Sept 7, 2010 4.06 to 5.45 -
Oct 6 to Oct 6 to
Nov 28, 2005 350,000 Nov 28, 2010 5.85 to 6.46 -
Jan 11 to Jan 11 to
Mar 6, 2006 1,217,500 Mar 1, 2011 6.50 to 7.60 -
------------------------------------------------------------------------
4,375,334 518,334
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) All options granted under the stock-based compensation plan vest as
to one-third on each anniversary date of their grant except for the
initial options granted. These options vest one-third on January 1
in each of the years 2006, 2007 and 2008.
(2) 20,000 options were exercised and 16,666 options were cancelled
prior to March 31, 2006.


Performance Warrants

At March 31, 2006, there were outstanding 3,749,665 performance warrants with an exercise price of $3.00. Each performance warrant entitles the holder to purchase one common share at the exercise price.

The performance conditions were fulfilled in the fourth quarter of 2005, resulting in all of the performance warrants vesting and becoming fully exercisable. As a result, the full amount of the compensation expense related to the performance warrants was recorded by the Corporation in the fourth quarter of 2005. In December 2005, 300,000 performance warrants were exercised and the compensation expense ($432,000) relating to these exercised warrants was removed from contributed surplus and credited to share capital in accordance with the Corporation's accounting policy.

Consequently for the three months ended March 31, 2006, the Corporation recorded $NIL compensation expense in the statement of income (loss) relating to stock based compensation for the performance warrants.

A summary of the changes during the three months ended March 31, 2006 and the Corporation's outstanding performance warrants as at March 31, 2006 is presented below:



---------------------------------
---------------------------------
Weighted
Average
Exercise
Number Price $
---------------------------------
Outstanding, December 31, 2004 - -
Issued 4,049,665 3.00
Exercised (300,000) 3.00
---------------------------------
Outstanding, December 31, 2005 3,749,665 3.00
Issued - -
Exercised - -
---------------------------------
Outstanding, March 31, 2006 3,749,665 3.00
---------------------------------
---------------------------------


------------------------------------------------------------------------
Number Number
Outstanding Exercisable
at March Exercise at March
Date of Grant 31, 2006 Date of Expiry Price 31, 2006
------------------------------------------------------------------------
January 14, 2005 3,749,665 January 31, 2010 $ 3.00 3,749,665
------------------------------------------------------------------------
------------------------------------------------------------------------


The fair value of each option and performance warrant was determined
on the date of the grant using the Black-Scholes option-pricing model.
The weighted average assumptions used in calculating the fair values
are set forth below:



-----------------------
2006 2005
-----------------------
Risk-free interest rate 4.0% 3.6%
Expected maturity (years) 5.0 5.0
Expected volatility 40.0% 47.3%
Dividend per share $0.00 $0.00



Contributed Surplus Continuity

-----------------------
$000's $000's
-----------------------
Balance, December 31, 2004 63
Stock-based compensation expense
- stock options 1,116
Stock-based compensation expense
- performance warrants (1) 5,832
-----------
Stock-based compensation expense - total 2005 6,948
Exercise of performance warrants (432)
----------
Balance, December 31, 2005 6,579
Stock-based compensation expense - stock options 623
Cancellation of stock options (24)
Exercise of stock options (29)
----------
Balance, March 31, 2006 7,149
----------
----------

(1) All of the performance warrants vested during the fourth quarter
of 2005 and as such 100% of the stock-based compensation value
to be expensed was charged against income in the fourth quarter.


9. COMMITMENTS

Flow-Through Shares

In the fourth quarter of 2005, the Corporation committed to renounce approximately $13.5 million of exploration expenditures pursuant to a flow-through common share issue completed on December 20, 2005. Birchcliff has until December 31, 2006 to incur these exploration expenditures. The Corporation will be subject to Part XII.6 tax based on the prescribed rate and the balance of exploration expenditures not yet incurred at the end of each month subsequent to January 31, 2006. To March 31, 2006, the eligible costs incurred with respect to the $13.5 million flow-through share obligation are approximately $3.5 million.

Office Premises

Subsequent to March 31, 2006, the Corporation is committed under an operating lease for its current office premises which expires on September 30, 2007. It is also committed to March 29, 2011 under an operating lease for some other premises that it does not use and has sublet to an arm's length party on a basis that recovers all of its rental costs. The Corporation is committed to
the following aggregate minimum lease payments (not reduced by rents receivable by the Corporation):



-------------
$
-------------

2006 (Apr 1 - Dec 31) 460,000
2007 682,000
2008 202,000
2009 202,000
2010 202,000
Thereafter 51,000



10. SUPPLEMENTARY CASH FLOW INFORMATION

The following table details the components of non-cash working capital:

--------------------------------------------
Three months ended Three months ended
March 31, 2006 March 31, 2005
--------------------------------------------
$000's $000's
--------------------------------------------
Provided by (used in)
Accounts receivable 3,445 477
Prepaid and other 6 (50)
Accounts payable and
accrued liabilities (7,074) 131
--------------------------------------------
(3,623) 558
--------------------------------------------
--------------------------------------------
Operating 1,367 378
Investing (4,990) 180
--------------------------------------------
(3,623) 558
--------------------------------------------
--------------------------------------------


Advisory

BOE Conversions: The term barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. Per barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil equivalent ("6:1"). A boe conversion ratio of 6:1 is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Forward Looking Statements: This document may contain forward-looking statements regarding the business and operations of Birchcliff Energy Ltd. All statements other than statements of historical fact contained here are forward-looking statements under applicable securities law, and there can be no assurance that the plan, intentions or expectations upon which these forward looking statements are based will occur.

In addition, all such forward-looking information necessarily involve risks associated with oil and gas exploration, production, marketing and transportation such as loss of market, volatility of prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers and ability to access sufficient capital from internal and external sources. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements.

Birchcliff is a publicly traded company that trades on the TSX Exchange under the symbol "BIR".

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

Contact Information

  • Birchcliff Energy Ltd.
    Jeff Tonken
    President and Chief Executive Officer
    (403) 261-6401
    (403) 261-6424 (FAX)
    or
    Birchcliff Energy Ltd.
    Bruno Geremia
    Vice President and Chief Financial Officer
    (403) 261-6401
    (403) 261-6424 (FAX)
    or
    Birchcliff Energy Ltd.
    Jim Surbey
    Vice President, Corporate Development
    (403) 261-6401
    (403) 261-6424 (FAX)