Cinch Energy Corp.
TSX : CNH

Cinch Energy Corp.

May 09, 2007 23:59 ET

Cinch Energy Corp. Releases First Quarter 2007 Results

CALGARY, ALBERTA--(Marketwire - May 9, 2007) - Cinch Energy Corp (TSX:CNH) ("Cinch" or "the Company") is pleased to report on the Company's activities and financial results for the first quarter of 2007. Highlights are as follows:



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Three Months Ended March 31,
2007 2006
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(Unaudited) (Unaudited)

Oil and gas sales, net of transportation
($000's) 6,116 5,200

Sales volumes per day
Natural gas (Mcf/d) 6,790 5,647
Natural gas liquids (Bbl/d) 222 189
Equivalence at 6:1 (BOE/d) 1,354 1,130

Sales Price
Natural gas ($/Mcf) 8.03 8.22
Natural gas liquids ($/Bbl) 60.54 60.19
Equivalence at 6:1 ($/BOE) 50.21 51.13

$ $
Funds from operations (000's)(1) 3,371 2,475
- per share, basic(1) 0.07 0.05
- per share, diluted(1) 0.06 0.05

Net loss (000's) (268) (131)
- per share, basic (0.01) (0.00)
- per share, diluted (0.01) (0.00)

Capital expenditures ($000's) 6,228 6,696

Basic weighted average shares outstanding (000's) 51,111 47,813

Working capital (net debt) (2) ($000's) $
- As at March 31, 2007 (17,264)
- As at December 31, 2006 (23,745)

As at May 7, 2007

Common Shares and Special Warrants outstanding 55,625
Options outstanding 5,111
- average exercise price 1.76
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(1) Funds from operations and funds from operations per share is not a
generally accepted accounting principle ("GAAP") and represents cash
provided by operating activities on the statement of cash flows less
the effect of changes in non-cash working capital related to
operating activities.
(2) Net debt is a non-GAAP measure and represents the sum of the working
capital (deficiency) and the outstanding credit facility balance.


President's Message

PRODUCTION, PRICES, AND COSTS

For the three months ended March 31, 2007, Cinch's production averaged 1,354 BOE/d versus an average of 1,130 BOE/d in the first quarter of 2006 and 1,320 BOE/d in the fourth quarter of 2006. The increase is attributable mainly to new production adds in the Chime, Kakwa, and the Resthaven areas. Production in the Bigstone area was curtailed again on January 30, 2007, however additional processing capacity is projected by the operator to be available commencing in May, which should alleviate the restrictions. The Company anticipates that production in the first half of 2007 should average approximately 1,300-1,400 BOE/d and increase in the second half as new wells are brought on stream.

Prices for the first quarter of 2007 averaged $50.21 per BOE, which is slightly up from the 2006 fourth quarter average of $47.22 per BOE. This increase is due to both an increase in the natural gas price and in the price for natural gas liquids. The company does not have any hedges in place and remains positive about the future natural gas market.

Operating costs in the first quarter of 2007 were $6.18 per BOE, as compared to $7.52 per BOE in the comparable quarter of 2006, and down slightly from $6.25 per BOE in the fourth quarter of 2006. These decreases in operating costs are primarily due to additional production volumes coming on stream.

OPERATIONS

During the first quarter, Cinch operated the drilling of one well in British Columbia and participated in three well recompletions.

In the Musreau area, the Company participated in the recompletion operations of Musreau 14-7 and Musreau 8-2. The completion operation on Musreau 8-2 was not completed prior to breakup due to difficulties encountered during the operation and the well was placed back on production. The work will recommence after breakup. The Musreau 14-7 well was completed as a dual zone gas well and will be production tested after breakup with tie-in operations to commence in the third quarter.

At Resthaven, the 09-25 well which was completed as a dual zone gas well in 2006, was commingled and placed back on production in the quarter.

At Wilder, British Columbia, Cinch operated the drilling of the Wilder 11-36 well, which was cased to 1,875 metres as a potential gas well. In addition, the Company completed the Wilder A06-5 well as a potential gas well. Cinch will earn a 50% working interest in 3 sections of land by paying 100% of the drilling and completion costs for the Wilder 11-36 well and will earn a 15% working interest in the section of land on which the Wilder A06-5 well is located by having completed the well. The Company also has an option to drill a new Triassic test well on the remaining farmin lands.

At Chime, the Company is preparing to drill the Chime 9-36 location in which it has a 45% working interest. All of the Company's partners have agreed to drill this location, which is expected to commence in early June. A number of follow up locations have been identified and have been surveyed in preparation for future development drilling.

At Kakwa, Cinch is preparing the Kakwa 10-18 infill Dunvegan location for drilling after breakup.

The Company's $30 million capital budget was weighted to the second half of the year, however planned activities in one of the Company's core areas in the first quarter were slower than anticipated. Industry partners remained uncertain on natural gas prices and costs and therefore delayed drilling plans to later in the year, with the expectation that prices will then have improved. The Company anticipates that it will become more active in several of its core areas after current breakup conditions have subsided, anticipated at this time to be late in the second quarter.

FINANCING

On February 21, 2007 Cinch closed its financing for gross proceeds of $10 million on a private placement basis. Cinch issued a total of 7,812,500 common shares on a "flow-through" basis at an issue price of $1.28 per share. This financing has strengthened the Company's balance sheet, with the proceeds being used to fund the Company's $30 million capital program. In addition, the Company's credit facility of $33 million was renewed in April, 2007.

ANNUAL MEETING

Cinch's annual and special meeting of shareholders will be held in The Great Room 3 on the Plus 15 level at the Sandman Hotel, Calgary, 888-7th Avenue S.W. Calgary, Alberta on May 16th at 2:30 p.m. (Calgary time).

We look forward to seeing you at our annual meeting.

George Ongyerth

President

Forward Looking Statements

Statements throughout this release that are not historical facts may be considered to be "forward looking statements". These forward looking statements sometimes include words to the effect that management believes or expects a stated condition or result. All estimates and statements that describe the Company's objectives, goals, or future plans, including management's assessment of future plans and operations, anticipated commodity prices, production estimates and expected production rates and declines, partner risk, expected royalty rates and operating expenses, drilling plans and the expected levels of activities may constitute forward-looking statements under applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, volatility of commodity prices, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to complete and/or realize the anticipated benefits of acquisitions, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources and changes in the regulatory and taxation environment. As a consequence, the Company's actual results may differ materially from those expressed in, or implied by, the forward-looking statements. Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect the Company's operations and financial results is included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com), and at the Company's website (www.cinchenergy.com). Furthermore, the forward-looking statements contained in this news release are made as at the date of this news release and the Company does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

Barrel of Oil Equivalency

Natural gas reserves and volumes contained herein are converted to barrels of oil equivalent (BOE) on the basis of six thousand cubic feet (mcf) of gas to one barrel (bbl) of oil. The term "barrels of oil equivalent" may be misleading, particularly if used in isolation. A BOE conversion ratio of six mcf to one bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

MANAGEMENT'S DISCUSSION AND ANALYSIS

May 7, 2007

The following management's discussion and analysis ("MD&A") should be read in conjunction with the unaudited interim financial statements and related notes for the three month period ended March 31, 2007 and the audited financial statements and related management discussion and analysis of Cinch Energy Corp. ("Cinch" or the "Company") for the year ended December 31, 2006. Additional information relating to Cinch, including Cinch's Annual Information Form, is available on SEDAR at www.sedar.com.

Non-GAAP Measures

The MD&A contains the term "funds from operations" which should not be considered an alternative to, or more meaningful than, cash provided by operating activities or net income as determined in accordance with Canadian generally accepted accounting principles ("GAAP") as an indicator of the Company's performance. The Company considers funds from operations to be a key measure that demonstrates its ability to generate funds for future growth through capital investment. Funds from operations is calculated by taking cash provided by operating activities on the statement of cash flows less the effect of changes in non-cash working capital related to operating activities. The Company's determination of funds from operations may not be comparable with the calculation of similar measures by other companies. The Company also presents funds from operations per share, where funds from operations is divided by the weighted average number of shares outstanding to determine per share amounts. The Company evaluates its performance based on earnings and funds from operations.

The MD&A contains the term "net debt" which is the sum of the working capital (deficiency) and the outstanding credit facility balance. This number may not be comparable to that reported by other companies.

OPERATIONAL UPDATE

For the first quarter of 2007, the Company's production averaged 1,354 BOE/d, higher than the fourth quarter 2006 average production of 1,320 BOE/d and lower than the December 31, 2006 exit rate of approximately 1,600 BOE/d. Approximately 57% of the decrease from the December 2006 exit rate was attributable to production being shut-in during the first quarter of 2007 and approximately 43% was attributable to declines on flush production from four wells which commenced production late in 2006. With respect to the shut-in production, on January 30, 2007 our Bigstone wells, which produce at a total rate of approximately 140 BOE/d, were shut-in once again due to capacity issues and have been producing intermittently since then. In addition, two wells, one each at Resthaven and Musreau, were shut-in for a portion of the quarter in order to perform additional completion operations on additional zones in the wells. Both of these wells recommenced production in the quarter.

The Company's funds from operations and funds from operations per share in the first quarter of 2007 exceeded that of every quarter in 2006, as a result of the higher production average of 1,354 BOE/d in 2007 and improved natural gas prices versus the last three quarters of 2006.

The Company incurred $6.2 million of capital expenditures in the quarter, with approximately 60% of that incurred in the month of March. Expenditures were incurred on completion operations as previously mentioned, on drilling and completing an oil well in the Kakwa East area, and on drilling and completion operations in the Wilder area pursuant to a farm-in. Results on the latter operation will be assessed after spring breakup.

In the second quarter of 2007, the Company plans to focus on the Chime, Musreau and Wilder areas. A location is planned in the Chime area, offsetting a well producing at rates exceeding 25mmcf/d. Drilling operations for the Cinch well are now planned for June 2007.

PRODUCTION



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Three months ended March 31,
2007 2006 Change
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Sales volumes %
Natural gas (Mcf/d) 6,790 5,647 20
Liquids (Bbl/d) 222 189 17
Equivalence (BOE/d) 1,354 1,130 20

Sales prices $ $ %
Natural gas ($/Mcf) 8.03 8.22 (2)
Liquids($/Bbl) 60.54 60.19 1
Equivalence ($/BOE) 50.21 51.13 (2)
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Sales volumes for the three months ended March 31, 2007 increased over the
same period of 2006 due to additional wells brought on production since March
2006, partially offset by declines. The most significant wells which commenced
production subsequent to March 2006 were the Resthaven 9-25 well, averaging
approximately 136 BOE/d in the first quarter of 2007 and currently producing
approximately 200 BOE/d, the Kakwa North 10-20 well, which produced
approximately 66 BOE/d in the first quarter of 2007, and the Kakwa 13-13 well,
which produced approximately 55 BOE/d in the quarter.
Natural gas prices were 2% lower compared to the same period of 2006 and
7% higher than the fourth quarter of 2006. The Company's natural gas
production continues to be unhedged and is marketed in the Alberta spot
market.
Natural gas liquids pricing was 1% higher compared to the same period of
2006 and 5% higher than the fourth quarter of 2006. Natural gas liquids
represent approximately 19% of the Company's oil and gas revenues. The Company
has not hedged any of its liquids production.

REVENUES

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2007 2006 Change
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$ $ %
Oil and gas sales,
net of transportation 6,116 5,200 18
Per BOE 50.21 51.13 (2)
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Revenues for the three months ended March 31, 2007 were 18% higher than
the same period of 2006 due to higher production partially offset by slightly
lower natural gas prices, as previously discussed. Transportation expenses
increased by approximately $0.14 per BOE in the first quarter of 2007 compared
to the same period of 2006. The increase is attributable to the Company
producing at higher levels while keeping production delivered under lower
priced, firm transportation contracts level, and is also attributable to
slightly higher fuel fees on the transportation system.

ROYALTIES

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2007 2006 Change
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$ $ %
Royalties 999 1,294 (23)
Per BOE 8.20 12.72 (36)
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Royalty expense, as well as the Company's royalty rate (royalties as a
percentage of oil and gas sales), decreased in the three months ended
March 31, 2007 compared to the same period of 2006 primarily due to the deep
gas royalty holiday received on wells which commenced production after March,
2006, and due to increased gas cost allowance in the first quarter (which
decreased crown royalty expense).
Management anticipates that the Company's royalty rate for 2007 will be
higher than the rate experienced in the first quarter of 2007, due to the
exhaustion of certain royalty holidays in the last nine months of the year.
Anticipated royalty rates can change however, depending upon commodity prices,
actual success achieved and the zone in which productive success is achieved.


OPERATING EXPENSES

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2007 2006 Change
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$ $ %
Operating 753 765 (2)
Per BOE 6.18 7.52 (18)
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Total operating expenses are consistent with operating expenses for the
same period of 2006, as a result of decreased compressor and equipment
maintenance costs and freight and hauling costs, offset partially by an
increase in gas gathering and processing fees of approximately $0.60/BOE.
Operating expenses per BOE decreased compared to the same period of 2006
due to similar operating expenses over higher production. Operating expenses
per BOE are slightly lower than those experienced in the fourth quarter of
2006 at $6.25/BOE due to higher production levels in the first quarter of
2007.
Operating expenses are expected to average approximately $6.50 per BOE in
2007.

GENERAL AND ADMINISTRATIVE EXPENSES

Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2007 2006 Change
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$ $ %
General and administrative 1,071 861 24
Per BOE 8.79 8.47 4
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Total general and administrative expenses increased for the three months ended March 31, 2007 compared to the same period of 2006 due to increased salaries and related compensation ($145 thousand). This amount includes an increase in non-cash stock based compensation expense of $110 thousand, attributable to a greater number of stock options outstanding (5,110,500 options at March 31, 2007 compared to 3,344,000 options at March 31, 2006). The Company does not capitalize general and administrative expenses. Overhead recoveries were also approximately $45 thousand lower in the first quarter of 2007 compared to 2006 due to a change in the mix of operated versus non-operated activities. Public company related expenses such as annual reports, corporate governance compliance, audit fees, and reserve reports have also increased in the first quarter of 2007.

Total general and administrative expenses increased in the first quarter of 2007 compared to the fourth quarter of 2006 mostly due to lower overhead recoveries recorded in the first quarter of 2007 as well as higher public company related expenses. General and administrative costs per BOE were also higher due to higher expenses partially offset by slightly higher production.

Cash general and administrative expenses per BOE for 2007 were approximately $6.47 per BOE compared to $6.77 per BOE for the same quarter of 2006. The lower expenses per BOE can be attributed to higher production. The non-cash stock based compensation expense was approximately $2.30 per BOE for the first quarter of 2007 compared to $1.69 per BOE in 2006. The increased expense can be attributed to increased stock options outstanding in 2007.

INTEREST EXPENSE



Dollars in thousands, except per unit amounts
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Three months ended March 31,
2007 2006 Change
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$ $ %
Interest expense 230 6 3733
Per BOE 1.89 0.05 3680
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Interest expense increased in the three months ended March 31, 2007 compared to the same period of 2006 due to draws on the Company's bank credit facility in 2007, exiting the quarter with an amount outstanding on the credit facility of $12.8 million. The Company did not draw on its $33 million bank line in 2006 until the second quarter.

ACCRETION OF ASSET RETIREMENT OBLIGATIONS EXPENSE



Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2007 2006 Change
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$ $ %
Accretion expense 41 9 356
Per BOE 0.34 0.09 278
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Accretion expense increased in the three months ended March 31, 2007 compared to the same period of 2006 due to an increase in the number of wells with asset retirement obligations as a result of drilling operations and due to an increase in the Company's estimate of the risk-free interest rate on which the liability is accreted.

DEPLETION AND DEPRECIATION EXPENSE



Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2007 2006 Change
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$ $ %
Depletion and depreciation 3,306 2,506 32
Per BOE 27.14 24.64 10
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Total depletion and depreciation expense as well as depletion per BOE for the three months ended March 31, 2007 increased compared to the same period of 2006 due to a larger capital asset balance being depleted, partially offset by reserve additions since March 31, 2006.

TAXES



Dollars in thousands, except per unit amounts
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Three Months Ended March 31,
2007 2006 Change
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$ $ %
Current - 20 (100)
Future income taxes (recovery) 9 (81) (111)
Per BOE 0.07 (0.60) (112)
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There was no large corporations tax paid in the three months ended March 31, 2007, consistent with the elimination of the large corporations tax effective January 1, 2006, which became law on June 22, 2006 and was therefore not reflected until the second quarter of 2006.

Future income taxes recorded in the first three months of 2007 are minimal, primarily because stock compensation expense recorded in the quarter is non-taxable and its elimination for tax purposes results in a small amount of taxable income for the Company. The first quarter of 2006 was also impacted by stock compensation expense, and by the partial non-deductibility of crown charges, partial elimination of Alberta Royalty Tax Credit and the resource allowance deduction. All of the latter three items are no longer a consideration in federal tax calculations for 2007 and future years, as a result of amendments to the Income Tax Act.

Tax pools at March 31:



Dollars in thousands
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2007 2006
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COGPE 12,283 7,626
CDE 21,675 19,070
CEE 23,938 8,843
UCC 20,674 16,124
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78,570 51,663
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The Company's tax pools increased significantly since March 31, 2006 as a result of capital expenditures which were higher than the tax pools needed to eliminate taxable income. On February 21, 2007, the Company completed an equity financing for gross proceeds of $10 million, issuing 7,812,500 common shares on a flow through basis at $1.28 per share. The Company will renounce $10 million of Canadian exploration expenditures to the flow through investors effective December 31, 2007. The Company anticipates no difficulties in meeting this obligation.

NET LOSS AND FUNDS FROM OPERATIONS



In thousands, except share and per share figures
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Three Months Ended March 31,
2007 2006 Change
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$ $ %
Net loss (268) (131) 105
per basic share (0.01) (0.00) 92
per diluted share (0.01) (0.00) 94
Funds from operations 3,371 2,475 36
per basic share 0.07 0.05 40
per diluted share 0.06 0.05 20
Weighted average shares &
special warrants outstanding 51,111 47,813 7
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For the three months ended March 31, 2007, the Company incurred a net loss, attributable to higher general and administrative costs, depletion and depreciation and interest expense, partially offset by higher revenues and lower crown royalties.

The Company's funds from operations for the three months ended March 31, 2007 increased by 36% over the same period in 2006. Funds from operations in 2007 are higher primarily due to increased revenues from higher production levels.

LIQUIDITY AND CAPITAL RESOURCES



Dollars in thousands
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March 31, December 31,
2007 2006 Change
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$ $ %
Working capital deficiency,
excluding credit facility (4,480) (6,441) (30)
Credit facility (12,784) (17,304) (26)
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Net debt (17,264) (23,745) (27)
Capital lease obligation (208) (277) (25)
Shareholders' equity (100,152) (90,551) 11
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At March 31, 2007, the Company had net debt of $17.3 million, comprised of a working capital deficiency of $4.5 million and an outstanding balance on the credit facility of $12.8 million. The $6.5 million reduction in net debt from December 31, 2006 can be attributed to proceeds of $9.4 million, net of issue costs, received from a flow through financing completed on February 21, 2007 and first quarter funds from operations of $3.3 million, offset partially by capital expenditures incurred in the first quarter of 2007 of $6.2 million.

Management intends to fund the remainder of its 2007 capital program with a combination of funds generated from operations and its bank credit facility. At March 31, 2007, the Company had draws of $12,783,652 on its $33,000,000 demand, bank credit facility which was renewed subsequent to the end of the quarter with no changes in the facility terms.

The increase in shareholder's equity at March 31, 2007 from December 31, 2006 is due to the financing completed in February 2007, as previously discussed.

CAPITAL EXPENDITURES

Additions to property, plant and equipment



Dollars in thousands
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Three Months Ended March 31,
2007 2006
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Land and rentals 25 218
Seismic 36 160
Drilling, completing and equipping 5,661 5,525
Pipelines and facilities 484 650
Other assets 22 143
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Total 6,228 6,696
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Capital expenditures for the three months ended March 31, 2007 were incurred primarily on drilling and completing locations in the Musreau, Kakwa East and Wilder areas. At March 31, 2007, the Company had seven wells at various stages of drilling and completion.

The Company's 2007 second quarter capital program will be focused on drilling, completing and tieing in locations in the Chime, Musreau, and Wilder areas. Several prospective locations at Chime have been identified using reprocessed 3-D seismic data, which are offsetting a well currently producing at rates in excess of 25mmcf/d since October 2006. Drilling is expected to commence in the latter part of the second quarter.

Management's primary strategy is to expend capital on exploration and development drilling and earn land by drilling. The Company may, however, also purchase land where considered strategic.

BUSINESS RISKS AND RISK MANAGEMENT

The long-term commercial success of the Company depends on its ability to find, acquire, develop and commercially produce oil and natural gas reserves. Cinch attempts to reduce risk in accomplishing these goals through the combination of hiring experienced and knowledgeable personnel and careful evaluation.

The Company's program is exploratory in nature and in areas with deep, tight gas. The wells the Company drills therefore tend to be deep (a substantial portion are deeper than 2,500 meters), and are subject to higher drilling costs than those in more shallow areas. In addition, most wells require fracture treatment before they are capable of production, also increasing costs. The Company mitigates the additional economic pressure that this creates by carefully evaluating risk/reward scenarios for each location, by taking what management considers to be appropriate working interests after considering project risk, by practicing prudent operations so that drilling risk is decreased, by ranking and limiting the zones that the Company is willing to complete, and also by drilling deep so that the multi-zone potential of the area can be accessed and potentially developed. The Company operates the majority of its lands which provides a measure of control over the timing and location of capital expenditures. In addition, the Company monitors capital spending on an ongoing and regular basis so that the Company maintains liquidity and so that future financial resource requirements can be anticipated.

The financial capability of the Company's partners can pose a risk to the Company, particularly during periods when access to capital is more challenging and prices are depressed. The Company mitigates the risk of collection by attempting to obtain the partners share of capital expenditures in advance of a project and by monitoring receivables regularly. The ability of the Company to implement its capital program when the financial wherewithal of a partner is challenged can be more difficult, although the Company attempts to mitigate the risk by cultivating multiple business relationships and obtaining new partners when needed and where possible.

Commodity price fluctuations can pose a risk to the Company, and management monitors these on an ongoing basis. External factors beyond the Company's control may affect the marketability of the natural gas and natural gas liquids produced. The Company has not to date implemented any hedging instruments.

The Company has selected the appropriate personnel to monitor operations and has automated field information where possible, so that difficulties and operational issues can be assessed and dealt with on a timely basis, and so that production can be maximized as much as possible. Not all operational issues; however, are within the Company's control. Management will address them nonetheless, and attempt to implement solutions, which may be by their nature longer term.

Oil and natural gas exploration, development and production operations are subject to all the risks and hazards typically associated with such operations, including hazards such as fire, explosion, blowouts, and spills, each of which could result in damage to wells, production facilities, other property and the environment or in personal injury. In accordance with industry practice, the Company insures against most of these risks (although not all such risks are insurable). The Company maintains liability insurance in an amount that it considers consistent with industry practice, although the nature of these risks is such that liabilities could potentially exceed policy limits. The Company also reduces risk by operating a large percentage of its operations. As such, the Company has control over the quality of work performed and the personnel involved.

The Company anticipates making substantial capital expenditures in future for the exploration, development, acquisition and production of oil and natural gas reserves. If the Company's revenues or reserves decline, it may have limited ability to expend the capital necessary to undertake or complete future drilling programs. There can be no assurance that debt or equity financing will be available. The Company mitigates this risk by monitoring expenditures, operations and results of operations in order to manage available capital effectively.

Attracting and retaining qualified individuals is crucial to the Company's success. The Company understands the importance of maintaining competitive compensation levels given this increasingly competitive environment in which the Company operates. The inability to attract and retain key employees could have a material adverse effect on the Company.

The Company's ability to move heavy equipment in the field is dependent on weather conditions. Rain and snow can impact conditions, and many secondary roads and future oil and gas production sites are incapable of supporting the weight of heavy equipment until the roads are thoroughly dry. The duration of difficult conditions has a direct impact on the Company's activity levels and as a result can delay operations.

On February 16, 2007, the Alberta Government announced that a review of the province's royalty and tax regime pertaining to oil and gas resources, including oil sands, conventional oil and gas and coalbed methane, will be conducted by a panel of experts, with the assistance of individual Albertans and key stakeholders. The review panel is to produce a final report that will be presented to the Minister of Finance by August 31, 2007.

All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation pursuant to a variety of federal, provincial and local laws and regulations. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. In 2002, the Government of Canada ratified the Kyoto Protocol (the "Protocol"), which calls for Canada to reduce its greenhouse gas emissions to specified levels. There has been much public debate with respect to Canada's ability to meet these targets and the Government's strategy or alternative strategies with respect to climate change and the control of greenhouse gases.

On March 8, 2007, the Alberta Government introduced Bill 3, the Climate Change and Emissions Management Amendment Act, which intends to reduce greenhouse gas emission intensity from large industries. On April 26, 2007, the Federal Government released its Action Plan to Reduce Greenhouse Gases and Air Pollution (the "Action Plan"), also known as ecoACTION which includes the Regulatory Framework for Air Emissions. This Action Plan covers not only large industry, but regulates the fuel efficiency of vehicles and the strengthening of energy standards for a number of energy-using products. Given the evolving nature of the debate related to climate change and the control of greenhouse gases and resulting requirements, it is not currently possible to predict either the nature of those requirements or the impact on the Company and its operations and financial condition.

DISCLOSURE CONTROLS AND PROCEDURES

The Company has designed disclosure controls and procedures to provide reasonable assurance that material information relating to the Company required to be disclosed is recorded, processed, summarized and reported within the time periods specified by securities regulations and that information required to be disclosed is communicated to management on a timely basis.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

The Company's Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their supervision, internal controls over financial reporting for the Company in order to provide reasonable assurance on the reliability of the Company's financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.

The Company's Chief Executive Officer and Chief Financial Officer are required to cause the Company to disclose any change in the Company's internal controls over financial reporting that occurred during the Company's most recent interim period that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. No material changes in the Company's internal controls over financial reporting were identified during the three months ended March 31, 2007, that have materially affected, or are reasonably likely to affect, the Company's internal controls over financial reporting.

The Chief Executive Officer and Chief Financial Officer have signed form 52-109F2 - Certification of interim filings, which can be found on SEDAR at www.sedar.com.

CONTRACTUAL OBLIGATIONS, COMMITMENTS, AND GUARANTEES

The Company has contractual obligations and commitments in the normal course of its operating and financing activities. These obligations and commitments have been considered when assessing the Company's cash requirements in its analysis of future liquidity.



Dollars in thousands
-------------------------------------------------------------------------

Payments (greater
(less than) 1-3 4-5 than)
Total 1 year years years 5 years
-------------------------------------------------------------------------
Capital lease
obligation 484 276 208 - -
Operating lease 464 174 290 - -
-------------------------------------------------------------------------
948 450 498 - -
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On February 21, 2007, the Company issued 7,812,500 flow through common shares for gross proceeds of $10 million. The Company will renounce $10 million of Canadian exploration expenditures to the flow through investors effective December 31, 2007 and is required to incur such expenditures on or before December 31, 2008. Management does not anticipate any difficulties in meeting this obligation.

CHANGES IN ACCOUNTING POLICIES

Effective January 1, 2007, the Company adopted the CICA Handbook Section 3855 "Financial Instruments - Recognition and Measurement", Section 3861 "Financial Instruments - Disclosure and Presentation", Section 3865 "Hedges", Section 1506 "Accounting Changes", Section 1530 "Comprehensive Income" and Section 3251 "Equity". The adoption of the new standards did not have a significant impact on the Company's financial statements due to the nature of the financial instruments recorded on the balance sheet as well as the nature of the contracts to which the Company is a party. The Company does not currently have any hedges in place and therefore the adoption of Section 3865 "Hedges" did not have any impact on the Company's financial statements. For more information on these policies, see note 2 of the Company's financial statements for the three months ended March 31, 2007.

On December 1, 2006, the CICA issued three new accounting standards: Handbook Section 1535, Capital Disclosures, Handbook Section 3862, Financial Instruments - Disclosures, and Handbook Section 3863, Financial Instruments - Presentation. These new standards are effective January 1, 2008. Section 1535 specifies the disclosure of (i) an entity's objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non-compliance. The new Sections 3862 and 3863 replace Handbook Section 3861, Financial Instruments - Disclosure and Presentation, revising and enhancing its disclosure requirements, and carrying forward unchanged its presentation requirements. These new sections place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks. We are currently assessing the impact of these new standards on our financial statements.

CRITICAL ACCOUNTING ESTIMATES

There are a number of critical estimates underlying the accounting policies the Company applies in preparing its financial statements.

Reserves

The estimate of reserves is used in forecasting what will ultimately be recoverable from the properties and their economic viability and in calculating the Company's depletion and potential impairment of asset carrying costs. The process of estimating reserves is complex and requires significant interpretation and judgment. It is affected by economic conditions, production, operating and development activities, and is performed using available geological, geophysical, engineering and economic data.

Reserves at year end are evaluated by an independent engineering firm and quarterly updates to those reserves are estimated by the Company.

Revenue Estimates

Payment and actual amounts for petroleum and natural gas sales can be received months after production. The Company estimates a portion of its petroleum and natural gas production, sales and related costs, based upon information received from field offices, internal calculations, historical and industry experience.

Cost Estimates

Costs for services performed but not yet billed are estimated based on quotes provided and historical and industry experience.

Asset Retirement Obligations

The liability recorded for asset retirement obligations, an estimate of restoring assets and locations back to environmental and regulatory standards upon future retirement or abandonment, include estimates of restoration costs to be incurred in the future and an estimated future inflation rate. Costs estimated are based upon internal and third party calculations and historical experience and future inflation rates are estimated using historical experience and available economic data.

Income taxes

The Company records future tax liabilities to account for the expected future tax consequences of events that have been recorded in its financial statements. These amounts are estimates; the actual tax consequences may differ from the estimates due to changing tax rates and regimes, as well as changing estimates of cash flows and capital expenditures in current and future periods. 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.

TREND ANALYSIS

In 2007, the Company continues to be focused on drilling, completing and tieing-in production. Some of the challenges encountered in 2006 such as rig availability have been alleviated with the softening of the oil and gas market experienced in the latter part of 2006 and early 2007. In the first quarter of 2006, the Company experienced numerous delays due to lack of rig availability. The Company alleviated the problem in the second quarter of 2006 by entering into a one year contract on a drilling rig (200 days), which facilitated the execution of the Company's 2006 third and fourth quarter drilling programs. In the first quarter of 2007, the Company completed its commitment with the drilling rig contract and does not anticipate extending the contract given the slowdown in the market. The Company has not experienced problems obtaining rigs for the first quarter of 2007 and does not anticipate challenges in obtaining rigs for the remainder of 2007.

The Company's production for the three months ended March 31, 2007 increased compared to the last quarter of 2006 (1,354 BOE/d versus 1,320 BOE/d) as well as increased over the same quarter as the prior year. The increase can be attributed to 9 new wells which have come on production since March 31, 2006, increasing both production and reserves over the prior year as well as offsetting natural production declines. Initial high declines are typical with deep, tight gas wells until decline rates stabilize, ultimately providing for a strong production base.

Natural gas prices strengthened in the first quarter of 2007 exceeding prices realized in the last nine months of 2006 and that, in combination with higher production rates, resulted in increased revenues for the quarter of 2007 compared to any quarter in 2006. The natural gas prices realized are still far below the prices experienced in the latter part of 2005 and are not expected to increase to that level in 2007 but are anticipated to remain strong nevertheless.

Natural gas liquids pricing increased in the first quarter of 2007 compared to the first and last quarters of 2006 but decreased compared to the second and third quarters. The increased natural gas liquids pricing in the first quarter combined with the increased production contributed to the increased revenues experienced in the quarter. The Company anticipates natural gas liquids pricing to remain consistent with prices experienced in the first quarter of 2007. The Company is largely impacted by price variations in the short term. Management believes in the long term strength of the natural gas market, despite short term fluctuations and volatility.



SELECTED ANNUAL AND QUARTERLY INFORMATION
(000's, except per share data)

Q1 Q2 Q3 Q4 Annual
-------------------------------------------------------------------------
2007 $ $ $ $ $
-------------------------------------------------------------------------
Oil and gas sales,
net of
transportation and
before royalties 6,116
Funds from operations 3,371
Per share - basic 0.07
- diluted 0.06
Net income (loss) (268)
Per share - basic (0.01)
- diluted (0.01)
Capital expenditures 6,228
Total assets 136,520
Working capital
(net debt)(1) (17,264)
-------------------------------------------------------------------------
Production (BOE/d) 1,354
-------------------------------------------------------------------------
2006 $ $ $ $ $
-------------------------------------------------------------------------
Oil and gas sales,
net of
transportation and
before royalties 5,200 4,692 4,487 5,733 20,112
Funds from operations 2,475 2,406 2,115 2,970 9,966
Per share - basic 0.05 0.05 0.05 0.06 0.21
- diluted 0.05 0.05 0.04 0.06 0.20
Net income (loss) (131) 879 (576) (488) (317)
Per share - basic (0.00) 0.02 (0.01) (0.01) (0.01)
- diluted (0.00) 0.02 (0.01) (0.01) (0.01)
Capital expenditures 6,696 13,542 7,403 9,324 36,966
Total assets 113,356 121,861 125,894 136,983 136,983
Working capital
(net debt)(1) (820) (11,942) (17,307) (23,745) (23,745)
-------------------------------------------------------------------------
Production (BOE/d) 1,130 1,141 1,135 1,320 1,182
-------------------------------------------------------------------------
2005 $ $ $ $ $
-------------------------------------------------------------------------
Oil and gas sales,
net of
transportation and
before royalties 6,062 5,821 7,207 8,323 27,413
Funds from operations 3,198 3,037 3,908 4,899 15,042
Per share - basic 0.10 0.09 0.09 0.10 0.38
- diluted 0.09 0.08 0.09 0.10 0.36
Net income 612 537 851 1,364 3,364
Per share - basic 0.02 0.01 0.02 0.03 0.08
- diluted 0.02 0.01 0.02 0.03 0.08
Capital expenditures 6,381 8,116 9,566 11,982 36,045
Total assets 80,706 89,047 112,178 113,620 113,620
Working capital
(net debt)(1) (16,621) (3,670) 10,629 3,490 3,490
-------------------------------------------------------------------------
Production (BOE/d) 1,421 1,264 1,262 1,245 1,297
-------------------------------------------------------------------------
Note: numbers may not cross-add due to rounding
(1) Working capital (net debt) excludes the long term financial
liabilities which consists of the long term portion of the capital
lease obligation (March 31, 2007 - $207,858, December 31, 2006 -
$276,806, December 31, 2005 - $420,988, December 31, 2004 -
$620,764).


Financial Statements

Cinch Energy Corp.
March 31, 2007
(unaudited)



CINCH ENERGY CORP.

BALANCE SHEETS
(Unaudited)


As at March 31, December 31,
2007 2006
$ $
-------------------------------------------------------------------------
Assets (notes 4 and 5)

Current
Accounts receivable 5,501,353 9,107,635
Prepaid expenses and deposits 911,311 957,338
-------------------------------------------------------------------------
6,412,664 10,064,973

Property, plant and equipment (note 3) 115,490,657 112,301,421

Goodwill 14,616,996 14,616,996
-------------------------------------------------------------------------

136,520,317 136,983,390
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current
Accounts payable and accrued liabilities 10,616,907 16,229,842
Credit facility (note 4) 12,783,652 17,304,333
Current portion of capital lease
obligation (note 5) 275,789 275,789
-------------------------------------------------------------------------
23,676,348 33,809,964

Capital lease obligation (note 5) 207,858 276,806

Asset retirement obligations (note 6) 3,243,412 2,934,899

Future income taxes (note 7) 9,240,900 9,410,600
-------------------------------------------------------------------------
36,368,518 46,432,269
-------------------------------------------------------------------------

Commitments (notes 8 and 9)

Shareholders' equity
Share capital (note 8) 99,205,234 89,618,546
Contributed surplus (note 8) 2,426,810 2,144,649
Deficit (1,480,245) (1,212,074)
-------------------------------------------------------------------------

100,151,799 90,551,121
-------------------------------------------------------------------------

136,520,317 136,983,390
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes



CINCH ENERGY CORP.

STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME AND DEFICIT
(Unaudited)


For the three months ended March 31, 2007 2006
$ $
-------------------------------------------------------------------------

Revenue
Oil and gas sales 6,355,871 5,386,084
Transportation (239,521) (185,621)
Royalties (998,875) (1,293,558)
Other income 24,327 48,922
-------------------------------------------------------------------------

5,141,802 3,955,827
-------------------------------------------------------------------------

Expenses
Operating 753,064 765,224
General and administrative (note 8) 1,070,515 861,472
Interest on credit facility 222,524 43
Interest on capital lease (note 5) 7,266 5,540
Accretion of asset retirement
obligations (note 6) 41,468 9,203
Depletion and depreciation 3,306,036 2,505,830
-------------------------------------------------------------------------

5,400,873 4,147,312
-------------------------------------------------------------------------

Loss before income taxes (259,071) (191,485)

Taxes (note 7)
Current - 20,280
Future income tax expense (recovery) 9,100 (81,100)
-------------------------------------------------------------------------

9,100 (60,820)
-------------------------------------------------------------------------

Net loss and comprehensive income (loss)
for the period (note 2) (268,171) (130,665)

Deficit, beginning of period (1,212,074) (895,539)
-------------------------------------------------------------------------

Deficit, end of period (1,480,245) (1,026,204)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net loss and comprehensive income (loss)
for the period per share (note 8)

Basic and diluted (0.01) (0.00)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes


CINCH ENERGY CORP.

STATEMENTS OF CASH FLOWS
(Unaudited)


For the three months ended March 31, 2007 2006
$ $
-------------------------------------------------------------------------

Operating activities
Net loss for the period (268,171) (130,665)
Add non-cash items:
Depletion and depreciation 3,306,036 2,505,830
Accretion of asset retirement obligations 41,468 9,203
Non-cash compensation expense (note 8) 282,161 171,486
Future income taxes (recovery) 9,100 (81,100)
-------------------------------------------------------------------------
3,370,594 2,474,754

Net change in non-cash working capital 142,994 318,214
-------------------------------------------------------------------------

Cash provided by operating activities 3,513,588 2,792,968
-------------------------------------------------------------------------

Investing activities
Additions to property, plant and equipment (6,228,227) (6,696,192)
Net change in non-cash working capital (2,267,801) (398,453)
-------------------------------------------------------------------------

Cash used in investing activities (8,496,028) (7,094,645)
-------------------------------------------------------------------------

Financing activities
Issue of common shares, net of issue costs 9,407,889 (36,299)
Decrease in credit facility (4,520,681) -
Capital lease payments (68,948) (52,562)
Net change in non-cash working capital 164,180 29,217
-------------------------------------------------------------------------

Cash provided by (used in) financing
activities 4,982,440 (59,644)
-------------------------------------------------------------------------

Decrease in cash - (4,361,321)

Cash and cash equivalents, beginning of period - 5,654,594
-------------------------------------------------------------------------

Cash and cash equivalents, end of period - 1,293,273
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplemental information:
Cash taxes paid - 50,612
Cash interest paid 192,241 5,583
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes

CINCH ENERGY CORP.

NOTES TO FINANCIAL STATEMENTS

March 31, 2007 and 2006
(Unaudited)


1. SIGNIFICANT ACCOUNTING POLICIES

The unaudited interim financial statements of Cinch Energy Corp. have been prepared in accordance with Canadian generally accepted accounting principles, following the same accounting policies and methods of computation as the financial statements of the Company for the year ended December 31, 2006 except as disclosed in note 2 below. These unaudited financial statements do not include all disclosures required in the annual financial statements and should be read in conjunction with the Company's annual audited financial statements and notes thereto for the year ended December 31, 2006.

2. CHANGES IN ACCOUNTING POLICIES

Effective January 1, 2007, the Company adopted five new accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA"): Handbook Section 3855 "Financial Instruments - Recognition and Measurement", Section 3861 "Financial Instruments - Disclosure and Presentation", Section 3865 "Hedges", Section 1506 "Accounting Changes", Section 1530 "Comprehensive Income" and Section 3251 "Equity".

Impact upon adoption of Sections 3855, 3861, 3865, 1506, 1530 and 3251.

The adoption of the new standards did not have a significant impact on the Company's financial statements due to the nature of the financial instruments recorded on the balance sheet and the contracts to which the Company is a party.

Financial instruments - recognition and measurement

Section 3855 establishes standards for recognizing and measuring financial assets, financial liabilities, and non-financial derivatives. It requires that financial assets and financial liabilities, including derivatives, be recognized on the balance sheet when the Company becomes a party to the contractual provisions of the financial instrument or non-financial derivative contract. Under this standard, all financial instruments are required to be measured at fair value upon initial recognition except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as held-for-trading, available-for sale, held-to-maturity, loans or receivables, or other financial liabilities. Financial assets and financial liabilities held-for-trading are measured at fair value with changes in those fair values recognized in net earnings. Financial assets held-to-maturity, loans and receivables, and other financial liabilities are measured at amortized cost using the effective interest method of amortization. Investments in equity instruments classified as available-for-sale that do not have a quoted market price in an active market are measured at cost.

Derivative instruments are recorded on the balance sheet at fair value, including those derivatives that are embedded in financial or non-financial contracts that are not closely related to the host contracts. Changes in the fair values of derivative instruments are recognized in net earnings, with the exception of derivatives designated as effective cash flow hedges and hedges of the foreign currency exposure of a net investment in a self-sustaining foreign operation, which are recognized in other comprehensive income.

In addition, Section 3855 requires that an entity must select an accounting policy of either expensing debt issue costs as incurred or applying them against the carrying value of the related asset or liability.

The financial instruments recognized on Cinch's balance sheet are deemed to approximate their estimated fair values, therefore no further adjustments were required upon adoption of the new sections. There were no financial assets on the balance sheet which were designated as held-for-trading, held-to-maturity or available-for-sale. All financial assets were classified as loans or receivables and are accounted for on an amortized cost basis. All financial liabilities were classified as other liabilities.

Hedges

Section 3865 provides alternative treatments to Section 3855 for entities which choose to designate qualifying transactions as hedges for accounting purposes. It replaces and expands on Accounting Guideline 13 "Hedging Relationships", and the hedging guidance in Section 1650 "Foreign Currency Translation" by specifying how hedge accounting is applied and what disclosures are necessary when it is applied.

The Company does not currently have any hedges in place and therefore the adoption of Section 3865 "Hedges" did not have any impact on the Company's financial statements.

Accounting changes

Section 1506 provides expanded disclosures for changes in accounting policies, accounting estimates and corrections of errors. Under the new standard, accounting changes should be applied retrospectively unless otherwise permitted or where impracticable to determine. As well, voluntary changes in an accounting policy are to be made only when required by a primary source of GAAP or the change results in more relevant and reliable information.

The Company did not have any accounting changes in the first quarter of 2007 and therefore was not impacted by this new standard.

Comprehensive income (loss) and accumulated other comprehensive income

(loss)

Section 1530 introduces comprehensive income, which consists of net earnings and other comprehensive income ("OCI"). OCI represents changes in shareholder's equity during a period arising from transactions and changes in prices, markets, interest rates, and exchange rates. OCI includes unrealized gains and losses on financial assets classified as available-for-sale, unrealized translation gains and losses arising from self-sustaining foreign operations net of hedging activities and changes in the fair value of the effective portion of cash flow hedging instruments.

The Company has not entered into any transactions which require any amounts to be recorded to other comprehensive income (loss) or accumulated other comprehensive income (loss).

Future accounting changes

On December 1, 2006, the CICA issued three new accounting standards: Handbook Section 1535, Capital Disclosures, Handbook Section 3862, Financial Instruments - Disclosures, and Handbook Section 3863, Financial Instruments - Presentation. These new standards are effective January 1, 2008. Section 1535 specifies the disclosure of (i) an entity's objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non-compliance. The new Sections 3862 and 3863 replace Handbook Section 3861, Financial Instruments - Disclosure and Presentation, revising and enhancing its disclosure requirements, and carrying forward unchanged its presentation requirements. These new sections place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks. We are currently assessing the impact of these new standards on our financial statements.

3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment



March 31, 2007
-------------------------------------------------------------------------
Accumulated Net
Cost depletion and book value
depreciation
$ $ $
-------------------------------------------------------------------------

Petroleum and natural gas
properties 147,777,025 (33,170,680) 114,606,345
Equipment under capital lease 1,020,307 (214,048) 806,259
Office furniture and equipment 240,570 (162,517) 78,053
-------------------------------------------------------------------------

149,037,902 (33,547,245) 115,490,657
-------------------------------------------------------------------------
-------------------------------------------------------------------------


December 31, 2006
-------------------------------------------------------------------------
Accumulated Net
Cost depletion and book value
depreciation
$ $ $
-------------------------------------------------------------------------

Petroleum and natural gas
properties 141,281,753 (29,905,549) 111,376,204
Equipment under capital lease 1,020,307 (188,179) 832,128
Office furniture and equipment 240,570 (147,481) 93,089
-------------------------------------------------------------------------

142,542,630 (30,241,209) 112,301,421
-------------------------------------------------------------------------
-------------------------------------------------------------------------


For the three month period ended March 31, 2007 and for the year ended December 31, 2006, no indirect general and administrative expenditures were capitalized.

As at March 31, 2007, $15,151,582 of costs related to undeveloped lands were excluded from costs subject to depletion (December 31, 2006 - $10,900,069). For the three months ended March 31, 2007, the depletion calculation included future development costs of $2,562,750 (December 31, 2006 - $3,264,000).

4. CREDIT FACILITY

As at March 31, 2007, the Company had a demand, bank credit facility of $33,000,000 (December 31, 2006 - $33,000,000). The facility bears interest at the lender's prime rate. The effective interest rate at March 31, 2007 was 5.6% (March 31, 2006 - nil, as there were no draws). The interest rate realized in the first quarter of 2007 is lower than the prime rate due to drawings on guaranteed notes, which bear a lower interest rate. As at March 31, 2007, there was $12,783,652 drawn on the credit facility (December 31, 2006 - $17,304,333). As collateral for the facility, the Company has provided a general security agreement with the lender constituting a first ranking security interest in all Company property and a first ranking floating charge on all real property of the Company subject only to a subordination agreement to another bank for the amount of, and as security for, a capital lease (see note 5).

At March 31, 2007, the Company had a letter of credit outstanding in the amount of $120,879 (December 31, 2006 - $ nil).

5. CAPITAL LEASE OBLIGATION

The Company is committed to annual minimum payments under a capital lease agreement as follows:



Years ending December 31, $
-------------------------------------------------------------------------
2007 228,641
2008 304,855
-------------------------------------------------------------------------

Total minimum lease payments 533,496

Less amounts representing interest at 5.12% (49,849)
-------------------------------------------------------------------------

Present value of minimum lease payments 483,647

Less current portion (275,789)
-------------------------------------------------------------------------

Capital lease obligation at March 31, 2007 207,858
-------------------------------------------------------------------------
-------------------------------------------------------------------------


For the three months ended March 31, 2007, there was $7,266 (March 31, 2006 - $5,540) recorded in interest expense relating to capital leases. There is a first charge on the Company's assets as security for the capital lease obligation.

6. ASSET RETIREMENT OBLIGATIONS

The total future asset retirement obligations result from the Company's net ownership interest in wells and facilities. Management estimates the total undiscounted amount of future cash flows required to reclaim and abandon wells and facilities as at March 31, 2007 is approximately $5,660,000 to be incurred over the next 43 years (December 31, 2006 - $5,300,000). The Company used a credit adjusted, risk-free rate ranging from 5% to 7.5% and an inflation rate of 2% to arrive at the recorded liability of $3,243,412 at March 31, 2007 (December 31, 2006 - $2,934,899).

The Company's asset retirement obligations changed as follows:



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

Asset retirement obligations, as at December 31, 2006 2,934,899
Liabilities incurred 267,045
Accretion expense 41,468
-------------------------------------------------------------------------

Asset retirement obligations, as at March 31, 2007 3,243,412
-------------------------------------------------------------------------
-------------------------------------------------------------------------


7. FUTURE INCOME TAXES

Income tax recovery differs from the amount that would be computed by applying the Federal and Provincial statutory income tax rates to loss before income taxes. The reasons for the differences are as follows:



March 31, March 31,
2007 2006
-------------------------------------------------------------------------

Statutory income tax rate 32.12% 35.62%
$ $
Anticipated income tax recovery (83,214) (68,207)
Increase/(decrease) resulting from:
Resource allowance - (120,767)
Non-deductible crown royalties, net of Alberta
Royalty Tax Credit - 42,700
Stock based compensation expense 90,630 61,083
Other 1,684 4,091
-------------------------------------------------------------------------

Future income tax expense (recovery) 9,100 (81,100)
-------------------------------------------------------------------------

Large corporations tax - 20,280
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. The components of the Company's future income tax assets and liabilities are as follows:



March 31, December 31,
2007 2006
$ $
-------------------------------------------------------------------------

Net book value of capital assets in
excess of tax pools (11,073,985) (11,051,577)
Share issue costs 748,155 649,182
Asset retirement obligations 979,510 886,339
Other 105,420 105,456
-------------------------------------------------------------------------

Future income tax liability (9,240,900) (9,410,600)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

8. SHARE CAPITAL

Authorized - Unlimited number of common voting shares without par value

-------------------------------------------------------------------------
Issued Number $
-------------------------------------------------------------------------
Common shares
Balance, as at December 31, 2006 47,757,632 89,584,611
Issued for cash on flow through private
placement (i) 7,812,500 10,000,000
Issue costs, net of future income taxes (i) - (413,312)
-------------------------------------------------------------------------
Balance, as at March 31, 2007 55,570,132 99,171,299
-------------------------------------------------------------------------
Special warrants
Balance at beginning and end of period 55,000 33,935
-------------------------------------------------------------------------
Share capital, as at March 31, 2007 55,625,132 99,205,234
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus
Balance, as at December 31, 2006 2,144,649
Non cash compensation expense (ii) 282,161
-------------------------------------------------------------------------
Contributed surplus, as at March 31, 2007 2,426,810
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Common Shares

(i) Private Placement

On February 21, 2007, the Company issued under private placement a
total of 7,812,500 flow through common shares at $1.28 per share
for proceeds of $10,000,000 before total issue costs of $592,111.
The Company will renounce $10 million of Canadian exploration
expenditures to the flow through investors effective December 31,
2007 and is required to incur such expenditures on or before
December 31, 2008. The Company anticipates no difficulties in
meeting this obligation.

(ii) Exercise of options

Non-cash compensation expense is comprised of the stock option
benefit for all outstanding options amortized over the vesting
period of the options.


Per share amounts

Basic per share amounts have been calculated using the weighted average number of common shares and special warrants outstanding during the three months ended March 31, 2007 of 51,111,243 (March 31, 2006 - 47,812,632). As at March 31, 2007, all of the stock options are anti-dilutive and therefore not included in the determination of dilutive per share amounts. If the amounts had not been anti-dilutive the weighted average number of common shares would be calculated assuming the exercise of outstanding, in-the-money options, and future compensation costs to be incurred on outstanding options resulting in a weighted average number of common shares of 53,370,279. (March 31, 2006 - 50,506,628).

Stock option plan

The Company has a stock option plan authorizing the grant of options to purchase shares to designated participants, being directors, officers, employees or consultants. Under the terms of the plan, the Company may grant options to purchase shares equal to a maximum of ten percent of the total issued and outstanding shares and special warrants of the Company. The aggregate number of options that may be granted to any one individual must not exceed five percent of the total issued and outstanding shares and special warrants. Options are granted at exercise prices equal to the estimated fair value of the shares at the date of grant and may not exceed a ten year term. The vesting for options granted occurs over a three year period, with one third of the number granted vesting on each of the first, second, and third anniversary dates of the grant unless otherwise specified by the Board of Directors at the time of grant.

The following is a continuity of stock options for which shares have been reserved:



March 31, 2007 March 31, 2006

Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
-------------------------------------------------------------------------
$ $
Stock options outstanding,
beginning of period 4,071,334 1.96 2,328,000 2.17
Granted 1,047,500 1.00 1,016,000 2.25
Expired / Cancelled (8,334) 2.70 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options outstanding,
end of period 5,110,500 1.76 3,344,000 2.19
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Stock options outstanding at the end of the period are comprised of the
following:

March 31, 2007
-------------------------------------------------------------------------

Exercisable options
-------------------

Weighted
Exercise Number of Number of average
Price Options options price
-------------------------------------------------------------------------
$ $
1.00-1.50 1,942,500 - -
1.51-2.00 1,338,000 888,998 1.87
2.01-2.50 1,125,000 398,330 2.23
2.51-3.00 580,000 351,997 2.53
3.01-3.50 125,000 41,667 3.30
-------------------------------------------------------------------------

1.76 5,110,500 1,680,992 2.13
-------------------------------------------------------------------------
-------------------------------------------------------------------------


March 31, 2006
-------------------------------------------------------------------------

Exercisable options
-------------------

Weighted
Exercise Number of Number of average
Price Options options price
-------------------------------------------------------------------------
$ $
1.24-1.50 - - -
1.51-2.00 1,308,000 710,000 1.87
2.01-2.50 1,231,000 43,333 2.33
2.51-3.00 680,000 185,332 2.52
3.01-3.50 125,000 - -
-------------------------------------------------------------------------

2.19 3,344,000 938,665 2.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------


The options outstanding at March 31, 2007 have a weighted average remaining contractual life of 3.7 years (March 31, 2006 - 3.9 years).

The fair value of stock options granted to employees, directors and consultants during the three month periods ended March 31, 2007 and 2006, was estimated on the date of grant using the Black Scholes option pricing model with the following weighted average assumptions: dividend yield of zero% (2006 - zero%), expected volatility of 50% (2006 - 55.3%), risk-free interest rate of 3.91%(2006 - 4.04%), and an expected life of four years (2006 - four years). Outstanding options granted during the three month periods ended March 31, 2007 and 2006 had an estimated weighted average fair value of $0.43 per option (2006 - $1.05 per option), for a total estimated value of $450,425 (2006 - $1,063,200). For the three months ended March 31, 2007, a total of $282,161 (2006 - $171,486) has been recognized as stock compensation expense in general and administrative expenses with an offsetting credit to contributed surplus.

9. COMMITMENTS

The Company has entered into an operating lease for office premises expiring on November 20, 2009, which requires minimum monthly payments of $14,520 for the remainder of the lease.

The Company has entered into a capital lease obligation, as more fully described in note 5.

10. FINANCIAL INSTRUMENTS

Fair value of financial instruments

Financial instruments recognized on the balance sheet consist of accounts receivable, deposits, accounts payable, credit facility and capital lease obligations. As at March 31, 2007, there was no significant difference between the carrying amounts of these financial instruments reported on the balance sheet and their estimated fair values. It is management's opinion that the Company is not exposed to significant credit risk.

Interest rate risk

The Company is exposed to interest rate risk relating to increases in interest rates on its variable rate credit facility.

Commodity price risk management

As at March 31, 2007, the Company had no fixed price contracts associated with future production.

11. BASIS OF PRESENTATION

Certain of the comparative figures have been reclassified to conform to the presentation adopted in the current period.

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