Defiant Resources Corporation
TSX : DFR

Defiant Resources Corporation

May 15, 2006 09:00 ET

Defiant Resources Corporation 2006 First Quarter Report & News Release

CALGARY, ALBERTA--(CCNMatthews - May 15, 2006) - Defiant Resources Corporation (TSX:DFR) -

For Three Months ended March 31, 2006

Report to Shareholders

We are pleased to present our first quarter report to shareholders.

Our first quarter can be characterized as one of resolving delays and laying the groundwork for accelerated growth throughout the year and into 2007. Building on 2005 successes in our Southeast Peace River Arch core area, we dramatically expanded our lands, 3D seismic coverage and prospect inventory. Most important though was finalizing the right of way and acquiring all easements required to construct an essential pipeline in the Grande Prairie area. This right of way combined with another acquired last summer provides Defiant the ability to quickly increase and access sweet and sour natural gas processing capacity in the area by as much as 20 mmcf/d. Construction of the Grande Prairie pipeline and associated well-site facilities is nearing completion and we expect to bring 400 boe/d on production during June.

Despite the delays and with in excess of 600 boe/d of productive capacity remaining untapped, first quarter oil and gas sales increased 39% from the previous quarter to 719 boe/d. The increase resulted from commencing gas production at our Reine property the first week of January and our West Pembina Belly River DDD pool water-flood optimization performing as anticipated with oil production increasing monthly. Startup of the Grande Prairie pipeline in June is expected to further increase oil and gas production to 1100 boe/d.

In the first quarter, we drilled less wells than we had forecast. Even though drilling rigs during the winter drilling season were virtually inaccessible for smaller operators like Defiant, we were able to drill 4 (4.0 net) wells in the first quarter. Our original plan was to drill approximately 8 wells in the first quarter, consequently one of our "winter only" locations had to be deferred until next year. To prevent this problem from recurring, we have secured a drilling rig throughout the summer and we are considering contracting a rig for next year's winter season. Of the four wells drilled, two are cased awaiting completion and two are abandoned resulting in a net success rate of 50% for the quarter.

HIGHLIGHTS

- Increased sales volumes 39% from Q4-2005 to 719 boe/d (3,109 mcf/d gas, 18
bbls/d ngl and 183 bbls/d oil).

- Acquired 38 sections of proprietary 3D seismic in the Grande Prairie area.
- Purchased 14 sections of 3D seismic on an exclusive basis in the Grande Prairie area.

- Year to date we have acquired of 26 (21.5 net) sections of mineral rights in our Southeast Peace River Arch core area (18 (13.5 net) in Grande Prairie, 6 in Reine, 1 in Sheldon and 1 in Valleyview).

- Increased drilling inventory to in excess of 50 locations including three very exciting new high risk high reward prospects, each having the potential to double the current size of the company.

- Permitted and initiated construction of Grande Prairie area pipeline and wells-site facilities to tie-in our two prolific, moderately sour Halfway discoveries.

- Increased bank credit facility to $14 million with a provision for further increase to $18 million when the Grande Prairie Halfway discovery is onstream.

OPERATIONS REVIEW

Southeast Peace River Arch Area

Grande Prairie

With the acquisition of all of necessary land owner easements and consents our Grande Prairie area pipeline permit was received March 15. Concerns over increased costs and environmental issues related to construction during spring break up caused management to postpone pipeline construction until May. Construction is nearing completion and we plan to commence producing 400 boe/d from our two prolific Halfway wells by June.

We have added 52 sections of proprietary or exclusive 3D seismic to our data base in the Grande Prairie area. This seismic combined with the acquisition of 18 (13.5 net) sections of land has increased our drilling inventory to 15 locations. Three of these locations are significantly higher risk and higher reward each having the potential to add 1500 boe/d production and 2.5 mmboe of reserves thereby doubling the current value of the company. We are currently allocating 70% of our planned 2006 capital expenditures to the Grande Prairie area.

Defiant drilled and abandoned one Dunvegan test during the quarter.

Sheldon

Concluding a minor acquisition in Sheldon, we increased our interest in 4 sections of land to 45% and our interest in a standing well to 55%. We also acquired one section at a crown sale bringing our total land position to 11 (8.8 net) sections. With a well scheduled for drilling in the second quarter we anticipate increasing behind pipe deliverability in Sheldon to approximately 2 mmcf/d. We believe this would create the critical mass required for the next step which is construction of a 6.5 mile pipeline and a 5 mmcf/d gas processing facility combined with drilling a 10 to 15 well program to develop long life oil and gas reserves in the Montney formation.

Reine

Two (2.0 net) wells were drilled resulting in one well cased awaiting completion and one well being abandoned. With crown land sale purchases we have expanded our lands from three to eleven net sections. Additional drilling locations will be evaluated pending acquisition of additional 3D seismic coverage on a portion of the new lands.

Production from Reine commenced in early January and continues to be restricted to approximately 200 boe/d through a third party gathering system. With continued drilling success, we will work with this third party to modify facilities and eliminate this restriction.

Doris

At Doris one (1.0) net well was drilled and is currently awaiting completion. This location may not be accessible for completion until next winter.

West Pembina Area

Pembina Belly River DDD

Our water-flood optimization in this area continues to perform as projected by the independent engineer's reservoir simulation. The company's net production has gone from 110 to 150 boe/d and continues to increase monthly. We anticipate production peaking at approximately 200 boe/d and having a moderate annual decline of less than 10% thereafter.

OUTLOOK

Defiant Resources Corporation is a natural gas focused company and we expect natural gas will continue to represent 60 to 70% of our product mix. Due to one of the mildest winters on record across North America, the short term outlook for natural gas prices is somewhat negative at a time when the outlook for other commodities is very strong. Current natural gas prices are 50% below their winter peak.

Despite the current scenario, the medium and long-term outlook for natural prices remains very positive. North American natural gas supply versus demand is tighter than it has ever been and the fundamentals that caused natural gas prices to exceed $10.00 per GJ remain in place. What we can count on is highly volatile gas prices and although we cannot predict when, we are confident that before too long we will again see significantly higher gas prices.

The projects we are pursuing are economically viable with natural gas prices at $5 per GJ and oil prices at $35 WTI. Consequently, we maintain that our best strategy is to continue to grow our production and reserve base as rapidly as possible. We believe that achieving our exit production rate target of 1800 to 2000 boe/d combined with anticipated strengthening of natural gas prices will create substantial value for our shareholders.

Respectfully submitted on behalf of the Board of Directors

Rick J. Ironside

President and Chief Executive Officer

May 12, 2006

Management's Discussion and Analysis of Results of Operations and Financial Condition

ADVISORIES

The following management's discussion and analysis ("MD&A") of financial results as provided by the management of Defiant Resources Corporation ("Defiant" or the "Company") should be read in conjunction with the audited financial statements for the year ended December 31, 2005. This commentary is based on information available as at May 11, 2006. Certain statements in this document or documents incorporated herein by reference for the Company may constitute forward-looking statements. These forward-looking statements can generally be identified as such because of the context of the statements including words such as the Company "believes", "anticipates", "expects", "plans", "estimates", or words of a similar nature.

The forward-looking statements are based on current expectations and are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others: general economic and business conditions which will, among other things, impact demand for and market prices of the Company's products; foreign currency exchange rates; worldwide economic conditions; political uncertainty, including actions of or against terrorists, insurgent groups or other conflict including conflict between states; industry capacity; ability of the Company to implement its business strategy, including exploration and development activities; impact of competition, availability and cost of seismic, drilling and other equipment; ability of the Company to complete its capital programs; ability of the Company to transport its products to market; potential delays or changes in plans with respect to exploration or development projects or capital expenditures; operating hazards and other difficulties inherent in the exploration for and production and sale of crude oil and natural gas; availability and cost of financing; success of exploration and development activities; timing and success of integrating the business and operations of acquired companies; production levels; uncertainty of reserve estimates; actions by governmental authorities; government regulations and the expenditures required to comply with them (especially safety and environmental laws and regulations); asset retirement obligations; and other circumstances affecting revenues and expenses. The impact of any one factor on a particular forward-looking statement is not determinable with certainty as such factors are interdependent upon other factors, and management's course of action would depend upon its assessment of the future considering all information then available.

Statements relating to "reserves" are deemed to be forward-looking statements as they involve the implied assessment based on certain estimates and assumptions that the reserves described can be profitably produced in the future.

Readers are cautioned that the foregoing list of important factors is not exhaustive. Although the Company believes that the expectations conveyed by the forward-looking statements are reasonable based on information available to it on the date such forward-looking statements are made, no assurances can be given as to future results, levels of activity and achievements. All subsequent forward-looking statements, whether written or oral, attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. The Company assumes no obligation to update forward-looking statements should circumstances or management's estimates or opinions change.

Special note regarding non-GAAP financial measures

Management's discussion and analysis includes references to financial measures commonly used in the oil and gas industry, such as cash flow from operations, cash flow from operations per share and netback. These financial measures are not defined by generally accepted accounting principles ("GAAP") and therefore are referred to as non-GAAP measures. The non-GAAP measures used by the Company may not be comparable to similar measures presented by other companies. The Company uses these non-GAAP measures to evaluate the performance of the Company and its business segments. The non-GAAP measures should not be considered an alternative to or more meaningful than net earnings, as determined in accordance with Canadian GAAP, as an indication of the Company's performance.

The MD&A contains the term cash flow which is cash flow from operations before the change in non-cash working capital items. The non-GAAP measure used should not be considered an alternative to, or more meaningful than, cash flow from operations. The Company considers cash flow to be a key measure as it demonstrates the Company's ability to generate funds for investing. Cash flow does not have any standardized meaning prescribed by GAAP and therefore it may not be comparable with the calculation of similar measures of other entities. Cash flow per share is calculated using the same weighted average number of common shares as used in calculating the earnings per share. The terms cash flow and funds from operations are used synonymously.

Barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of 6 mcf of gas to 1 barrel of oil. Boe maybe misleading if used in isolation. A boe conversion ratio of 6 mcf of gas to 1 barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the well-head.

Netbacks equal total revenue less royalties and operating costs on a boe basis. Total boes are calculated by multiplying the daily production by the number of days in the period.

Business strategy and key performance drivers

The business plan of the Company is to create profitable per share growth in the exploration for, and the development and production of, natural gas and crude oil in western Canada. Defiant pursues a growth strategy involving drilling through farm-ins and participation agreements, and pursues strategic asset acquisitions on properties where exploitation, development and exploration drilling opportunities exist. We direct approximately 10% of our capital budget to high impact exploration prospects, which have a higher degree of risk.

The Company's current areas of focus are in the West Central Alberta corridor trending from North West of Edmonton to the South Peace River Arch.

Defiant's strategy involves acquiring properties, consolidating ownership by buying additional interests in its properties and developing its properties through well and facility optimization. Our management and technical team have expertise and experience in our focus areas. We believe this creates a competitive advantage for the Company.



DRILLING

To date in 2006, and for the first quarter, Defiant drilled 4 (4 net)
wells for a net success rate of 50%.

Gross Wells Gas Oil D&A Total
------------------------------------------------------------------------
Southeast Peace River Arch 2 - 2 4
West Pembina - - - -
------------------------------------------------------------------------
Total 2 - 2 4
------------------------------------------------------------------------
Exploratory wells 1 - 1 2
Development wells 1 - 1 2
------------------------------------------------------------------------
Total 2 - 2 4
------------------------------------------------------------------------
------------------------------------------------------------------------


Net Wells Gas Oil D&A Total
------------------------------------------------------------------------
Southeast Peace River Arch 2 - 2 4
West Pembina - - - -
------------------------------------------------------------------------
Total 2 - 2 4
------------------------------------------------------------------------
Exploratory wells 1 - 1 2
Development wells 1 - 1 2
------------------------------------------------------------------------
Total 2 - 2 4
------------------------------------------------------------------------
------------------------------------------------------------------------


Of the 4 wells drilled in 2006 to date, 2 were development wells drilled in the Southeast Peace River arch area. The 2 remaining wells were exploratory, prospective for new reserves outside these known pools.



SALES VOLUMES
Three months ended March 31
UNIT 2006 2005 Change
------------------------------------------------------------------------
Daily sales volumes
Natural gas (mcf/d) 3,109 39 7,846%
Light oil (bbls/d) 183 99 85%
Natural gas liquids (bbls/d) 18 4 394%
------------------------------------------------------------------------
Total (boe/d @ 6:1) 719 109 558%
------------------------------------------------------------------------
------------------------------------------------------------------------


In the first quarter of 2006, average daily sales volumes increased 558% to 719 boe/d compared to 109 boe/d for the first quarter of 2005. Natural gas volumes grew to 3,109 mcf/d, a 7,846% increase over the first quarter of 2005 volumes of 39 mcf/d. This increase in gas production came from new wells at Grande Prairie, Atim and Reine. Light oil production increased 85% to 183 bbls/d in the first quarter compared to 99 in the first quarter of 2005. This increase in oil production came from new wells at Carrot Creek, Sheldon and Reine, as well as increased recoverable barrels at the Pembina unit due to the successful water-flood program. Natural gas liquids volumes increased 394% to 18 bbls/d in the first quarter compared to 4 in 2005.



PRICES AND REVENUE
Three months ended March 31
2006 2005 Change
------------------------------------------------------------------------
Commodity Pricing
Benchmarks
West Texas Intermediate US$/bbl 63.53 49.78 28%
Exchange rate US$ 0.8659 0.8157 6%
Edmonton Par $/bbl 69.02 61.59 12%
NYMEX US$/mmbtu 7.71 6.39 21%
Alberta Spot $/mcf 7.50 7.06 6%
------------------------------------------------------------------------
Company Prices
Natural gas price $/mcf 7.81 7.65 2%
Light oil price $/bbl 67.10 60.86 10%
Natural gas liquids price $/bbl 53.20 37.82 41%
------------------------------------------------------------------------
Revenue
Natural gas sales $m 2,186 27 8,020%
Light oil sales $m 1,107 543 104%
Natural gas liquids sales $m 84 12 595%
------------------------------------------------------------------------
Total $m 3,377 582 480%
------------------------------------------------------------------------
------------------------------------------------------------------------


World oil prices showed continued strength during the first quarter of 2006 compared to 2005, due to growing demand and various supply concerns including the hurricanes in the Gulf of Mexico, political unrest and terrorist attacks. Our oil is light oil (40 API) and commands pricing close to the Edmonton Par benchmark price.

North American natural gas prices increased 21% in the first quarter of 2006 compared to the first quarter of 2005. In early 2006, following an unusually warm January and February across North America, natural gas prices declined. Natural gas pricing tends to be volatile and is affected by supply and demand, inventory levels, weather conditions and fuel switching to less expensive sources of energy. The Company's natural gas receives a premium over the average AECO spot price because of the favourable heat content adjustment.

The Company has no hedging contracts in place at March 31, 2006 and markets its crude oil and natural gas into the spot markets.

The Canadian dollar remained strong throughout the first quarter of 2006. The appreciation in the dollar eroded some of the benefits of stronger commodity prices.

For the three months ended March 31, 2006, revenues increased by 480% over the first quarter 2006, mainly due to increased natural gas sales volumes and higher commodity prices.



ROYALTIES
Three months ended March 31
2006 2005 Change
------------------------------------------------------------------------
Crown royalties $m 638 62 931%
Crown royalties per boe $ 9.86 6.29 57%
Royalty rate 19% 11%
Freehold & Gross overriding royalties $m 100 -
Freehold & Gross overriding royalties
per boe $ 1.54 -
Royalty rate 3% 0%
------------------------------------------------------------------------
------------------------------------------------------------------------


Defiant's producing wells are subject to Crown royalties, freehold royalties and gross overriding royalties payable to the owners of the mineral lease rights. Royalty rates can vary based on a number of factors such as reference pricing, royalty holidays, production rates. Crown royalty holidays are generally available to certain production from new pool discoveries.

Defiant's crown royalty rate was 19% for the three months ended March 31, 2006, compared to 11% during the first quarter 2005, due to increased gas production.

Forecasted royalty rates for the balance of 2006, before ARTC, are anticipated to be consistent with the 2006 first quarter rates. The Company anticipates receiving the maximum ARTC on Crown royalties during 2006.

The freehold and gross overriding royalty rate increased to 3% for the three months ended March 31, 2006, compared to 0% during the first quarter 2005, as a result of wells coming on stream which were drilled through farm-in agreements.



OPERATING EXPENSES
Three months ended March 31
2006 2005 Change
------------------------------------------------------------------------
Operating expenses $m 628 153 311%
Operating expenses per boe $ 9.71 15.55 (38%)
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating expenses were $628,000 or $9.71 per boe for the three months ended March 31, 2006 compared to $153,000 or $15.55 per boe during the first quarter 2005. The decrease per boe is mainly the result of increased production levels which created greater economies of scale with respect to the fixed costs associated with our production.

The Company expects operating costs to average $8.50 to $9.50 per boe during the balance of 2006.



GENERAL AND ADMINISTRATIVE EXPENSES
Three months ended March 31
2006 2005 Change
------------------------------------------------------------------------
Gross expenses $m 793 640 24%
Stock-based compensation $m 94 3 3,033%
Capitalized $m (330) (320) 3%
Overhead recoveries $m (73) (52) 39%
------------------------------------------------------------------------
Net 485 271 79%
------------------------------------------------------------------------
Per boe:
Gross expenses $ 12.26 65.06 (81%)
Stock-based compensation $ 1.45 0.31 376%
Capitalized $ (5.10) (32.55) (84%)
Overhead recoveries $ (1.12) (5.29) (79%)
------------------------------------------------------------------------
Net $ 7.49 27.53 (73%)
------------------------------------------------------------------------
------------------------------------------------------------------------


General and administrative ("G&A") expenses were $485,000 for the three months ended March 31, 2006 compared to $271,000 during the first quarter of 2005. This increase is mostly payroll-related, reflecting the increase in salaries to non-management personnel and the issuance of stock options to directors, officers and employees. On a per unit basis, the G&A costs decreased to $7.49 per boe in the first quarter compared to $27.53 during the first quarter 2005. We believe we can significantly grow the Company with small adjustments to our current level of staffing, allowing us to bring our G&A cost per boe down significantly, as we increase our production.



INTEREST AND FINANCE CHARGES
Three months ended March 31
2006 2005 Change
------------------------------------------------------------------------
Interest and finance charges $m 23 - 11,224%
Interest and finance charges per boe $ 0.36 0.02 1,621%
------------------------------------------------------------------------
------------------------------------------------------------------------


DEPLETION, DEPRECIATION AND ACCRETION
Three months ended March 31
2006 2005 Change
------------------------------------------------------------------------
Depletion, depreciation and accretion $m 1,534 173 785%
Depletion, depreciation and accretion
per boe $m 23.71 17.63 34%
------------------------------------------------------------------------
------------------------------------------------------------------------


Depletion, depreciation and accretion expense for the three months ended March 31, 2006 amounted to $1,534,000 ($23.71 per boe) compared to $173,000 (17.63 per boe) for the three months ended March 31, 2005. The rate per boe increase of 34% is due to Defiant having a larger capital depletable base as compared to the increase in proved reserves, as well a higher percentage of reserves being assigned to probable versus proved at year end. Defiant's year-end reserves are based on new drilling completed during 2005 which had minimal production history. Therefore, our independent reserve engineers assigned a significant portion of the new reserves to probable rather than proved reserve categories.



NETBACKS PER BOE
Three months ended March 31
$ unless otherwise stated 2006 2005 Change
------------------------------------------------------------------------
Price 52.19 59.22 (12%)
Transportation expenses (0.88) -
Crown royalties (9.86) (6.29) 57%
Gross overriding royalties (1.54) -
Operating expenses (9.71) (15.55) (38%)
------------------------------------------------------------------------
Field netback 30.20 37.38 (19%)
------------------------------------------------------------------------
------------------------------------------------------------------------


Defiant's field netback per boe for the three months ended March 31, 2006 decreased to $30.20 from $37.38 per boe for the first quarter of 2005. The decrease is mainly due to a higher proportion of production being gas which receives a lower price than oil, higher crown royalty and gross overriding royalty costs, offset by decreased operating expenses during the first quarter of 2006.



LOSS AND CASH FLOW
Three months ended March 31
2006 2005 Change
------------------------------------------------------------------------
Weighted average shares outstanding
Basic m 17,986 12,740 41%
Diluted m 19,813 14,181 40%
Cash flow from operations $m 1,565 97 1,518%
Basic per share $ 0.09 0.01 800%
Diluted per share $ 0.08 0.01 700%
Loss $m (79) (78) (31%)
Basic per share $ - (0.01)
Diluted per share $ - (0.01)

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


For the three months ended March 31, 2006, cash flow increased to $1,565,000 from $97,000 in the first quarter of 2006. The increase in cash flow was due to the significant increase in Defiant's overall production and higher commodity prices. The weighted average number of shares outstanding (diluted) was 19.8 million shares.



CAPITAL EXPENDITURES
Three months ended March 31
2006 2005 Change
------------------------------------------------------------------------
Land and lease retentions 1,112 28 3,871%
Seismic 1,490 134 1,012%
Drilling and completions 2,433 3,190 (24%)
Production facilities, pipeline, plant
and equipment 1,558 872 79%
Acquisitions 325 -
Capitalized general and administrative
expenses 330 320 3%
------------------------------------------------------------------------
7,248 4,544 60%
------------------------------------------------------------------------
------------------------------------------------------------------------


Capital expenditures were $7.2 million for the three months ended March 31, 2006. During the first quarter, Defiant drilled 4.0 net wells, undertook a large proprietary 3-D seismic program, and incurred costs to tie in gas wells and bring them on production.

LIQUIDITY AND CAPITAL RESOURCES

Oil and gas exploration and development is a capital intensive business. Periodic infusions of additional capital may be required to accelerate the rate of the Company's growth. Defiant chooses to finance its ongoing capital expenditure program through a combination of reinvesting cash flow, bank borrowing and additional equity.

At March 31, 2006, Defiant had net debt of $11.3 million, comprised of bank debt $6.4 million and a working capital deficiency of $4.9 million.

On April 18, 2006, the credit facility was increased to $14 million.

As at the date hereof the Company has 17,990,849 common shares, 1,539,500 options to purchase common shares and 2,719,867 share purchase warrants issued and outstanding.



SELECTED QUARTERLY INFORMATION
2006 2005
(unaudited) Q1 Q4 Q3 Q2 Q1
------------------------------------------------------------------------
Financial ($m, except where
noted)
Oil and natural gas sales
before royalties ($) 3,377 3,443 2,237 1,247 582
Cash flow from operations ($) 1,565 2,058 1,302 684 97
Per share - basic ($) 0.09 0.12 0.09 0.05 0.01
Per share - diluted ($) 0.08 0.11 0.08 0.04 0.01
Net earnings ($) (79) 599 340 193 (78)
Per share - basic ($) - 0.03 0.02 0.01 (0.01)
Per share - diluted ($) - 0.03 0.02 0.01 (0.01)
Capital expenditures ($net) 7,248 13,308 10,394 5,089 4,544
------------------------------------------------------------------------
Operations
Natural gas sales (mcf/d) 3,109 2,093 1,407 630 39
Average price ($Cdn/mcf) 7.81 12.18 9.25 7.54 7.65
Light oil sales (bbls/d) 183 161 141 130 99
Average price ($Cdn/bbl) 67.10 70.97 75.55 65.68 60.86
Natural gas liquids sales (bbls/d) 18 8 10 10 4
Average price ($/bbl) 53.20 59.43 60.02 45.04 37.82
Total sales (boe/d) 719 518 386 244 109
------------------------------------------------------------------------
------------------------------------------------------------------------


Balance Sheets
March 31 December 31
2006 2005
------------------------------------------------------------------------
(unaudited)
Assets

Current assets
Cash $ - $ 3,777,865
Accounts receivable 3,578,648 3,555,542
Prepaid expenses and refundable
deposits 151,909 162,430
------------------------------------------------------------------------
3,730,557 7,495,837

Property, plant and equipment (note 1) 51,030,779 45,220,769

------------------------------------------------------------------------
$ 54,761,336 $ 52,716,606
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities
Accounts payable and accrued
liabilities $ 8,627,005 $ 13,172,596
Bank debt (note 2) 6,438,603 -
------------------------------------------------------------------------
15,065,608 $ 13,172,596


Asset retirement obligations (note 3) 990,942 895,055

Future income taxes (note 4) 1,937,250 240,790

Shareholders' equity
Share capital (note 5) 34,279,362 35,926,131
Warrants (note 5) 1,305,536 1,314,76
Contributed surplus (note 6) 205,000 111,000
Retained earnings 977,638 1,056,267
------------------------------------------------------------------------
36,767,536 38,408,165

Subsequent event (note 2)
------------------------------------------------------------------------
$ 54,761,336 $ 52,716,606
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to interim financial statements.



Statements of Loss and Retained Earnings (Deficit)

Three Months Three Months
ended ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue
Oil and natural gas sales $ 3,376,689 $ 582,196
Crown royalties,
net of Alberta Royalty Tax Credit (637,624) (61,824)
Other royalties (99,880) -
Interest income 25,129 54
------------------------------------------------------------------------
2,664,314 520,426

Expenses
Operating 628,356 152,878
Transportation 57,171 -
General and administrative 484,868 273,618
Interest 23,101 204
Depletion, depreciation and accretion 1,533,989 173,316
------------------------------------------------------------------------
2,727,485 600,016

------------------------------------------------------------------------
Loss before taxes (63,171) (79,590)


Taxes
Future income taxes (reduction) (note 4) 15,458 (2,000)
------------------------------------------------------------------------
15,458 (2,000)

Net loss for the period (78,629) (77,590)

Retained earnings,
beginning of period 1,056,267 2,195
------------------------------------------------------------------------

Retained earnings (deficit),
end of period $ 977,638 $ (75,395)
------------------------------------------------------------------------
------------------------------------------------------------------------

Loss per share (note 5)
Basic and diluted $ 0.00 $ 0.01
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to interim financial statements.



Statements of Cash Flows
Three Months Three Months
ended ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
(unaudited) (unaudited)
Cash provided by (used in):

Operations
Net loss for the period $ (78,629) $ (77,590)
Add: non-cash items
Depletion, depreciation and acccretion 1,533,989 173,316
Stock-based compensation 94,000 3,000
Future income taxes (reduction) 15,458 (2,000)
------------------------------------------------------------------------
Funds from operations 1,564,818 96,726
Changes in non-cash operating
working capital (note 7) (1,122,758) 878,761
------------------------------------------------------------------------
442,060 975,487

Financing
Issuance of common shares 25,002 7,522,500
Cost of issuing shares - (416,286)
Bank debt 6,438,603 -
------------------------------------------------------------------------
6,463,605 7,106,214

Investments
Additions to property,
plant and equipment (7,248,112) (4,543,940)
Changes in non-cash investing
working capital (note 7) (3,435,418) 4,315,828
------------------------------------------------------------------------
(10,683,530) (228,112)
------------------------------------------------------------------------

Increase (decrease) in cash (3,777,865) 7,853,589

Cash, beginning of period 3,777,865 2,273,563
------------------------------------------------------------------------
Cash, end of period $ - $ 10,127,152
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to interim financial statements.

Notes to Financial Statements

For the three months ended March 31, 2006 and 2005
(unaudited)


The interim financial statements of Defiant Resources Corporation ("Defiant" or the "Company") 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 year ended December 31, 2005. The disclosures included below are incremental to those included with the annual financial statements. The interim financial statements should be read in conjunction with the financial statements and the notes thereto in the Company's annual report for the year ended December 31, 2005.



1. Property, Plant and Equipment
------------------------------------------------------------------------
March 31, December 31,
2006 2005
------------------------------------------------------------------------
Petroleum and natural gas assets $ 54,830,616 $ 47,508,606
Accumulated depletion and depreciation (3,799,837) (2,287,837)
------------------------------------------------------------------------
$ 51,030,779 $ 45,220,769
------------------------------------------------------------------------
------------------------------------------------------------------------


During the first quarter, the Company capitalized $330,000 (2005 - $320,000) of general and administrative expenses directly related to exploration and development activities.

Estimated future development cost of $1,755,000 (2005 - nil) were included in the calculation of depletion expense for the three months ended March 31, 2006. As at March 31, 2006, undeveloped land, seismic and other costs of $14,015,384 (2005 - $5,585,865) were excluded from assets subject to depletion.

2. Bank Debt

As at March 31, 2006 the Company had a $7 million revolving term credit facility and a US$0.5 million swap facility with a Canadian chartered bank. The credit facility bears interest at the bank's prime rate per annum and the swap facility bears interest at the U.S. base rate. The credit facility is a revolving demand facility, and is subject to a review each year. The swap facility is structured such that each swap will not exceed one year. Borrowings under the credit facility are limited to a borrowing base determined by the bank. Principal repayments are required only if the borrowing base is exceeded. The facilities are secured by a floating charge over all of the Company's assets. Interest of $23,101 (2005 - $204) was paid in the first quarter of 2006.
Effective April 18, 2006 the Company's revolving demand credit facility was increased from $7 million to $14 million.

3. Asset Retirement Obligations

The asset retirement obligations result from net ownership interests in petroleum and natural gas assets, including well sites, gathering systems and processing facilities. At March 31, 2006, the estimated total undiscounted amount of cash flows required to settle the asset retirement obligations is approximately $2,330,000 (December 2005 - $2,130,000), the majority of which will be incurred after 2020. A credit-adjusted discount rate of 9% and an inflation rate of 2% were used to calculate the fair value of the asset retirement obligations.

A reconciliation of the asset retirement obligations is provided below:



Three months Year
ended ended
Mar. 31, Dec. 31,
2006 2005
------------------------------------------------------------------------
Asset retirement obligations
Balance, beginning of period $ 895,055 $ 369,675
Liabilities incurred in period 73,898 341,559
Revisions to cost estimates - 141,736
Liabilities settled in period - (8,162)
Accretion expense 21,989 50,247
------------------------------------------------------------------------
Balance, end of period $ 990,942 $ 895,055
------------------------------------------------------------------------
------------------------------------------------------------------------


4. Future Income Taxes

Future income tax expense differs from the amount that would be computed by applying the basic combined federal and provincial statutory income tax rate of 35.62% (2005 - 36.62%) to loss before taxes. The reasons for the differences are as follows:



Three Three
months ended months ended
Mar. 31, 2006 Mar. 31, 2005
------------------------------------------------------------------------
Expected provision $ (22,502) $ (29,940)
Add (deduct)
Non-deductible crown payments 65,000 11,715
Resource allowance (55,000) (8,865)
Valuation allowance - 23,086
Non-deductible stock-based compensation 33,483 1,129
Other (5,523) 875
------------------------------------------------------------------------
Future income tax (reduction) $ 15,458 $ (2,000)
------------------------------------------------------------------------
------------------------------------------------------------------------

The tax effects of temporary differences that give rise to the future
tax iabilities are as follows:

Three Three
months ended months ended
Mar. 31, 2006 Mar. 31, 2005
------------------------------------------------------------------------
Tax liabilities:
Property, plant and equipment $ (2,585,976) $ (878,988)
Tax assets:
Share issue costs 315,571 336,609
Asset retirement obligations 333,155 300,917
Other - 672
------------------------------------------------------------------------
Net future income tax liability $ (1,937,250) $ (240,790)
------------------------------------------------------------------------
------------------------------------------------------------------------

5. Share Capital

Authorized

Unlimited number of common shares, issuable in series.

Issued and outstanding common shares

Number of
Shares Amount
------------------------------------------------------------------------
Balance, December 31, 2004 11,822,408 $ 14,221,034
Issue of common shares for cash 5,248,851 17,522,502
Issue of common shares on exercise
of warrants 7,500 9,750
Excercise of warrants - 3,600
Issue of flow-through common shares
for cash 892,858 5,000,005
Share issue costs, net of future income
taxes of $420,762 - (830,760)
------------------------------------------------------------------------
Balance, December 31, 2005 17,971,617 $ 35,926,131
------------------------------------------------------------------------
------------------------------------------------------------------------
Issue of common shares on exercise
of warrants 19,232 25,002
Excercise of warrants - 9,231
Tax effect of flow-through share renouncements - (1,681,002)
------------------------------------------------------------------------
Balance, March 31, 2006 17,990,849 $ 34,279,362
------------------------------------------------------------------------
------------------------------------------------------------------------


On October 13, 2005, the Company completed the private placement issue of 892,858 flow-through shares at a price of $5.60 per share for gross proceeds of $5.0 million. Pursuant to the terms of the flow-through arrangement, the Company renounced $5.0 million of Canadian tax deductions and recorded the future tax associated with this renouncement in the first quarter of 2006.

At March 31, 2006, the Company had 17,990,849 (2005 - 14,772,408) common shares, 1,539,500 (2005 - 100,000) options and 2,719,867 (2005 - 2,746,599) share purchase warrants issued and outstanding.

Issued and outstanding share purchase warrants



Number of
Warrants Amount
------------------------------------------------------------------------
Balance, December 31, 2004 2,746,599 $ 1,318,367
------------------------------------------------------------------------
------------------------------------------------------------------------
Exercise of warrants (7,500) (3,600)
------------------------------------------------------------------------
Balance, December 31, 2005 2,739,099 $ 1,314,767
------------------------------------------------------------------------
------------------------------------------------------------------------
Exercise of warrants (19,232) (9,231)
------------------------------------------------------------------------
Balance, March 31, 2006 2,719,867 $ 1,305,536
------------------------------------------------------------------------
------------------------------------------------------------------------


Options

The Company has a stock option plan under terms of which it will grant options to acquire common shares to certain officers, directors, employees and consultants. Under terms of the plan, up to 10% of the shares outstanding from time to time are issuable, and no more than 5% of the outstanding shares may be issued to any one insider as defined by such plan. The following table summarizes the change in the outstanding options.



March 31, 2006 December 31, 2005
------------------------------------------------------------------------
Weighted Weighted
Number average Number average
of exercise of exercise
Options price Options price
------------------------------------------------------------------------
Balance beginning of period 550,000 $ 3.17 - $ -
Granted to officers, directors,
and employees 989,500 $ 3.50 620,000 3.15
Cancelled - - (70,000) 3.00
------------------------------------------------------------------------
Balance, end of period 1,539,500 $ 3.38 550,000 $ 3.17
------------------------------------------------------------------------
------------------------------------------------------------------------


Weighted Weighted Weighted
Average Average Average
Number Contractual Exercise Number Exercise
Grant Price Outstanding Life (years) Price Exercisable Price
------------------------------------------------------------------------
$2.75 - $3.00 385,000 1.84 $ 2.94 33,333 $ 2.75
$3.01 - $4.00 1,154,500 2.60 $ 3.53 - $ -
------------------------------------------------------------------------
1,539,500 2.22 $ 3.38 33,333 $ 2.75
------------------------------------------------------------------------
------------------------------------------------------------------------


Options have a term of three years to expiry and employees' options vest equally over a 34 month period starting on the first anniversary date of the grant. Non-management Directors' options have a term of three years and vest quarterly over one year from the date of the grant. The options granted have an exercise price ranging from $2.75 to $3.71 per share and weighted average remaining contractual life of 2.22 years at March 31, 2006. At March 31, 2006, 33,333 options were exercisable.

Stock-based Compensation

Options granted are accounted for using the fair value method. The compensation cost that has been charged against earnings for the stock option plan was $94,000 for the quarter. The fair value of the options granted in the three months ended March 31, 2006 was $1.29 (2005 - $1.02) per option.

The fair market value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:



Three Three
months ended months ended
Mar. 31, 2006 Mar. 31, 2005
------------------------------------------------------------------------
Weighted average fair value per option $ 1.29 $ 1.02
Dividend yield zero zero
Volatility 53% 50%
Risk-free rates 3.5% 3.5%
Expected life (years) 3 3
------------------------------------------------------------------------
------------------------------------------------------------------------

Per share amounts

The weighted average numbers of shares outstanding for the determination
of basic and diluted per share amounts are as follows:

Three Three
months ended months ended
Mar. 31, 2006 Mar. 31, 2005
------------------------------------------------------------------------
Basic 17,985,507 12,740,186
Diluted 19,813,275 14,181,058
------------------------------------------------------------------------
------------------------------------------------------------------------

As at March 31, 2006, 165,000 options were excluded from dilution
calculations as they were anti-dilutive.

6. Contributed Surplus
------------------------------------------------------------------------

Three Three
months ended months ended
Mar. 31, 2006 Mar. 31, 2005
------------------------------------------------------------------------
Balance, beginning of period $ 111,000 $ -
Stock-based compensation 94,000 121,000
Cancellation of unvested options - (10,000)
------------------------------------------------------------------------
Balance, end of period $ 205,000 $ 111,000
------------------------------------------------------------------------
------------------------------------------------------------------------

7. Other Disclosures
------------------------------------------------------------------------

Cash was provided by (used in) the following changes in non-cash working
capital:

Three Three
months ended months ended
Mar. 31, 2006 Mar. 31, 2005
------------------------------------------------------------------------
Accounts receivable $ (23,106) $ (587,484)
Prepaid expenses and deposits 10,521 (12,541)
Accounts payable and accrued liabilities (4,545,591) 5,794,614
------------------------------------------------------------------------
$(4,558,176) $ 5,194,589
Less: change in non-cash working capital
related to investing (3,435,418) 4,315,828
------------------------------------------------------------------------
Change in non-cash working capital related
to operations $(1,122,758) $ 878,761
------------------------------------------------------------------------
------------------------------------------------------------------------

Other cash flow information

Three Three
months ended months ended
Mar. 31, 2006 Mar. 31, 2005
------------------------------------------------------------------------
Interest paid $ 23,101 $ 204
------------------------------------------------------------------------
------------------------------------------------------------------------


Corporate Information

HEAD OFFICE

Defiant Resources Corporation
1800, 800 Sixth Avenue SW
Calgary AB T2P 3G3
tel: (403) 266 5587
fax: (403) 266 5506
e-mail: info@defiantresources.com
web: www.defiantresources.com

BOARD OF DIRECTORS

David J. Evans
Chairman
Defiant Resources Corporation
Calgary AB

Rick J. Ironside
President & Chief Executive Officer
Defiant Resources Corporation
Calgary AB

Gary R. Bugeaud 2,3
Partner
Burnet, Duckworth & Palmer LLP
Calgary AB

Richard M. Cooper 1,2
President & Director
T.R.L. Investments Limited
Toronto ON

Raymond T. Chan 1,2,3
President & CEO
Baytex Energy Trust
Calgary AB

Naveen Dargan 1,3
Independent Businessman
Calgary AB

Timothy V. Dunne
Independent Businessman
Calgary AB

OFFICERS

Rick J. Ironside
President
& Chief Executive Officer

Rob H. Solinger
Vice President Finance
& Chief Financial Officer

Arne Hamarsnes
Vice President Operations

Dwight D. Fieseler
Controller

LEGAL COUNSEL
Burnet, Duckworth & Palmer LLP
Calgary AB

AUDITORS

KPMG LLP
Calgary AB

BANKERS

CIBC
Calgary AB

QUALIFIED INDEPENDENT
EVALUATION ENGINEERS

Sproule Associates Limited
Calgary AB

LISTING INFORMATION

Toronto Stock Exchange (TSX)
Symbol: DFR

REGISTRAR
AND TRANSFER AGENT

Valiant Trust Company
510, 550 Sixth Avenue SW
Calgary AB T2P 0S2
tel: (403) 233 2801
fax: (403) 233 2857
e-mail: valiant@telusplanet.net

WEBSITE

Shareholders and other interested
individuals can access current public
information about Defiant Resources
Corporation via the internet at this
website:

www.defiantresources.com

Defiant's website includes: annual and
quarterly interim reports, corporate
profile, news releases, the most
recent corporate presentation and
historical information as well as
trading and contact information.


1 Audit Committee
2 Reserves Committee
3 Compensation & Corporate
Governance Committee



Contact Information