Defiant Resources Corporation
TSX : DFR

Defiant Resources Corporation

November 08, 2007 21:54 ET

Defiant Resources Corporation: 2007 Third Quarter Report & News Release

CALGARY, ALBERTA--(Marketwire - Nov. 8, 2007) - Defiant Resources Corporation (TSX:DFR) -

Report to Shareholders

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

Highlights of the third quarter include:

- Three gas wells were drilled and completed resulting in the addition of significant reserves and a substantial increase in our current production to over 1,500 boe per day.

- The Company's credit facility was increased from $18 to $20 million.

- As outlined in our September 9, 2007 press release, the Company's total proved plus probable reserves increased by 1,829 mboe. This represents a 58% increase in reserves, net of production, since December 31, 2006.

Operations Update

During the third quarter the Company accelerated its capital expenditure program with the objective of ensuring all wells we drilled in the third quarter were on production. To realize maximum value, it was necessary to ensure sufficient test and producing information for the new wells prior to the completion of the strategic review process. Third quarter activity included the following:

- At Karr we drilled, completed, fracture stimulated and tied in two 100% gas wells. These wells were placed on production in mid October at a combined rate of over 1.7 mmcf per day. We more than doubled our land position in the area with the acquisition of two additional crown sections and the negotiation of a farm in agreement on adjacent lands.

- At Clairmont we drilled, completed and fracture stimulated our second (0.83 net) development gas well. This well was tied in and placed on production in mid October increasing our total production at Clairmont to 3.0 (2.7 net) mmcf per day.

- At Reine we successfully re-entered an existing well bore and completed a lower zone for oil. The well is now producing at an average rate of 40 barrels of oil per day.

- At Gold Creek, Grande Prairie East and Dimsdale we incurred significant up front capital costs in respect to our fall and winter drilling program.

Production for the nine months ended September 30, 2007 increased 26% from the same period last year to average 1,104 boepd. Third quarter production was lower than last year due to third party plant maintenance, workovers, oil well allowables coming into full effect, reduced first half activity and natural declines . Our production mix has been gas weighted with an approximate 70/30 gas/oil split. With the new wells being placed on production the gas weighting will increase to approximately 80%.

Cash flow from operations was lower in the third quarter relative to last year due to reduced production for the quarter and lower gas prices. Fourth quarter cash flow is expected to be significantly higher given the increase in production to 1,500 boe per day and higher oil prices. Capital expenditures of $6.5 million versus cash flow of $1.8 million for the quarter resulted in net debt increasing to $19.9 million. By year end net debt is expected to be reduced to $18 million.

To date, operational activity during the fourth quarter includes the following:

- At Clairmont we fracture stimulated the existing well which had produced without stimulation for over two years. This has doubled the productive capacity of the well and it is currently contributing 1.5 mmcf per day. We also drilled a third (0.60 net) gas well which is scheduled to be fracture stimulated and tied in as soon as booster compression can be installed to accommodate its production.

- At Gold Creek we drilled and cased our second well for gas and completion operations are underway. The well has tested gas but requires a fracture stimulation to determine if it will be capable of commercial rates.

Drilling and operational activities planned for the balance of the fourth quarter include:

- Drilling and completing our third well and acquiring and interpreting 3D seismic over Company lands at Karr.

- Drilling one commitment well at Grande Prairie East.

Strategic Review Process

In September Defiant opened its data room wherein the Company has made numerous presentations to prospective bidders. Defiant has extended the bid deadline until mid November to allow prospective bidders to assess the impact of our increased production, recent drilling results and the proposed changes to the Alberta royalty regime. We will be providing updates as events warrant.

Alberta Crown Royalty and Reserves Update

On October 25, 2007, the Government of Alberta announced changes to the royalties payable on all Crown mineral rights owned by the province. The legislation, when enacted, together with production rates, commodity prices and product mix, will determine the actual impact on the Company.

Defiant had its previously released August 31, 2007 reserves, as evaluated by Sproule, updated to determine the impact of the proposed royalty changes and reflect the Company's recent operations. As a result of theses updates, the net present value of the Company's reserves, discounted at 10% before tax, has increased 1 % to $72 million. The impact of the proposed royalties was a reduction in value of approximately 4% which was more than offset by a 5% increase in the value attributable to the operational activities.

Outlook for 2007

We are on track to exceed our goal of a year-end exit rate of 1,500 boe per day once we drill and complete more wells at Karr and Grande Prairie.

Respectfully submitted,

Rick J. Ironside, President and Chief Executive Officer

MANAGEMENT'S DISCUSSION and ANALYSIS

ADVISORIES

This Management's discussion and analysis ("MD&A"), prepared effective November 8, 2007 should be read in conjunction with the Defiant Resources Corporation ("Defiant" or the "Company") unaudited financial statements for the nine months ended September 30, 2007 and the audited financial statements for the year ended December 31, 2006.

Basis of Presentation - The financial data presented has been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The reporting and measurement currency in the financial statements and in this discussion and analysis is the Canadian dollar, unless otherwise stated.

Non-GAAP Measure - Defiant evaluates performance based on net income, cash flow from operations and cash flow from operations per share. Cash flow from operations and cash flow from operations per share are not measurements defined by GAAP, but are financial terms commonly used in the oil and gas industry. The Company's cash flow from operations is detailed on the Statement of Cash Flow and may not be comparable to other companies. Defiant calculates cash flow from operations as cash flow prior to changes in non-cash working capital and per share amounts using the same method and shares outstanding which are used in the determination of net earnings per share. The Company considers it a key measure as it demonstrates the ability of the Company to generate the funds necessary to finance future capital investments.

Field Netback - Defiant also uses field netback as a key performance indicator. Field netback does not have a standardized meaning prescribed by Canadian GAAP and therefore may not be comparable with the calculation of similar measures by other companies. Field netback is determined by deducting royalties, operating and transportation expenses from petroleum and natural gas sales revenue.

Cash flow from operations and field netback are not intended to represent operating profits, nor should they be viewed as an alternative to other measures of financial performance calculated in accordance with GAAP.

Boe Conversion - Certain natural gas volumes have been converted to barrels of oil equivalent ("boe"), whereby six thousand cubic feet (mcf) of natural gas is equal to one barrel (bbl) of oil, unless otherwise stated. This conversion ratio is based on an energy equivalent conversion applicable at the burner tip and does not represent a value equivalency at the wellhead.

Forward-Looking Information - Certain information regarding Defiant set forth in this document, including management's assessment of the Company's future plans and operations, contains forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond Defiant's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, the lack of, or availability of qualified technical personnel or management, stock market volatility and ability to access capital from internal and external sources. Defiant's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what impact it would have on Defiant.

Internal Controls

The Company has implemented a system of internal controls that it believes adequately protects the assets of the Company and is appropriate for the nature of its business and the size of its operations. These internal controls include disclosure controls and procedures designed to ensure that information required to be disclosed by the Company is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure. The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of September 30, 2007, that our disclosure controls and procedures are effective to provide reasonable assurance that material information related to the Company is made known to them except as noted below. It should be noted that while the Company's Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures provide a reasonable level of assurance that the system of internal controls are sufficient, they do not guarantee that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

The Chief Executive Officer and Chief Financial Officer of the Company are responsible for designing internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles. We have designed controls for this process and have conducted an evaluation which has identified certain weaknesses in our controls. Due to the limited number of staff at the Company, there is an inherent weakness in the system of internal controls due to our inability to achieve appropriate segregation of duties. The limited number of staff may also result in identifying weaknesses with respect to accounting for complex and non-routine accounting transactions as the Company does not have a sufficient number of finance personnel with technical accounting knowledge to address all complex and non-routine accounting matters that may arise. As a result of these weaknesses there is no guarantee that a material misstatement would be prevented or detected. These items have been classified as material weaknesses. Management and Board review are utilized to mitigate the risk of material misstatement; however, we do not have reasonable assurance that this risk can be reduced to a remote likelihood of a material misstatement. Defiant currently has no plans to remediate these weaknesses because the Company believes that an adequate control environment exists at this time.

Environmental Regulation and Risk

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. Implementation of strategies for reducing greenhouse gases whether to meet the limits required by the Protocol or as otherwise determined, could have a material impact on the nature of oil and natural gas operations, including those of the Company.

The Federal Government released on April 26, 2007, its Action Plan to Reduce Greenhouse Gases and Air Pollution (the "Action Plan"), also known as ecoACTION and 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. Regarding large industry and industry related projects the Government's Action Plan intends to achieve the following: (i) an absolute reduction of 150 megatonnes in greenhouse gas emissions by 2020 by imposing mandatory targets; and (ii) air pollution from industry is to be cut in half by 2015 by setting certain targets. New facilities using cleaner fuels and technologies will have a grace period of three years. In order to facilitate the companies' compliance of the Action Plan's requirements, while at the same time allowing them to be cost-effective, innovative and adopt cleaner technologies, certain options are provided. These are: (i) in-house reductions; (ii) contributions to technology funds; (iii) trading of emissions with below-target emission companies; (iv) offsets; and (v) access to Kyoto's Clean Development Mechanism.

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. Bill 3 states that facilities emitting more than 100,000 tonnes of greenhouse gases a year must reduce their emissions intensity by 12% starting July 1, 2007; if such reduction is not initially possible the companies owning the large emitting facilities will be required to pay $15 per tonne for every tonne above the 12% target. These payments will be deposited into an Alberta-based technology fund that will be used to develop infrastructure to reduce emissions or to support research into innovative climate change solutions. As an alternate option, large emitters can invest in projects outside of their operations that reduce or offset emissions on their behalf, provided that these projects are based in Alberta. Prior to investing, the offset reductions, offered by a prospective operation, must be verified by a third party to ensure that the emission reductions are real.

Given the evolving nature of the debate related to climate change and the control of greenhouse gases and resulting requirements, it is not possible to predict the impact of those requirements on the Company and its operations and financial condition.

Proposed Changes to Alberta Royalty Regime

On October 25, 2007, the Government of Alberta announced changes to the royalties' payable on all Crown mineral rights owned by the province. If enacted on January 1, 2009, as released on October 25, 2007, factors determining the calculation of Crown royalties to be paid will include the rate of production per well, commodity prices and the depth drilled. Based on Defiant's current production profile and commodity prices, future Crown royalties paid to the province of Alberta in 2009 and future years are estimated to increase by 5% and consequently reduce cash flow available for future capital spending. Management estimates that the net present value of reserves, as at August 31, 2007, discounted at 10% before tax, will decrease by $2.7 million or 4%.

Business Strategy

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 exploratory and development drilling augmented by strategic acquisitions on properties where exploitation, development and exploration opportunities exist. The Company's current areas of focus are in the West Central Alberta corridor trending from North West of Edmonton to the South East 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.

On June 21, 2007, the Company announced that its board of directors had determined to commence a formal process to seek strategic alternatives to maximize shareholder value. At that time the Board established a special committee and on July 12, 2007 they retained First Energy Capital Corp. as its exclusive financial advisor to assist in exploring strategic alternatives. The Company expects to receive bids in mid November and will report back to shareholders as developments warrant.

Three month overview

During the quarter ended September 30, 2007 capital expenditures were $6.5 million versus cash flow of $1.8 million resulting in net debt increasing to $19.9 million. Our spending was focused at Karr and Clairmont: we drilled three (3.0 net) gas wells and re-completed one (1.0 net) gas well.

For the three months ended September 30, 2007, production averaged 989 boe per day, a 17% decrease from the 1,195 boe per day in the corresponding period of 2006. The third quarter production also represents an 18% decrease from the second quarter 2007 production of 1,205 boe per day. Production decreases resulted from normal production declines, a higher than anticipated production decline rate at one gas well, some wells being shut in due to third party plant maintenance turnarounds and Defiant shutting in wells at Majeau and Tangent for workover maintenance.

Outlook for 2007

The Company will continue to drill lower risk prospects, tie-in production behind pipe, optimize existing production and add to its land base. These activities will occur in conjunction with the completion of the process to maximize shareholder value. Our production as of mid-October 2007 was in excess of 1,500 boe per day.

Fourth quarter operations to date include placing the first two wells at Karr and the new well at Clairmont on production. We drilled and cased a follow up well to our Gold Creek gas discovery and have also drilled a third gas well at Clairmont. The Company expects to complete these wells shortly and tie-in the Clairmont well in November.

The Company plans to drill wells at Atim, Grande Prairie East and Karr prior to the end the year.



OPERATIONS

Sales Volumes

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Three Months Ended Nine Months Ended
Sept 30 Sept 30
2007 2006 Change 2007 2006 Change
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Daily sales volumes
Natural gas mcf/d 3,931 5,464 -28% 4,510 3,872 16%
Light oil bbls/d 265 249 6% 282 206 37%
Natural gas liquids bbls/d 69 35 97% 70 24 192%

Total boe/d 989 1,195 -17% 1,104 875 26%
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Sales volumes for the three months ended September 30, 2007 averaged 989 boe per day, a decrease of 17% from the 1,195 boe per day during the corresponding period in 2006. Natural gas volumes decreased to 3,931 mcf per day, a 28% decrease from the 2006 volume of 5,464 mcf per day. This decrease in gas production is the result of third party facility maintenance requiring temporary shut-in of some gas wells in the Grande Prairie area. The Company experienced natural declines in its gas production and a higher than expected decline at one of its newer Grande Prairie gas wells. Light oil production increased 6% to 265 bbls per day in the third quarter of 2007 compared to 249 bbls per day in the second quarter of 2006. The increase in oil production came from the new oil wells in the Dunvegan formation. Natural gas liquid volumes increased to 69 bbls per day in the period, compared to 35 bbls per day in the corresponding period in 2006, due to the gas wells brought on in the second quarter of 2006 having a higher heat and liquids content.

For the first nine months of 2007 natural gas production increased 16% to 4,510 mcf per day compared to 3,872 mcf per day in the corresponding period in 2006. Light oil production for the nine months ended September 30, 2007 was 282 bbls per day, an increase of 37% over the 206 bbls per day in 2006. Natural gas liquids production of 70 bbls per day represents an increase of 192% over the 2006 production of 24 bbls per day.



Marketing and Revenue

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Three months ended Nine months ended
Sept 30 Sept 30
Commodity pricing 2007 2006 Change 2007 2006 Change
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Benchmark
Alberta Spot (Gas) $/mcf 5.16 5.65 -9% 6.54 6.39 2%
West Texas
Intermediate (Oil) US$/bbl 75.46 70.15 8% 66.17 68.03 -3%
Exchange rate US$ 0.96 0.89 8% 0.91 0.88 3%
Edmonton Par (Oil) $/bbl 79.95 79.07 1% 72.99 75.53 -3%
Company Prices
Natural gas price $/mcf 6.15 6.07 1% 7.66 6.65 15%
Oil price $/bbl 79.42 80.58 -1% 73.02 75.98 -4%
Liquids price $/bbl 59.51 62.01 -4% 57.38 60.64 -5%
Revenue
Natural gas $m 2,224 3,054 -27% 9,430 7,031 34%
Oil $m 1,936 1,849 5% 5,620 4,273 32%
Liquids $m 380 199 91% 1,098 400 175%
Royalty income $m 12 12 0% 91 88 3%
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Total $m 4,552 5,114 -11% 16,239 11,792 38%
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Alberta spot gas prices are based on Natural Gas Exchange prices at the AECO Hub. During the first half of 2007, all of Defiant's natural gas production was sold on the spot market. Natural gas pricing tends to be volatile and is affected by supply and demand, storage levels, weather conditions and fuel switching to alternative sources of energy. Alberta spot natural gas prices decreased 9% in the third quarter of 2007 compared to 2006. West Texas Intermediate ("WTI") at Cushing, Oklahoma is the benchmark for North American light sweet oil prices and is the crude type against which the NYMEX futures contracts are priced. Alberta crude oil prices are based on refiners' postings at hubs such as Edmonton and Hardisty, Alberta. The Alberta postings generally vary with the WTI price. Alberta crude oil prices include adjustments for transportation differential, the US/Canadian exchange rate, and quality and regional market conditions. Defiant's crude oil is light and sweet, which receives pricing close to the Edmonton benchmark price. The Company's natural gas receives a higher than average price due to the higher heat content whereby we have more gigajoules per mcf.

The Company monitors the impact of commodity price exposure and may, from time to time, implement hedging measures to mitigate such price risk. The objective of this hedging strategy is to reduce the Company's risk exposure to changes in cash flow resulting from changes in commodity prices, thereby ensuring our ability to complete the planned capital program. The Company may utilize derivative instruments from time to time such as swaps, puts or collars to implement this hedging strategy. In February 2007, the Company hedged 1,000 gigajoules per day of gas production for the April 2007 through October 2007 period via a "three way costless collar". The collar is priced with floors of $5.40 and $7.25 per gigajoule and a ceiling of $9.00 per gigajoule. The contract was settled on August 31, 2007 and the sales revenue for three months ended September 30, 2007 includes the $156,013 realized gain on this contract.

Sales revenues for the three months ended September 30, 2007 decreased 11% to $4.5 million from $5.1 million in 2006 as a result of the decrease in production volumes. The oil and gas revenues for the nine months ended September 30, 2007 were $16.1 million, an increase of 38% over the $11.7 million in the corresponding period in 2006.



Royalties

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Three Months Ended Nine Months Ended
Sept 30 Sept 30
2007 2006 Change 2007 2006 Change
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Royalties, net of ARTC $m 763 999 -24% 3,130 2,274 38%
Royalties per boe $ 8.38 9.09 -8% 10.09 9.52 6%
Royalty rate 17% 19% -11% 19% 19% 0%
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Defiant's producing wells are subject to Crown, freehold and gross overriding royalties which are payable to the owners of the mineral rights. Royalty rates can vary based on a number of factors including reference pricing, royalty holidays and production rates. Crown royalty holidays are available to certain oil and gas production from new pool discoveries. In 2006 the Company was still receiving ARTC payments from the Alberta Government; this program was eliminated effective January 1, 2007. The elimination of the ARTC has been offset by a large increase in a gas cost allowance (which reduces crown royalties) because of our infrastructure spending to tie in gas wells in 2006.

Royalties for the third quarter of 2007 totalled $0.8 million ($8.38 per boe) compared to $1.0 million ($9.09 per boe) for 2006. The royalty rate during the quarter was 17% of sales compared to 19% in the same period of 2006. The decrease in royalty rates and royalties per boe was due to the decreased production in the quarter and receipt of a larger than expected gas cost allowance adjustment in the quarter.

For the first nine months of 2007, royalties were $3.1 million (19% of sales) compared $2.3 million (19% of sales) in 2006.



Operating expenses

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Three Months Ended Nine Months Ended
Sept 30 Sept 30
2007 2006 Change 2007 2006 Change
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Operating expenses $m 1,279 1,200 7% 3,561 2,566 39%
per boe $ 14.05 10.91 29% 11.82 10.74 10%
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Operating expenses were $1.3 million, or $14.05 per boe, for the quarter ended September 30, 2007, compared to $1.2 million, or $10.91 per boe, during the comparable period of 2006. The increased costs per boe are attributable to a wet spring in the Grande Prairie area leading to higher than expected lease and road maintenance charges, a workover on our Majeau gas well and lower production volumes. The workover and maintenance charges amounted to approximately $1.50 per boe.

The operating expenses for the nine months ended September 30, 2007 increased 39% to $3.6 million ($11.82 per boe) from $2.6 million ($10.74 per boe) during the corresponding period in 2006.



Transportation expenses
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Three Months Ended Nine Months Ended
Sept 30 Sept 30
2007 2006 Change 2007 2006 Change
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Transportation expenses $m 101 103 -2% 302 204 48%
per boe $ 1.11 0.93 19% 1.00 0.85 18%
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Transportation costs increased for the nine months ended September 30, 2007
due to increased gas production.

Field Netback
----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept 30 Sept 30
$ per boe 2007 2006 Change 2007 2006 Change
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Sales price 50.00 46.53 7% 53.89 49.35 9%
Less: Royalties, net of ARTC 8.38 9.09 -8% 10.09 9.52 6%
Operating and transportation
expenses 15.16 11.84 28% 12.82 11.59 11%
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Field netback 26.46 25.60 3% 30.98 28.24 10%
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Defiant's field netback per boe for the three months ended September 30, 2007 increased 3% to $26.46 from $25.60 per boe for the corresponding 2006 period. The increase in sales price was offset by an increase in the operating expenses and slightly lower royalties in 2007.

For the nine months ended September 30 the field netback increased 10% from $28.24 in 2006 to $30.98 in 2007.



General and Administrative ("G&A") Expense and Stock Based Compensation
("SBC")

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Three months ended Nine months ended
Sept 30 Sept 30
2007 2006 Change 2007 2006 Change
----------------------------------------------------------------------------
Gross G&A $m 591 978 -40% 2,058 2,409 -15%
Capitalization &
recoveries $m (332) (547) -39% (1,111) (1,208) -8%
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Net G&A expense $m 259 431 -40% 947 1,201 -21%
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Gross SBC $m 154 278 -45% 683 654 4%
Capitalization $m (69) (125) -45% (307) (269) 14%
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Net SBC expense $m 85 153 -44% 376 385 -2%
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Per boe:
Gross G&A $ 6.49 8.90 -27% 6.83 10.08 -32%
Capitalization &
recoveries $ (3.65) (4.98) -27% (3.69) (5.06) -27%
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Net G&A expense $ 2.84 3.92 -28% 3.14 5.02 -37%
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Gross SBC $ 1.69 2.53 -33% 2.27 2.74 -17%
Capitalization $ (0.76) (1.14) -33% (1.02) (1.13) -10%
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Net SBC expense $ 0.93 1.39 -33% 1.25 1.61 -22%
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For the quarter ended September 30, 2007, G&A expenses after capitalization and recoveries per boe decreased 28% to $2.84 per boe compared to $3.92 in 2006 as a result of decreased staffing in 2007. Gross G&A costs were also down from 2006 as a result of the lower staffing levels.

For the nine months ended September 30, 2007 the net G&A of $0.9 million was a 21% decrease from the $1.2 million in 2006. On a per boe basis the reduction to $3.14 per boe was a 37% decrease from the $5.02 per boe during the same period of 2006.

G&A expenses and their capitalization and recoveries are expected to remain at current levels. We believe expenses per boe will trend downward as production volumes increase.

Interest Expense

Interest expense for the three months ended September 30, 2007 was $0.2 million compared to $0.1 million for 2006. The increase in interest expense is due to an increase in bank debt as a result of our active drilling program in the fourth quarter of 2006 and throughout 2007.

Interest expense is expected to stay at current levels as the Company plans to maintain its borrowings at similar levels during the balance of the year.



Depletion, Depreciation and Accretion
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Three Months Ended Nine Months Ended
Sept 30 Sept 30
2007 2006 Change 2007 2006 Change
----------------------------------------------------------------------------
Depletion, depreciation $m
and accretion 2,197 2,766 -21% 8,564 5,721 50%
per boe $ 24.13 25.16 -4% 28.42 23.93 19%
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For the three months ended September 30, 2007, depletion, depreciation and accretion decreased 21% to $2.2 million ($24.13 per boe) from $2.8 million ($25.16 per boe) for the same period in 2006. The decrease in the provision is the result of decreased production volumes and the lower depletion rates are due to the reserve additions in 2007.

Ceiling Test

The Company performs a ceiling test quarterly and annually whereby the carrying amount of the petroleum and natural gas properties is compared to estimated future cash flow from the production of reserves. At September 30, 2007, the ceiling test was performed in accordance with the requirements of GAAP, resulting in undiscounted cash flows from proved reserves and the value of unproved properties being greater than the carrying amount of the petroleum and natural gas properties.

Income Taxes

Future income taxes for the three months ended September 30, 2007 was a reduction of $159,665 versus a reduction of $86,329 for 2006.

At September 30, 2007, the Company had tax pools of $53.4 million. During the first quarter of 2007, Defiant renounced $13.5 million of its tax deductions as a result of the flow through shares issued in 2006.



Cash Flow and Loss
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Three Months Ended Nine Months Ended
Sept 30 Sept 30
2007 2006 Change 2007 2006 Change
----------------------------------------------------------------------------
Cash flow from operations $m 1,822 2,310 -21% 7,644 5,472 40%
Basic per share $ 0.09 0.11 -18% 0.36 0.29 24%
Diluted per share $ 0.08 0.10 -20% 0.35 0.27 30%
Earnings (loss) $m (199) (522) 62% (851) (687) -24%
Basic per share $ (0.01) (0.03) -67% (0.04) (0.04) 0%
Diluted per share $ (0.01) (0.03) -67% (0.04) (0.04) 0%
Weighted average shares
outstanding
Basic m 21,412 20,515 4% 21,412 18,854 14%
Diluted m 21,979 22,145 -1% 22,004 20,482 7%
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For the three months ended September 30, 2007, cash flow from operations
decreased 21% to $1.8 million from $2.3 million in 2006. The decrease in
cash flow for the period was due to lower natural gas production.

Capital Expenditures
----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept 30 Sept 30
$m 2007 2006 Change 2007 2006 Change
----------------------------------------------------------------------------
Land and lease retentions 538 1,057 -49% 845 4,043 -79%
Seismic 27 234 -88% 83 2,047 -96%
Drilling and completions 5,113 3,267 57% 10,632 8,660 23%
Facilities, pipelines, and
equipment 651 739 -12% 2,069 4,752 -56%
Capitalized G&A expenses 205 355 -42% 769 1,045 -26%
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6,534 5,652 16% 14,398 20,547 -30%
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Drilling Activity

For the nine months ended September 30, 2007, Defiant drilled eight (6.3
net) wells for a net success rate of 100%.

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Gross Wells Net Wells
Gas Oil D&A Total Gas Oil D&A Total
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Peace River Arch 5.0 3.0 - 8.0 4.8 1.5 - 6.3
West Pembina - - - - - - - -
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Total 5.0 3.0 - 8.0 4.8 1.5 - 6.3
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Exploratory wells 3.0 - - 3.0 2.8 - - 2.8
Development wells 2.0 3.0 - 5.0 2.0 1.5 - 3.5
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Total 5.0 3.0 - 8.0 4.8 1.5 - 6.3
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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.

The Company had drawn $16.9 million against its $18 million credit facility at September 30, 2007. The Company's credit facility, renewable annually, is with a Canadian chartered bank in the form of a revolving loan and bears interest at the bank's prime lending rate. The loan is secured by all of the Company's assets. Principal repayments are required only if the borrowing base is exceeded. On October 22, 2007, the credit facility was increased to $20 million. The Company also had a working capital deficiency of $3.0 million as at September 30, 2007. Defiant plans to fund its 2007 capital program from cash flow, its available credit facility and proceeds from the expected exercise of outstanding share purchase warrants.

As at September 30, 2007, there were 21,412,026 common shares, 2,671,789 common share purchase warrants exercisable at $1.30 per share and 1,649,500 stock options with an average exercise price of $3.37 per share outstanding. As at November 8, 2007, there has been no change to the outstanding common shares, purchase warrants or stock options.

Contractual Obligations

Defiant has various contractual obligations and commitments arising in the normal course of operations and financing activities. These obligations and commitments have been considered when assessing the cash requirements in the above discussion of future liquidity.

On June 29, 2006, the Company issued 2,500,000 flow through common shares for gross proceeds of $10.4 million. On December 19, 2006, the Company issued 873,100 flow through common shares for gross proceeds of $3.1 million. Pursuant to the terms of the financings, the Company is obligated to spend the gross proceeds on qualifying Canadian exploration expenditures prior to December 31, 2007. As at March 7, 2007, Defiant had incurred $13.5 million of such qualifying expenditures thereby fulfilling all of its flow through financing obligations.

Off Balance Sheet Arrangements

The Company does not have any off balance sheet financial arrangements.



Selected Quarterly Information

----------------------------------------------------------------------------
2007
(unaudited) Unit Q3 Q2 Q1
----------------------------------------------------------------------------
Financial

Petroleum and natural gas
sales $m 4,539 6,200 5,408

Funds from operations $m 1,822 3,271 2,552

Per share - basic $ 0.09 0.15 0.12
Per share - diluted $ 0.08 0.15 0.12
Net earnings (loss) $m (199) (197) (455)

Per share - basic $ (0.01) (0.01) (0.02)

Per share - diluted $ (0.01) (0.01) (0.02)

Capital expenditures $m 6,534 1,346 6,518

Working capital deficiency
including bank debt $m 19,956 15,244 17,169


Operations
Production
Natural gas mcf/d 3,931 4,737 4,871

Light oil bbls/d 265 321 259

Natural gas liquids bbls/d 69 94 47

Total sales boe/d 989 1,205 1,118

Average price
Natural gas $/mcf 6.15 8.33 8.23

Light oil $/bbl 79.42 72.28 67.25

Natural gas liquids $/bbl 59.51 57.86 53.16

Boe $/boe 50.00 57.01 53.68

Field Netback $/boe 26.46 34.36 30.17

Weighted average shares outstanding
Basic m 21,412 21,412 21,412
Diluted m 21,979 22,133 21,913


----------------------------------------------------------------------------
2006 2005
(unaudited) Unit Q4 Q3 Q2 Q1 Q4
----------------------------------------------------------------------------
Financial

Petroleum and natural gas
sales $m 4,669 5,102 3,226 3,377 3,443

Funds from operations $m 2,665 2,290 1,492 1,528 2,058

Per share - basic $ 0.13 0.12 0.08 0.09 0.12
Per share - diluted $ 0.11 0.11 0.08 0.08 0.11
Net earnings (loss) $m (5) (522) (88) (79) 599

Per share - basic $ - (0.04) - - 0.03

Per share - diluted $ - (0.04) - - 0.03

Capital expenditures $m 7,860 5,632 7,543 7,248 13,308

Working capital deficiency
including bank deb $m 13,215 10,967 7,592 11,335 5,667


Operations
Production
Natural gas mcf/d 4,364 5,464 3,018 3,109 2,093

Light oil bbls/d 237 249 185 183 161

Natural gas liquids bbls/d 42 35 20 18 8

Total sales boe/d 1,006 1,195 708 719 518

Average price
Natural gas $/mcf 7.69 6.07 6.52 7.81 12.18

Light oil $/bbl 65.14 80.58 78.41 67.10 70.97

Natural gas liquids $/bbl 49.55 62.01 64.66 53.20 59.43

Boe $/boe 50.77 46.41 50.10 52.19 72.25

Field Netback $/boe 29.35 25.59 30.79 30.20 44.30

Weighted average shares outstanding
Basic m 20,632 20,515 18,032 17,986 17,514
Diluted m 23,050 22,145 19,711 19,813 19,462


Additional Information

Additional information regarding Defiant Resources Corporation, including the Company's Annual Information Form, is available on SEDAR at www.sedar.com or on the Company's website at www.defiantresources.com.



Interim Balance Sheets
(unaudited)

----------------------------------------------------------------------------
September 30 December 31
2007 2006
----------------------------------------------------------------------------

Assets

Current assets
Accounts receivable $ 3,255,851 $ 4,370,596
Prepaid expenses and
deposits 199,157 214,870
----------------------------------------------------------------------------
3,455,008 4,585,466

Petroleum and natural gas
properties (note 4) 71,963,791 65,461,096

----------------------------------------------------------------------------
$75,418,799 $70,046,562
----------------------------------------------------------------------------

Liabilities and
Shareholders'
Equity

Current liabilities
Accounts payable and
accrued liabilities $ 6,492,696 $ 9,968,949

Bank debt (note 5) 16,918,241 7,831,653
----------------------------------------------------------------------------
23,410,937 17,800,602

Asset retirement
obligations (note 6) 1,300,153 1,166,934

Future income taxes (note 7) 4,888,068 1,208,682

Shareholders' equity
Share capital (note 8b) 43,286,273 47,159,122
Warrants (note 8c) 1,282,459 1,291,690
Contributed surplus (note 9) 1,740,000 1,057,000
Retained earnings (deficit) (489,091) 362,532
----------------------------------------------------------------------------
45,819,641 49,870,344

----------------------------------------------------------------------------
Subsequent event (note 5)
----------------------------------------------------------------------------
$75,418,799 $70,046,562
----------------------------------------------------------------------------

See accompanying notes to interim financial statements.


Interim Statements of Operations and Retained Earnings (Deficit)
(unaudited)

----------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
----------------------------------------------------------------------------

Revenue
Petroleum and natural
gas sales $ 4,539,499 $ 5,101,803 $16,147,717 $11,704,510
Royalties, net of
Alberta royalty tax
credit (762,523) (998,908) (3,130,253) (2,274,056)
Royalty income 12,122 12,429 91,023 88,252
Interest income 6,827 - 8,864 27,318
----------------------------------------------------------------------------
3,795,925 4,115,324 13,117,351 9,546,024

Expenses
Operating 1,279,392 1,199,857 3,561,301 2,565,538
Transportation 101,155 102,595 301,844 204,280
General and
administrative 258,677 430,931 946,602 1,200,695
Stock based
compensation 85,000 153,000 376,000 385,000
Interest 234,315 70,719 560,171 223,723
Depletion,
depreciation and
accretion 2,196,531 2,766,280 8,563,551 5,720,961
----------------------------------------------------------------------------
4,155,070 4,723,382 14,309,469 10,300,197

Loss before taxes (359,145) (608,058) (1,192,118) (754,173)

Future income tax
reduction (note 7) (159,665) (86,329) (340,495) (65,499)
----------------------------------------------------------------------------

Net loss for the period (199,480) (521,729) (851,623) (688,674)
Retained earnings
(deficit), beginning
of period (289,611) 889,322 362,532 1,056,267
----------------------------------------------------------------------------
Retained earnings
(deficit), end of
period $ (489,091) $ 367,593 $ (489,091) $ 367,593
----------------------------------------------------------------------------

Loss per share
Basic and diluted
(note 8) ($0.01) ($0.03) ($0.04) ($0.04)
----------------------------------------------------------------------------

See accompanying notes to interim financial statements.


Interim Statements of Cash Flows
(unaudited)

----------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
----------------------------------------------------------------------------

Cash provided by (used
in)

Operating activities:
Net loss for the
period $ (199,480) $ (521,729) $ (851,623) $ (688,674)
Items not affecting
cash
Depletion,
depreciation and
accretion 2,196,531 2,766,280 8,563,551 5,720,961
Stock-based
compensation 85,000 153,000 376,000 385,000
Future income taxes
(reduction) (159,665) (86,329) (340,495) (65,499)
Asset retirement
obligations paid (100,517) (1,078) (102,851) (24,015)
----------------------------------------------------------------------------
1,821,869 2,310,144 7,644,582 5,327,773
Changes in non-cash
working capital (note
11) 3,429,815 190,091 (2,959,087) (840,407)
----------------------------------------------------------------------------
5,251,684 2,500,235 4,685,495 4,487,366
----------------------------------------------------------------------------

Financing activities:
Issuance of common
shares - 8,333 25,000 10,437,502
Share issue costs - (41,403) (12,592) (651,750)
Increase (decrease) in
bank debt 865,828 4,929,577 9,086,588 7,489,256
----------------------------------------------------------------------------
865,828 4,896,507 9,098,996 17,275,008
----------------------------------------------------------------------------

Investing activities:
Additions to petroleum
and natural gas
properties (6,533,507) (5,652,213) (14,397,783) (20,403,368)
Changes in non-cash
working capital (note
11) 415,995 (1,744,529) 613,292 (5,136,871)
----------------------------------------------------------------------------
(6,117,512) (7,396,742) (13,784,491) (25,540,239)
----------------------------------------------------------------------------

Decrease in cash - - - (3,777,865)
Cash, beginning of
period - - - 3,777,865
----------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
----------------------------------------------------------------------------

Supplemental
Information
----------------------------------------------------------------------------
Cash interest paid $ 253,557 $ 70,719 $ 636,970 $ 223,723
----------------------------------------------------------------------------

See accompanying notes to interim financial statements.



Notes to Interim Financial Statements

For the nine months ended September 30, 2007 and 2006

(unaudited)

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

1. Description of Business

Defiant Resources Corporation ("Defiant" or the "Company") is a junior oil and gas exploration and production company based in Calgary, Alberta. All of the Company's operations are located in Western Canada.

2. Significant Accounting Policies and Basis of Presentation

The unaudited interim financial statements of the Company have been prepared by management in accordance with the accounting principles generally accepted in Canada. The unaudited interim financial statements have been prepared following the same accounting policies and methods of computation as the financial statements for the fiscal year ended December 31, 2006 except for the accounting policy changes described below. The unaudited interim financial statement note disclosures do not include all of those required by Canadian generally accepted accounting principles ("GAAP") applicable for annual financial statements. Accordingly, the interim financial statements should be read in conjunction with the audited financial statements and the notes thereto for the years ended December 31, 2006 and 2005.

3. Change in Accounting Policies

Effective January 1, 2007 the Company adopted the following new accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA"); "Financial Instruments - Recognition and Measurement", "Comprehensive Income", "Hedges" and "Financial Instruments - Disclosure and Presentation". These new standards have been adopted prospectively. Adoption of these standards did not impact January 1, 2007 opening balances.

(i) Financial instruments

All financial instruments must be initially recognized at fair value on the balance sheet date. The Company has classified each financial instrument into the following categories: held for trading financial assets and liabilities, loans or receivables, held to maturity investments, available for sale financial assets, and other financial liabilities. Subsequent measurement of the financial instruments is based on their classification. Unrealized gains and losses on held for trading financial instruments are recognized in earnings. Gains and losses on available for sale financial assets are recognized in other comprehensive income and transferred to earnings when the asset is derecognized. The other categories of financial instruments are recognized at amortized costs using the effective interest rate method.

Upon adoption and with any new financial instrument, an irrevocable election is available that allows entities to classify any financial asset or financial liability as held for trading, even if the financial instrument does not meet the criteria to designate it as held for trading. The Company has not elected to classify any financial assets or financial liabilities as held for trading unless they meet the held for trading criteria. A held for trading financial instrument is not a loan or receivable and includes one of the following criteria:

- it is a derivative, except for those derivatives that have been designated as effective hedging instruments;

- it has been acquired or incurred principally for the purpose of selling or repurchasing in the near future; or

- it is part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking.

Upon adoption of these new standards, the Company designated its accounts receivable as loans and receivables, which are measured at amortized cost. Bank debt, accounts payable and accrued liabilities are classified as other financial liabilities which are also measured at amortized cost. The Company had no available for sale assets or held for trading instruments.

(ii) Derivative instruments and hedging activities

The Company may enter into derivative instrument contracts to manage its commodity price exposure, foreign exchange exposure and interest rate exposure. The Company does not enter into instrument contracts for trading or speculative purposes. The Company may choose to designate derivative instruments as hedges. Hedge accounting continues to be optional. The Company has no qualified hedges.

(iii) Comprehensive Income

Comprehensive income consists of net earnings and other comprehensive income ("OCI"). OCI comprises the change in the fair value of the effective portion of the derivatives used as hedging items in a cash flow hedge and the change in fair value of any available for sale financial instruments. Amounts included in the OCI are shown net of tax. Accumulated other comprehensive income is a new equity category comprised of the cumulative amounts of OCI.

The Company had no "other comprehensive income or loss" transactions during the three and nine months ended September 30, 2007 and no opening or closing balances for accumulated other comprehensive income or loss.



4. Petroleum and Natural Gas Properties

----------------------------------------------------------------------------
Accumulated
Property depletion
Plant and and Net
Equipment depreciation Book Value
----------------------------------------------------------------------------

Balance, December 31, 2005 $ 47,508,607 $ 2,287,838 $ 45,220,769
Additions 28,875,730 8,635,403 20,240,327
----------------------------------------------------------------------------
Balance, December 31, 2006 76,384,337 10,923,241 65,461,096
Additions 14,973,355 8,470,660 6,502,695
----------------------------------------------------------------------------

Balance, September 30, 2007 $ 91,357,692 $ 19,393,901 $ 71,963,791
----------------------------------------------------------------------------
----------------------------------------------------------------------------


During the period ended September 30, 2007, the Company capitalized a total of $1,076,000 (September 30, 2006 - $1,170,000) of general and administrative expenses including $307,000 (September 30, 2006 - $270,000) of stock based compensation relating to exploration and development activities.

In calculating the depletion and depreciation provision for the period ended September 30, 2007 $16.9 million (September 30, 2006 - $17.0 million) of costs relating to the undeveloped land, seismic and other costs were excluded from costs subject to depletion and depreciation. Estimated future development costs of $2.8 million (2006 - nil) were included in the calculation of depletion and depreciation for the period ended September 30, 2007.

5. Bank Debt

At September 30, 2007 the Company had an $18 million revolving demand credit facility with a Canadian chartered bank, of which $16.9 million was drawn. The credit facility bears interest at the bank's prime rate. The credit facility is subject to a review each year. On October 22, 2007 the credit facility was increased to $20 million. 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.



6. Asset Retirement Obligations

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

Balance, December 31, 2005 $ 895,055
Liabilities incurred 226,313
Liabilities settled (52,164)
Accretion expense 97,730
----------------------------------------------------------------------------
Balance, December 31, 2006 1,166,934
Liabilities incurred 143,179
Liabilities settled (102,851)
Accretion expense 92,891
----------------------------------------------------------------------------

Balance, September 30, 2007 $ 1,300,153
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Company's asset retirement obligations are based on the net ownership interests in wells and facilities. Management estimates the costs to abandon and reclaim the wells and facilities and the estimated time period during which these costs will be incurred in the future. These costs are expected to be incurred over the next 15 years with the majority of the costs being incurred between 2015 and 2020. The undiscounted amount of the estimated costs at September 30, 2007 was $3.3 million (2006 - $2.6 million). The estimated costs have been discounted at a credit adjusted risk free rate of nine percent and an inflation rate of two percent.

7. Future Income Taxes

Future income taxes differs from the amount that would be computed by applying the basic combined federal and provincial statutory income tax rate of 32.12% (2006 - 34.50%) to loss before taxes. The reasons for the differences are as follows:



----------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
----------------------------------------------------------------------------
Expected income tax
reduction $ (115,358) $ (194,696) $ (382,909) $ (245,106)
Add (deduct)
Non-deductible crown
payments - 85,000 - 180,000
Resource allowance - (66,000) - (154,000)
Non-deductible
stock-based
compensation 5,139 82,830 98,608 212,550
Effect of reduction in
tax rate (32,628) 4,671 (32,628) (64,499)
Other (16,818) 1,866 (23,566) 5,556

----------------------------------------------------------------------------
Future income tax
reduction $ (159,665) $ (86,329) $ (340,495) $ (65,499)
----------------------------------------------------------------------------


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

----------------------------------------------------------------------------
September 30, December 31,
2007 2006
----------------------------------------------------------------------------
Tax liabilities
Petroleum and natural gas
properties $ (5,615,751) $ (1,961,395)
Tax assets
Share issue costs 357,139 414,302
Asset retirement obligations 370,544 338,411
----------------------------------------------------------------------------
Net future income tax liability $ (4,888,068) $ (1,208,682)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


8. Share Capital

a) Authorized

Unlimited number of common shares; issuable in series

b) Common shares



----------------------------------------------------------------------------
Number of
Shares Amount
----------------------------------------------------------------------------

Balance, December 31, 2005 17,971,617 $ 35,926,131
Issue of common shares on exercise of warrants 48,078 62,501
Fair value of warrants on exercise - 23,076
Tax effect of flow-through share renouncements - (1,781,000)
Issue of flow-through common shares for cash 3,373,100 13,518,160
Share issue costs, net of future income taxes
of $257,392 - (589,746)

----------------------------------------------------------------------------
Balance, December 31, 2006 21,392,795 47,159,122
Issue of common shares on exercise of warrants 19,231 25,000
Fair value of warrants on exercise - 9,231
Tax effect of flow-through share renouncements - (3,898,119)
Share issue costs, net of future income taxes
of $3,631 - (8,961)

----------------------------------------------------------------------------
Balance, September 30, 2007 21,412,026 $ 43,286,273
----------------------------------------------------------------------------
----------------------------------------------------------------------------


On June 29, 2006, the Company completed a private placement issue of 2,500,000 flow-through shares at a price of $4.15 per share for gross proceeds of $10.4 million. Pursuant to the terms of the flow-through arrangement, the Company renounced $10.4 million of Canadian exploration expense deductions and recorded the future tax adjustment of $2,991,751 associated with this renouncement in the first quarter of 2007.

On December 19, 2006, the Company completed a private placement issue of 873,100 flow-through shares at a price of $3.60 per share for gross proceeds of $3.1 million. Pursuant to the terms of the flow-through arrangement, the Company renounced $3.1 million of Canadian exploration expense deductions and recorded the future tax adjustment of $906,368 associated with this renouncement in the first quarter of 2007.

At September 30, 2007 there were no further expenditure commitments on either flow-through share issue.

c) Common share purchase warrants

Each common share purchase warrant entitles the holder to acquire one common share of the Company for $1.30 per share. The share purchase warrants expire on December 20, 2007.



----------------------------------------------------------------------------
Number of
warrants Amount
----------------------------------------------------------------------------
Balance, December 31, 2005 2,739,099 $ 1,314,767

Exercised (48,078) (23,077)

----------------------------------------------------------------------------
Balance, December 31, 2006 2,691,021 1,291,690

Exercised (19,232) (9,231)

----------------------------------------------------------------------------
Balance, September 30, 2007 2,671,789 $ 1,282,459
----------------------------------------------------------------------------


d) 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, options totaling up to 10% of the common shares outstanding from time to time are issuable, and no more than 5% of the outstanding options may be issued to any one person as defined by the plan.



----------------------------------------------------------------------------
Weighted
Weighted average
Number average remaining
of options exercise price term (years)
----------------------------------------------------------------------------
Balance, December 31, 2005 550,000 $ 3.17 1.29
Granted 1,249,500 3.46 2.10
Forfeited (60,000) 3.50 1.17
----------------------------------------------------------------------------
Balance, December 31, 2006 1,739,500 3.36 1.88
Forfeited (90,000) 3.19 1.38
----------------------------------------------------------------------------
Balance, September 30, 2007 1,649,500 $ 3.37 1.13
----------------------------------------------------------------------------


Options have a term of three years and vest over a 34 month period starting on the first anniversary date of the grant. Options granted to non-management Directors have a term of three years and vest quarterly over a one year period from the date of the grant. The options granted have exercise prices ranging from $2.75 to $3.71 per share. At September 30, 2007, 1,127,165 options were exercisable, with exercise prices ranging from $2.75 to $3.71.

e) Per share amounts

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



----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Basic 21,412,026 20,514,888 21,411,885 18,853,686
Diluted 21,978,769 22,144,556 22,003,838 20,481,578
----------------------------------------------------------------------------


As at September 30, 2007, 1,649,500 (2006 - 1,304,500) options were excluded from the dilution calculation as they were anti-dilutive.

9. Contributed Surplus



----------------------------------------------------------------------------
Contributed Surplus Amount
----------------------------------------------------------------------------
Balance, December 31, 2005 $ 111,000

Stock-based compensation expense 946,000

----------------------------------------------------------------------------
Balance, December 31, 2006 1,057,000

Stock-based compensation expense 683,000

----------------------------------------------------------------------------
Balance, September 30, 2007 $ 1,740,000
----------------------------------------------------------------------------


The stock-based compensation expense is calculated based on the fair value of the stock options and warrants on the date of grant using the Black-Scholes option pricing model. The following assumptions were applied by the Company in this calculation.



----------------------------------------------------------------------------
Nine months ended September 30
2007 2006
----------------------------------------------------------------------------
Weighted average fair value per option n/a $ 1.37
Dividend yield n/a nil
Volatility n/a 49%
Risk-free rates n/a 3.50%
Expected life (years) n/a 3
----------------------------------------------------------------------------
----------------------------------------------------------------------------


No options or warrants were granted during the nine month period ended September 30, 2007

10. Financial instruments

The Company monitors the impact of commodity price exposure and may, from time to time, implement hedging measures to mitigate such price risk. The objective of this hedging strategy is to reduce the Company's risk exposure to changes in cash flow resulting from changes in commodity prices, thereby ensuring our ability to complete the planned capital program. The Company may utilize derivative instruments from time to time such as swaps, puts or collars to implement this hedging strategy. In February of 2007, the Company hedged 1,000 gigajoules per day of gas production for the April 2007 through October 2007 period via a three way costless collar. The collar is priced with floors of $5.40 and $7.25 per gigajoule and a ceiling of $9.00 per gigajoule. The contract was settled on August 31 resulting in a total realized gain of $219,243 and is included in petroleum and natural gas sales.



11. Changes in non-cash working capital

----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Accounts receivable $ 985,504 $ 80,295 $ 1,114,745 $ 625,868
Prepaid expenses
and deposits (2,076) 29,183 15,713 71,181
Accounts payable
and accrued
liabilities 2,862,382 (1,663,916) (3,476,253) (6,674,327)
----------------------------------------------------------------------------
3,845,810 (1,554,438) (2,345,795) (5,977,278)
Less: change in
non-cash working
capital related
to investing 415,995 (1,744,529) 613,292 (5,136,871)
----------------------------------------------------------------------------
Change in non-cash
working capital
related to
operations $ 3,429,815 $ 190,091 $ (2,959,087) $ (840,407)
----------------------------------------------------------------------------


Contact Information

  • Defiant Resources Corporation
    Rick J. Ironside
    President & C.E.O.
    (403) 218-4104
    (403) 266-5506 (FAX)
    or
    Defiant Resources Corporation
    Rob H. Solinger
    V.P., Finance & C.F.O.
    (403) 218-4106
    (403) 266-5506 (FAX)
    Email: info@defiantresources.com
    Website: www.defiantresources.com