Forte Resources Inc.
TSX : FRZ

Forte Resources Inc.

May 12, 2005 11:45 ET

Forte Resources Announces Q1 Results

CALGARY, ALBERTA--(CCNMatthews - May 12, 2005) - Forte Resources Inc. (TSX:FRZ) ("Forte") is pleased to announce its results for the quarter ended March 31, 2005.

Financial

Revenue for the quarter was $15,448,000 which represented an increase of 177% compared to revenue for the first quarter of 2004. Cash flow from operations was $7,837,000 ($0.20 per share) compared to $2,354,000 ($0.15 per share) in 2004. The net income reported for the quarter was $767,000 ($0.02 per share) compared to net income in 2004 of $32,000 ($0.00 per share).

Revenue and cash flow increased as a result of higher production volumes for both oil and gas and higher prices received for crude oil. Production increased from 1,699 boe/d in the first quarter of 2004 to 3,284 boe/d in 2005, resulting in additional revenues of $7.2 million. Crude oil prices received in the first quarter of 2005 were $56.14 per bbl compared to $34.95 per bbl in 2004. Natural gas prices averaged $7.13 per mcf in 2005 compared to $6.68 per mcf in 2004. The effect of higher prices was an increase to revenue of $2.7 million.

Production

Average production for 2005 was 3,284 boe/d compared to 1,699 boe/d in the first quarter of 2004 and 2,458 boe/d in the fourth quarter of 2004. Production increased from fourth quarter rates as a result of recent wells drilled in the Leaman, Redwater and Laprise areas that were brought on stream during the first quarter of 2005.

Production at March 31, 2005 was approximately 3,300 boe/d. In addition, there is approximately 1,000 boe/d of production capability that has been tested and which is anticipated to be tied in during the second and third quarters of 2005.

Operations

During the quarter the Company drilled 16 wells (10.17 net) resulting in 8 wells (5.67 net) cased for oil production, 6 wells (3.6 net) cased for natural gas production and 2 wells (0.9 net) dry and abandoned and a success rate of 87.5%. Activity in the Company's major areas is summarized as follows:

Leaman, Alberta - Since December, 2004 the Company has drilled four Paleozoic test wells at working interests from 94 to 100%. Two wells have been completed and tested at rates of approximately 250 boe/d of oil and gas production. One well has been completed and tested at a rate of 100 bbls/d of oil. The Company expects to continue drilling after break up with the next three wells planned in this multi well program. The Company can produce these wells at full capability for the first four production months, after which they become subject to the allowable production rates as set by the Energy and Utilities Board. The Company plans to study this pool as a candidate for waterflood which would increase allowable production rates and reserves recovery.

Redwater, Alberta - Two horizontal wells (1.0 net) were drilled, completed and tied in during the first quarter of 2005. As a result production from the Redwater area, net to the Company, increased initially to 750 boe/d and is currently at approximately 550 boe/d. The Company anticipates drilling three more horizontal wells and two vertical wells at working interests ranging from 30% to 50% in the second and third quarters, targeting the Basal Quartz and Bruderheim zones.

Laprise/Sojer, British Columbia - Forte has drilled 5 (2.0 net wells) in this area during the first quarter. A 50 square mile 3D seismic program has been completed over Forte's lands or lands under control in the area to evaluate Slave Point, Baldonnel and Bluesky potential. Forte participated in a Bluesky discovery, which tested at a rate of 1.8 mmcf/d of natural gas. The Bluesky well represents a potential new pool discovery with numerous follow up locations identified on the Company's acreage.

Webster, Alberta - Forte completed the drilling of a potential high impact exploratory gas well to test for production from the Wabamun formation in December, 2004 and completed and tested the well during the first quarter of 2005 at a sustained rate of 2.0 mmcf/d. The Company is proceeding to tie in the well for production.

Liquidity

Two transactions during the quarter have strengthened the Company's balance sheet. In February, the Company issued 4.0 million shares at a price of $3.90 per share resulting in proceeds, net of issue costs, of $14.8 million. In March the Company sold its interest in the Sukunka property in Northeast British Columbia for $7.9 million cash. The balance of the Company's bank loan at March 31, 2005 was reduced to $18.4 million.

Reorganization

On May 3, 2005 the Company announced a major reorganization with Thunder Energy Inc. and Mustang Resources Inc. If approved by shareholders, each shareholder will receive .35 of a share (pre consolidation) of the new combined trust created by the merger and one share of a new exploration company. Management believes that this transaction will be beneficial to our shareholders for the following reasons:

- The Thunder trust units will provide increased liquidity and sustainable cash flow through trust distributions. The management of the Thunder trust have estimated production of 13,000 boe/d from a balanced portfolio of oil and gas properties with a reserve life index in excess of 9.0 years. The trust is expected to pay out 65% of its cash flow in distributions, resulting in a monthly cash distribution of $0.15 per unit (after a 1:2 consolidation). This would equate to an annual distribution to a Forte shareholder of $0.315 per current Forte share.

- The newly created exploration company will be an excellent growth vehicle for the further development of properties such as Leaman, Webster and Laprise. We anticipate that initial growth will be substantial. Current production from the properties being transferred to the new company is 300 boe/d, but with additional production capability of 1,000 boe/d tested and awaiting tie-in we expect significant immediate production growth. The company will have a capital budget in excess of $14.0 million in 2005 and $20.0 million in 2006. There are over 50 locations in various stages of development in the prospect inventory, many of which are a continuation of the Company's first quarter drilling plans.

Management and the Board of Directors believe that the value of these two components to Forte shareholders will be greater than the value of Forte in its current structure. We will be providing additional details concerning this transaction in a mailing to all shareholders which is expected to occur in early June, 2005. If approved the transaction is expected to close on or about June 30, 2005.



HIGHLIGHTS Three months ended March 31,
2005 2004 % Change
------------------------------------------------------------------------
FINANCIAL
($ Thousands except per share data)
Oil and gas sales 15,448 5,576 177%

Cash flow from operations 7,837 2,354 233%
Per share - basic 0.20 0.15 33%
Per share - fully diluted 0.20 0.12 67%

Net income (loss) 767 32
Per share - basic 0.02 0.00
Per share - fully diluted 0.02 0.00

Capital expenditures 17,722 11,180 59%
Net Debt 20,111 8,165 146%
Average shares outstanding (000's) 38,777 15,774

OPERATIONS

Daily production
Oil and NGL's (bbls/d) 2,331 1,332 75%
Natural gas (mcf/d) 5,719 2,204 159%
Barrels of oil equivalent (boe/d) 3,284 1,699 93%

Average sales prices
Oil and NGL's ($/bbl) 56.14 34.95 61%
Natural gas ($/mcf) 7.13 6.68 7%

Barrels of oil equivalent are reported with a 6:1 conversion with six
mcf equals one barrel


MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis was prepared as at May 11, 2005 and is management's assessment of Forte's historical financial and operating results and should be read in conjunction with the unaudited interim consolidated financial statements of the Company for the three months ended March 31, 2005, and the audited financial statements and MD&A for the year ended December 31, 2004 together with the notes related thereto. The reader should be aware that historical results are not necessarily indicative of future performance. This discussion contains forward-looking statements that involve risks and uncertainties. Such information, although considered reasonable by Forte at the time of preparation, may prove to be incorrect and actual results may differ materially from those anticipated in the statements made. Where converted to a barrel of oil equivalent basis, all natural gas production results have been converted at the rate of six thousand cubic feet to one barrel of oil equivalent ("boe").

Non-GAAP Measurements

The Management's Discussion and Analysis contains the term cash flow from operations, which should not be considered an alternative to, or more meaningful than, cash flow from operating activities or net income as determined in accordance with Canadian generally accepted accounting principles as an indicator of the Company's performance. Forte's determination of cash flow from operations may not be comparable to that reported by other companies especially those in other industries. The reconciliation between net earnings and cash flow from operations can be found in the consolidated statements of cash flow in the unaudited interim consolidated financial statements and the audited consolidated financial statements. The Company also presents cash flow from operations per share whereby per share amounts are calculated using weighted average shares outstanding consistent with the calculation of earnings per share.

Operating results

Forte's operating results in dollar terms and on a boe basis for the three months ended March 31, 2005 and 2004 are provided below:



3/31/2005 3/31/2004 Difference
--------- --------- ----------
Revenue $000's $ boe $000's $ boe $000's $ boe
------------------------------------------------------------------------
Oil and liquids 11,777 56.14 4,237 34.95 7,540 21.19
Natural gas 3,671 42.79 1,339 40.06 2,332 2.73
---------------------------------------------
15,448 52.26 5,576 36.07 9,872 16.19

Royalties 2,857 9.67 1,060 6.85 1,797 2.82
Operating 3,356 11.35 1,691 10.94 1,665 0.41
General and administrative 961 3.25 284 1.84 677 1.41
Capital taxes 103 0.35 - - 103 0.35
Interest 334 1.13 187 1.21 147 (0.08)
---------------------------------------------
7,837 26.51 2,354 15.23 5,483 11.28

Depletion, depreciation
and site restoration 6,323 21.39 2,230 14.42 4,093 6.97
Stock based compensation 152 0.51 3 0.02 149 0.49
Future income taxes 595 2.01 89 0.58 506 1.43
---------------------------------------------

Net income 767 2.59 32 0.21 785 2.38
---------------------------------------------
---------------------------------------------


Revenue increased by 177% in the first quarter compared with the same period of 2004. Production was 93% higher for the first three months compared to the same 2004 period. Higher production volumes were the primary contributor to higher revenues, however the Company also benefited from higher commodity prices. The following table shows the impact of the change in pricing and volume components of revenue:



Oil and
Revenue Natural
($ Thousands) Liquids Gas Total
------------------------------------------------------------------------

Three months ended March 31, 2004 4,237 1,339 5,576
Effect of change in prices 2,567 91 2,658
Effect of change in production 4,973 2,241 7,214
--------------------------
Three months ended March 31, 2005 11,777 3,671 15,448


Production increased by 1,585 boe/d or 93% for the quarter. The following table shows the production for each product:



Production Three months ended March 31
2005 2004
------------------------------------------------------------------------
Crude oil (bbls/d) 2,203 1,210
Liquids (bbls/d) 128 122
----------------
2,331 1,332

Natural gas (mcf/d) 5,719 2,204

BOE (boe/d) 3,284 1,699


Royalties averaged 18.5% of revenue for the first quarter of 2005 compared to 19.0% in 2004. Royalty rates, including crown and freehold royalties as a percentage of revenue calculated before consideration of hedging gains or losses were 18.7% for 2005 compared to 16.6% in 2004. Properties acquired and developed in 2004 have higher average royalty rates resulting in the increased rate for the March 31, 2005 period.

Operating costs increased by $0.41 per boe in the first quarter of 2005, compared to the same 2004 period. Current industry conditions are placing upward pressure on operating costs, resulting in higher costs in 2005.

General and administrative expenses in the first quarter of 2005 increased 238% on an absolute basis and 77% on a boe basis. Costs increased in 2005 for the following reasons:

- The reserves and production base of the Company has changed significantly resulting in staffing increasing from 12 employees in the first quarter of 2004 to 22 employees in the first quarter of 2005. Associated costs for rent and office supplies also increased proportionately.

- In March, 2004 Forte became a public company, resulting in a significant increase in costs such as listing fees, corporate trust services, investor relations, legal and accounting. These costs were significantly higher in 2005.

General and administrative costs are reduced by amounts charged to joint venture partners on a cost recovery basis and by capitalized costs. Capitalized general and administrative costs represent the direct cost of geological salaries and services that are related to the Company's exploration program and are therefore capitalized as part of the cost of oil and gas property and deducted from general and administrative expense. The impact of cost recoveries and capitalized amounts is summarized as follows:



General and Administrative Three months ended March 31,
($ Thousands) 2005 2004
------------------------------------------------------------------------
Gross expenditures 1,360 556
Recoveries from partners (170) (88)
----------------
1,190 468
Capitalized portion (229) (184)
----------------
961 284


Interest expense, including bank charges, increased by $147,000 in the first quarter of 2005 primarily due to higher loan balances. Forte's interest rate on its revolving loan is the bank prime rate plus 0.4%. The average loan balance during the first quarter of 2005 was $21.0 million compared to $9.2 million in 2004.

Depletion, depreciation and accretion (DD&A) expense increased in 2005 as a result of higher production volumes and a higher cost base. The D,D & A rate per boe of $21.39 for the first quarter of 2005 was $6.42 higher per boe than the comparable period of 2004. The DD&A rate increased due to the high acquisition costs ascribed to the reserves acquired from Oiltec Resources Ltd., which were acquired at a cost of $23.59 per boe.

The provision for income taxes is greater than would be expected because of stock based compensation, which is not deductible for income tax purposes.

Capital expenditures excluding corporate acquisitions are indicated below:



Capital Expenditures Three months ended March 31
($ Thousands) 2005 2004
------------------------------------------------------------------------

Acquisitions - 10,042
Exploration, land and seismic 2,742 340
Drilling, completion and workovers 11,761 253
Equipping 3,198 527
Other 21 18
-----------------
17,722 11,180


Capital expenditures increased substantially over 2004 as the Company continued its active drilling program. The Company drilled a total 16 wells (10.17 net wells) during the first quarter of 2005. The Company also completed the majority of a large 3D seismic program as well as the installation of a major compressor facility in the Laprise area of Northeast British Columbia.

The Company disposed of its interest in the Sukunka area of Northeast British Columbia for $7.9 million cash. Proceeds from the sale were applied to reduce debt and the accumulated costs of the full cost pool.

Liquidity - Forte has a $34.35 million revolving line of credit of which $18.4 million is currently drawn. The revolving loan is demand in nature, however, the credit limits are based on a borrowing base calculation as determined by estimates of future cash flow from the Company's assets. The borrowing base calculation is subject to review at least annually with the next review scheduled for April 2005. The loans have certain covenants including quarterly tests of the working capital ratio, debt to equity ratio and debt to cash flow ratio.

On February 24, 2005 the Company issued 4.0 million shares on a bought deal basis at $3.90 per share to raise $14.8 million net of share issue costs. In March the remaining 1,341,000 preferred shares, Series I, were converted to common shares when the share price performance target of 20 consecutive trading days above $3.36 per share was met.

The net debt and working capital of $20.11 million is approximately $14.0 million less than the authorized credit line. With the unutilized credit line and with the anticipated cash flow there should be sufficient finances to fund the balance of the 2005 capital budget of $35.5 million.

Financial Instruments

In October 2004 the Company entered into a forward sales contract for 500 bbls/d in the 2005 calendar year at a price of $58.30 Cdn. This contract has been entered into with the company that purchases Forte's crude oil and is settled monthly in conjunction with payment for crude oil delivered under the Company's marketing agreement. A similar arrangement was entered into on February 24, 2005 for 200 bbls/d for the period from March 1, 2005 to December 31, 2005 at a price of $61.67 Cdn. In December 2004 the Company entered into a similar contract with its gas marketer to sell 500 mcf/d of its gas production at a price of $7.00 at AECO for the period from April 1, 2005 to October 31, 2005.

Contractual Obligations

The Company has entered into various commitments related to the Calgary office lease. The following table summarizes the outstanding contractual obligations of the Company for its office lease for the next five years and thereafter:



($000's) 2005 2006 2007 2008 2009 Total
-----------------------------------------------------------------------
(unaudited) 298 298 298 298 99 1,291


Off-Balance Sheet Arrangements and Related Party Transactions

The Company has not entered into any off-balance sheet transactions other than hedges or into any related party transactions. In addition, Forte has assumed the office lease of Oiltec, which has approximately 4 years remaining at an annual cost of $135,000. The Oiltec office lease has been sublet for no net cost to the Company for the remaining term of the lease.



Selected Quarterly Information


($ Thousands,
except per 2005 2004 2003
share) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
------------------------------------------------------------------------
Revenue, net
of royalties 12,591 9,310 10,835 6,430 4,516 4,503 4,389 3,271

Cash flow from
operations 7,837 4,355 6,208 3,259 2,354 1,908 2,364 1,574
Per share
- basic 0.20 0.13 0.17 0.14 0.15 0.12 0.14 0.10
Per share
- diluted 0.20 0.12 0.16 0.13 0.12 0.10 0.12 0.08

Net earnings 767 (162) 408 (70) 32 124 (453) 173
Per share
- basic 0.02 (0.01) 0.01 0.00 0.00 0.01 (0.03) 0.01
Per share
- diluted 0.02 (0.01) 0.01 0.00 0.00 0.01 (0.03) 0.01

Total
Assets 136,510 129,574 126,359 21,568 50,114 37,688 35,603 36,507
Bank Debt 18,406 28,005 33,796 35,765 8,324 11,077 11,149 13,927



Selected Annual Information

Year ended December 31, 2004 2003 2002
------------------------------------------------------------------------
Revenue, net of royalties 31,090 15,300 3,687

Cash flow from operations 16,176 7,671 1,936
Per share - basic 0.59 0.48 0.13
Per share - diluted 0.56 0.39 0.10

Net earnings 208 231 467
Per share - basic 0.01 0.01 0.03
Per share - diluted 0.01 0.01 0.03
Total Assets 129,574 37,688 21,263
Bank Debt 28,005 11,077 823


Critical Accounting Estimates

Management is often required to make judgments, assumptions and estimates in the application of generally accepted accounting principles that may have a significant impact on the financial results of the Company. A comprehensive discussion of the Company's significant accounting policies is contained in Note 2 to the annual consolidated financial statements. The following is a discussion of the accounting estimates that are critical in determining the Company's financial results.

(a) Full cost accounting

The Company follows the full cost method of accounting for exploration and development activities whereby all costs associated with these activities are capitalized, whether successful or not. The aggregate of capitalized costs, net of certain costs related to unproven properties, and estimated future development costs is amortized using the unit-of-production method based on estimated proven reserves. Changes in estimated proven reserves or future development costs have a direct impact on depletion and depreciation expense.

Certain costs related to unproven properties and major development projects may be excluded from costs subject to depletion until proved reserves have been determined or their value is impaired. These properties are reviewed quarterly to determine if proved reserves should be assigned, at which point they should be included in the depletion calculation, or for impairment, for which any write-down would be charged to depletion and depreciation expenses.

The alternative method of accounting for oil and natural gas properties and equipment is the successful efforts method. A major difference in applying the successful efforts method is that exploratory dry holes and geological and geophysical exploration costs would be charged against net earnings in the year incurred rather than being capitalized to property, plant and equipment.

(b) Oil and natural gas reserves

The Company's proved oil and gas reserves were 100 % evaluated and reported on by an independent petroleum engineering consultant as at December 31, 2004. The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production, estimated commodity price forecasts and the timing of future expenditures, all of which are subject to a number of uncertainties and various interpretations. The Company expects that over time its reserve estimates will be revised upward or downward based on updated information such as the results of future drilling, testing and production levels. Reserve estimates can have a significant impact on net earnings, as they are a key component in the calculation of depletion and depreciation. A revision to the reserve estimate could result in a higher or lower DD&A charge to net earnings. Downward revisions to reserve estimates could also result in a write-down of oil and natural gas property, plant and equipment under the ceiling test.

(c) Full cost accounting ceiling test

The carrying value of property, plant and equipment is reviewed for impairment. Impairment is determined by the carrying amount of the property, plant and equipment exceeding the sum of the undiscounted cash flows expected to result from the Company's proved reserves. Cash flows are calculated based on third party quoted forward prices and adjusted for the Company's contract prices and quality differentials. If there is impairment, the magnitude of such impairment would be calculated by comparing the carrying value of property, plant and equipment to the estimated net present value of future cash flow from proved plus risked probable reserves. A risk free interest rate is used to arrive at the net present value of the future cash flows. Any excess carrying value above the net present value of future cash flow would be recorded as a permanent impairment and charged as additional depletion expense in the consolidated statement of earnings. No write-down is required at March 31, 2005.

(d) Asset retirement obligation

The Company recognizes the fair value of an asset retirement obligation ("ARO") in the period in which it is incurred when a reasonable estimate of fair value can be made. The fair value of the estimated ARO is recorded as a long-term liability, with a corresponding increase in the carrying amount of the related asset. The capitalized amount is depleted on a unit-of-production basis over the life of the reserves. The liability amount is increased each reporting period due to the passage of time and the amount of this accretion is charged to earnings in the period. Revisions to the estimated timing of cash flow or to the original estimated undiscounted cost would also result in an increase or decrease to the ARO. Actual costs incurred upon settlement of the ARO are charged against the ARO to the extent of the liability recorded. Any difference between the actual costs incurred upon settlement of the ARO and the recorded liability is recognized as a gain or loss in the Company's earnings in the period in which the settlement occurs.

Determination of the original undiscounted costs is based on estimates using current costs and technology in accordance with existing legislation and industry practice. The estimation of these costs can be affected by factors such as the number of wells drilled, well depth and area specific environmental legislation.

(e) Future income tax

The Company follows the liability method of accounting for income taxes. Under this method income tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between the amounts reported in the financial statements and their respective tax base, using substantively enacted future income tax rates. In June 2003, the Federal Government introduced a gradual reduction in the general corporate income tax rate over a five year period starting January 1, 2003. The impact of the new legislation requires the Company to schedule out all existing temporary differences, identify the accounting and tax values during the five year phase-in period for the declining tax rates and recalculate the future income tax balance using tax rates in effect when temporary differences reverse. The above noted forecasts of estimated net revenue streams are utilized to calculate the future tax provision and, as such, are subject to revisions, both upwards and downwards, that are not known at this time. In addition to these revisions, future capital activities can impact the timing of the reversal of any temporary differences. These differences can have an impact on the amount of future taxes determined at a point in time, and to the extent that these differences are created, they can impact the charge against earnings for future taxes.

(f) Stock-based compensation

The Company's Stock Option Plan provides for granting of options to directors, officers and employees. The Company uses the fair value method for valuing stock option grants. Compensation costs attributable to share options granted are measured at fair value at the grant date and expensed over the expected exercise time frame with a corresponding increase to contributed surplus. Upon exercise of the stock options, consideration paid by the option holder, together with the amount previously recognized in contributed surplus is recorded as an increase to share capital.

Outlook

Forte is a junior exploration and development company that historically has focused on building a strong asset base through a strategy based upon accretive acquisitions followed by production enhancement and optimization operations combined with a grass roots exploration program. Beginning in the fourth quarter of 2004 the Company increased its emphasis on exploration and development activities to provide growth for the Company.

For 2005 the Board of Directors has approved a capital expenditure budget of $35.5 million to be expended on exploration and development activities. The budget includes approximately 50 gross (26.5 net) wells. Forte's 2005 capital program will focus on the following areas:

- Evaluation of the 3D seismic program at Laprise/Sojer and identification of potential future locations targeting the Baldonnel, Bluesky, Coplin and Slave Point locations.

- Continue the development of the Redwater property with additional horizontal wells targeting the Basal Quartz formation and vertical wells to obtain production from the Bruderheim formation.

- Continued drilling and extensions to our West Central, Alberta discovery.

- Additional drilling and development of the Leaman area Paleozoic oil pool.

- Completion of the Webster well in the Wabamun formation and evaluation of future drilling opportunities on the prospect. We will also continue to drill for new pools in the Peace River Arch area where we have scheduled wells targeting the Montney, Banff and Halfway formations.

During the first quarter of 2005 the Company initiated its 2005 capital program in the following areas:

- The 3D seismic program at Laprise/Sojer was completed and evaluation for possible future drilling opportunities is underway.

- Two horizontal oil wells were drilled at Redwater and placed on production at initial rates of approximately 500 boe/d net to the Company's interest.

- The Company drilled three additional successful wells in the Leaman area. A central battery facility is being planned to accommodate the tie in of these wells which tested at initial production rates of approximately 600 boe/d of net to the Company's interest.

- The Company completed and tested its Webster well and is proceeding to tie the well in and produce at an expected rate of 2.0 mmcf/d (1.1 mmcf/d net)of natural gas.

Reorganization

On May 3, 2005 the Company announced a major reorganization with Thunder Energy Inc. and Mustang Resources Inc. If approved by shareholders, each shareholder will receive .35 of a share (pre consolidation) of the new combined trust created by the merger and one share of a new exploration company. Management believes that this transaction will be beneficial to our shareholders for the following reasons:

- The Thunder trust units will provide increased liquidity and sustainable cash flow through trust distributions. The management of the Thunder trust have estimated production of 13,000 boe/d from a balanced portfolio of oil and gas properties with a reserve life index in excess of 9.0 years. The trust is expected to pay out 65% of its cash flow in distributions, resulting in a monthly cash distribution of $0.15 per unit (after a 1:2 consolidation). This would equate to an annual distribution to a Forte shareholder of $0.315 per current Forte share.

- The newly created exploration company will be an excellent growth vehicle for the further development of properties such as Leaman, Webster and Laprise. We anticipate that initial growth will be substantial. Current production from the properties being transferred to the new company is 300 boe/d, but with additional production capability of 1,000 boe/d tested and awaiting tie-in we expect significant immediate production growth. The company will have a capital budget in excess of $14.0 million in 2005 and $20.0 million in 2006. There are over 50 locations in the prospect inventory, many of which are a continuation of the Company's first quarter drilling plans.

Management and the Board of Directors believe that the value of these two components to Forte shareholders will be greater than the value of Forte in its current structure. We will be providing additional details concerning this transaction in a mailing to all shareholders which is expected to occur in early June, 2005. If approved the transaction is expected to close on or about June 30, 2005.



FORTE RESOURCES INC.
Consolidated Balance Sheets
($ Thousands)
(unaudited)
------------------------------------------------------------------------
March 31 December 31
2005 2004
----------------------------
ASSETS

CURRENT
Accounts receivable 12,705 9,309

Capital assets 115,028 111,488
Goodwill 8,777 8,777
----------------------------
136,510 129,574
----------------------------
----------------------------

LIABILITIES

CURRENT
Accounts payable and accrued liabilities 14,410 14,351
Bank loans 18,406 28,005
----------------------------
32,816 42,356

Asset retirement obligation 4,813 4,707
Future income taxes 10,272 4,961
----------------------------
47,901 52,024
----------------------------

SHAREHOLDERS' EQUITY
Share capital (Note 3) 86,557 76,329
Contributed surplus 404 340
Retained earnings 1,648 881
----------------------------
88,609 77,550
----------------------------
136,510 129,574
----------------------------
----------------------------

Signed on behalf of the Board

---------------- --------------
Doug N. Baker T. J. MacKay
"signed" "signed"



FORTE RESOURCES INC.
Consolidated Statements of Income and Retained Earnings
($ Thousands, except share data)
(unaudited)
------------------------------------------------------------------------
Three months ended March 31,
2005 2004
----------------------------
REVENUE
Oil and gas 15,448 5,576
----------------------------

EXPENSES
Royalties 2,857 1,060
Operating 3,356 1,691
General and administrative 961 284
Interest 334 187
Stock based compensation 152 3
Depletion, depreciation and accretion 6,323 2,230
----------------------------
13,983 5,455
----------------------------
INCOME BEFORE INCOME TAXES 1,465 121
----------------------------

PROVISION FOR INCOME TAXES
Future 595 89
Capital 103 -
----------------------------
698 89
----------------------------
NET INCOME 767 32

RETAINED EARNINGS, BEGINNING OF PERIOD 881 672
----------------------------

RETAINED EARNINGS, END OF PERIOD 1,648 704
----------------------------
----------------------------
Net income per common share
Basic and diluted 0.02 0.00
----------------------------
----------------------------

Weighted average number of common
shares outstanding
Basic 38,776,508 15,774,227
----------------------------
----------------------------
Diluted 40,102,251 19,297,931
----------------------------
----------------------------

See accompanying notes



FORTE RESOURCES INC.
Consolidated Statements of Cash Flows
($ Thousands)
(unaudited)
------------------------------------------------------------------------
Three months ended March 31
2005 2004
----------------------------

CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:

OPERATING
Net income 767 32
Adjustments for:
Depletion, depreciation and accretion 6,323 2,230
Future income taxes 595 89
Stock-based compensation 152 3
----------------------------
7,837 2,354

Asset retirement expenditures (110) -
Changes in non-cash working capital (3,744) 1,039
----------------------------
3,983 3,393
----------------------------

FINANCING
Revolving bank loan (9,599) (5,928)
Issuance of common shares, net of issue costs 14,855 7,445
----------------------------
5,256 1,517
----------------------------

INVESTING
Capital expenditures (17,722) (1,819)
Sale of petroleum and natural gas properties 8,074 -
Changes in non cash working capital 409 (1,603)
----------------------------
(9,239) (3,422)
----------------------------

NET CHANGE IN CASH - 1,488
CASH,BEGINNING OF PERIOD - -
----------------------------
CASH, END OF PERIOD - 1,488
----------------------------
----------------------------

SUPPLEMENTARY INFORMATION
Interest paid 432,029 97
----------------------------
----------------------------
Taxes paid - -
----------------------------
----------------------------


FORTE RESOURCES INC.

Notes to the Consolidated Financial Statements

(unaudited)

1. Significant Accounting Policies

The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles as disclosed in the Company's December 31, 2004 consolidated statements. The consolidated financial statements include the accounts of the Company and its subsidiaries all of which are wholly owned. Certain information and note disclosure normally included in the financial statements have been condensed or omitted. These interim financial statements should be read in conjunction with the most recent annual financial statements and notes for the year ended December 31, 2004. The preparation of the consolidated financial statements requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. Actual results may differ from these estimates.

2. Capital Assets

The Company capitalized general and administrative costs of $228,600 for the three months ended March 31, 2005 (March 31, 2004 - $184,143) relating to exploration and development activity.

3. Share Capital



Common Shares Number $ 000's
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Balance, December 31, 2004 37,117,208 76,329
Issued
Conversion of Preferred, Series I shares 1,341,000 -
For cash 4,000,000 15,600
Share issue costs (799)
Related tax benefit of share issue costs - 282
Exercise of stock options 36,500 54
Future tax liability related to flow
through shares renounced - (4,998)
Reclassification of contributed surplus 88
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Balance, March 31, 2005 42,494,708 86,557
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Number of $
Preferred Series I Shares 000's
------------------------------------------------------------------------
Balance, December 31, 2004 1,341,000 -
Conversion to common shares (1,341,000) -
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Balance, March 31, 2005 - -
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Stock Options Number of Exercise
Shares Price
------------------------------------------------------------------------
Balance, December 31, 2004 1,514,220 $2.36
Granted 205,000 3.38
Exercised (36,500) 1.47
Cancelled (40,000) 3.12
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Balance, March 31, 2005 1,642,720 2.49
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In March 2005 the Company's common shares traded for 20 consecutive days at a weighted average price exceeding $3.36 per share. Pursuant to the terms of the preferred shares, Series I, 1,341,000 preferred shares were converted to common shares of the Company.

In February 2005 the Company issued 4 million common shares at a price of $3.90 per share for a total consideration of $15.6 million.

The Company renounced eligible expenditures of $14.15 million related to eligible expenditures that were incurred prior to March 31, 2005. All flow through share commitments have been met as at March 31, 2005.

The fair value of each stock option granted during the period ended March 31, 2005 was estimated on the date of grant using the Black-Scholes option pricing model using a risk free interest rate of 4%, a five year expected life, nil dividend rate and an expected volatility of 40%.

4. Commitments

In October 2004 the Company entered into a contract to sell 500 bbls/d of its crude oil production at a price of $58.30 per bbl for the 2005 year. In December 2004 the Company entered into a contract to sell 500 mcf/d of its natural gas production at a price of $7.00 at AECO for the period from April 1, 2005 to October 31, 2005. In February 2005 the Company entered into a contract to sell 200 bbls/d of its crude oil production at a price of $61.57 per bbl for the period from March 1, 2005 to December 31, 2005.

5. Subsequent Event

On May 3, 2005 the Company announced that it had entered into an agreement to merge its operations with Thunder Energy Inc. and Mustang Resources Inc. to form a royalty trust. Pursuant to the terms of the agreement the Company's shareholders would receive .35 of a share of the Trust and one share of an exploration company. The above transaction is subject to shareholder and court approval and if received would likely be effective in July, 2005. There can be no assurance that this transaction can be completed.



Directors

T.J. MacKay D.N. Baker
R.B. Hammond J.S. Blair
G.S. Fletcher D.V. Richards
W.P. Comber G.D. Roane


Officers

T.J. MacKay, Chairman & Chief Executive Officer
D.N. Baker, President & Chief Financial Officer
R.B. Hammond, Senior Vice President & Chief Operating Officer


Forte Resources is a Calgary-based oil and natural gas production company with operations primarily in Alberta, Canada. The company has a record of successful growth through a combination of acquisitions, exploration and development. Forte's common shares are listed on the Toronto Stock Exchange under the symbol FRZ.

This news release may contain forward-looking statements including expectations of future production, cash flow and earnings. These statements are based on current expectations that involve a number of risks and uncertainties, which could cause actual results to differ from those anticipated. These risks include, but are not limited to: the risks associated with the oil and gas industry. (e.g. operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projects relating to production, costs and expenses, and health, safety and environmental risks), commodity price, price and exchange rate fluctuation and uncertainties resulting from the potential delays or changes in plans with respect to exploration or development projects or capital expenditures. Additional information on these and other factors that could affect Forte's operations or financial results are included in Forte's reports on file with Canadian securities regulatory authorities.

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