Grand Petroleum Inc.
TSX VENTURE : GPP

Grand Petroleum Inc.

May 25, 2006 17:01 ET

Grand Petroleum Inc. Announces Q1 2006 Results

CALGARY, ALBERTA--(CCNMatthews - May 25, 2006) - Grand Petroleum Inc. ("Grand" or the "Corporation") (TSX VENTURE:GPP) is pleased to announce continued strong results for the first quarter of 2006. Grand has filed its unaudited financial statements for the period ended March 31, 2006, on www.sedar.com and on the Corporation's web site, www.grandpetroleum.com. Certain selected operational and financial information for the first quarters of 2006 and 2005 are set out below and should be read in conjunction with Grand's unaudited financial statements.



Three months ended
March 31, March 31,
2006 2005 % change
------------- ------------ ---------
Petroleum and natural gas
sales $12,393,927 $ 4,494,288 176
Cash flow from operations 6,040,969 1,898,017 218
Per share - basic 0.25 0.10 155
Per share - diluted 0.24 0.10 143
Net earnings (202,842) (164,229) 24
Per share - basic (0.01) (0.01) -
Per share - diluted (0.01) (0.01) -
Capital expenditures, net 11,690,793 9,297,220 26
Net working capital
(deficiency) (21,331,128) (10,013,868) 113
Total assets 77,516,094 37,626,244 107
Shareholders' equity $35,134,550 $19,557,714 80
-------------------------------------------- ------------ ---------
-------------------------------------------- ------------ ---------

Common shares outstanding
Weighted average (#)
Basic 23,715,523 18,552,523 28
Fully Diluted 24,877,817 19,220,342 29
End of period (#)
Basic 23,965,190 18,552,523 29
Fully Diluted 25,773,523 20,397,523 26

Operations
Average daily production
Oil & NGLs (bbls/d) 1,764 839 110
Natural gas (mcf/d) 6,244 1,518 311
-------------------------------------------- ------------ ---------
-------------------------------------------- ------------ ---------
Total (boe/d) 2,803 1,092 91
-------------------------------------------- ------------ ---------
-------------------------------------------- ------------ ---------
Netback ($/boe)
Average selling price 49.12 45.73 7
Royalties (9.33) (5.01) 86
Production expense (12.59) (17.52) (28)
-------------------------------------------- ------------ ---------
-------------------------------------------- ------------ ---------
Realized netback 27.20 23.19 17
-------------------------------------------- ------------ ---------
-------------------------------------------- ------------ ---------
Gross (net) wells drilled (#)
Oil 7 (5.6) 2 (1.75) 220
Gas 0 (0.0) 3 (2.6) -
Abandoned 2 (2.0) 2 (1.5) 33
-------------------------------------------- ------------ ---------
-------------------------------------------- ------------ ---------
Total 9 (7.6) 7 (5.85) 30
-------------------------------------------- ------------ ---------
-------------------------------------------- ------------ ---------


FIRST QUARTER 2006 HIGHLIGHTS

- Cash flow was up by 218 percent, increasing from $1,898,017 in the first quarter of 2005 to $6,040,969 in the first quarter of 2006 and cash flow per fully diluted share increased by 143 percent, from $0.10 in the first quarter of 2005 to $0.24 in the first quarter of 2006;

- Average production increased by 91 percent, from 1,092 boe/d in the first quarter of 2005 to 2,803 boe/d in the first quarter of 2006;

- Current production (as of mid-May 2006) is estimated to be 3,000 boe/d;

- The Company drilled nine gross (7.6 net) wells with a success rate of 77 percent; and

- Grand's balance sheet remained strong, with net debt of approximately $21 million at the end of the quarter, which represents 0.9 times annualized Q1 cash flow and approximately 0.6 times forecast 2006 cash flow.

Grand operates only in areas of year-round access, which allows us to focus our drilling program in the off-season and minimize our drilling in the very busy January to mid-March period. We therefore began our 2006 drilling program in earnest late in the first quarter, drilling one (0.6 net) well in February and eight (7.0 net) wells in March, resulting in seven (5.6 net) oil wells and two (2.0 net) dry and abandoned wells for a drilling success rate of 77 percent. Our activity is accelerating in the second quarter, when we expect to drill 15 to 18 (approximately 9 to 11 net) wells.

Drilling and Operations

At Galahad, our main East Central Alberta operating area, Grand drilled four (4.0 net) wells in the first quarter, resulting in three oil wells and one dry and abandoned well. All three oil wells are currently on production at strong initial rates of more than 100 bbls/d per well. In the second quarter we plan to drill at least two horizontal development wells and one vertical exploration well, all at 100 percent interest. We expect to continue to pursue a combination of development and exploration targets in this area as we aim to maintain and perhaps further grow our East Central Alberta production base in 2006.

At St. Anne we abandoned one 100 percent exploration well in the first quarter. In the second quarter we plan to drill a 60 percent working interest well at Atim, east of St. Anne, targeting multiple lower Mannville horizons. Surface access has been a continual challenge at Atim and we expect to license an additional well in the third quarter following the completion of the surface access rights process.

At Pine Creek in West Central Alberta Grand completed construction of a facility to process the gas from our prolific producing well at 14-21-56-20W5. The 14-21 well (50 percent working interest) was tested in December 2005 utilizing a third-party facility but by year-end our production was shut in due to lack of capacity. We immediately began planning our own facility. It became operational in mid-March and the well is currently producing more than 5 mmcf/d (2.5 mmcf/d or more than 400 boe/d net to Grand).

At Sylvan Lake we drilled and completed two (1.6 net) successful oil wells, cased a third well (100 percent working interest) which is currently awaiting completion, and are currently drilling a fourth well (100 percent working interest). Sylvan Lake has become an increasingly important area for Grand, with close to one-third of the Company's production now coming from this area. Our prolific producer at 5-6-37-3W5 was not on production for most of January as it began to produce at high oil rates, overwhelming tank capacity. Additional storage was built in January and the well produced at strong rates until late April when we shut the well in pending regulatory approval of our Good Production Practice (GPP) application. We expect to resume production in the summer at an allowable rate of approximately 300 boe/d. We are currently drilling an offset to this location at 8-1-37-4W5 (100 percent working interest) to help delineate the pool.

At Hazelwood in southeast Saskatchewan, Grand and its partner drilled two (1.0 net) oil wells in the first quarter. Both wells are on production and are very encouraging, matching our geological and seismic models very closely. To date we have cased two (1.0 net) more oil wells at Hazelwood East and plan to drill an additional five (2.5 net) wells in the second quarter. In total we expect drill at least 30 (15.0 net) wells in the Hazelwood area in 2006 on our land base of more than 34 (17 net) sections of land.

Capital Expenditures

Grand's capital program totalled $11.7 million in the first quarter of 2006. Approximately $4.8 million, or 41 percent of the total, was invested in drilling and recompletions. A further $4.6 million, or 38 percent of the total, was spent on equipment and facilities. We are currently forecasting 2006 capital spending of $50 million, not including potential acquisitions. The market for property and corporate acquisitions continues to be highly competitive and expensive, but we continue to seek opportunities that would complement our exploration and development program.

Production and Cash Flow Guidance Update

As mentioned above, Grand's first quarter average production of 2,803 boe/d was up by 91 percent from the first quarter of 2005, and by 3 percent from 2,727 boe/d in the fourth quarter of 2005. We estimate from field receipts that production is 3,000 boe/d. Additional production is currently being tied in, which should allow Grand to meet its previously forecast average annual rate of over 3,500 boe/d. We are refining our annual average production guidance to a narrower range of 3,500 to 3,750 boe/d. We remain confident that Grand will exit 2006 with production of more than 4,000 boe/d.

Utilizing GLJ Petroleum Consultants Ltd.'s April 1, 2006 price forecast of 2006 commodity prices averaging US$64.40 per bbl WTI crude oil and Cdn$7.46/mcf of natural gas at AECO, Grand would generate cash flow of $1.40-$1.50 per fully diluted share. Grand has hedged 500 bbls/d from July 1, 2006 to December 31, 2006 using a WTI costless collar with a floor of US$65 per bbl and a ceiling of US$85 per bbl.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion is management's opinion about the operating and financial results of Grand Petroleum Inc ("Grand", the "Corporation", or the "Company") for the three months ended March 31, 2006 and 2005 and previous periods, and the outlook for Grand based on information available as at May 24th, 2006.

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes for the period ended March 31, 2006, and with the unaudited financial statements and management's discussion and analysis for the period ended March 31, 2005. Per barrel of oil equivalent amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil (6:1).

Management's discussion and analysis contains the term "cash flow from operations" and "operating netbacks". Cash flow from operations is calculated by adding non-cash items (stock-based compensation expense and depletion, depreciation and accretion) to earnings for the period and is before changes in non-cash working capital. Operating netbacks is calculated by subtracting royalties, production expenses and transportation expenses per boe from the average sales price per boe. Operating netbacks are used to determine the profitability of oil and gas operations. Cash flow from operations and operating netbacks are not generally accepted accounting principle standards and therefore may not be comparable to similar benchmarks presented by issuers outside the oil and gas industry.

This discussion contains forward-looking statements. Forward-looking statements address future events and conditions, and are based on current expectations. Because of the nature of forward-looking statements, they involve inherent risks and uncertainties, and therefore actual results could differ materially from those currently anticipated.

During the first quarter of 2006, wells drilled late in 2005 were tied into production. Grand began its 2006 drilling program in earnest late in the first quarter, drilling one (0.6 net) well in February and eight (7.0 net) wells in March, resulting in seven oil wells (5.6 net) and two dry and abandoned wells (2.0 net) for a 77 percent success rate. This activity continued into the second quarter when we expect to drill between 15 and 18 wells (approximately 9.0 to 11.0 net wells). Revenue and cash flow from operations were down slightly from the fourth quarter of 2005 due mainly to lower commodity prices which were offset by lower operating costs on a per boe basis.



DETAILED FINANCIAL ANALYSIS

Production

Three months ended March 31
2006 2005 % Change
------------------------------------------------------------------------

Crude oil (bbls/d) 1,610 826 95
Natural gas (mcf/d) 6,244 1,518 311
NGL (bbls/d) 153 13 1,075
------------------------------------------------------------------------
Total (boe/d) 2,803 1,092 157
------------------------------------------------------------------------
------------------------------------------------------------------------


Grand's production increased from an average of 1,092 boe/d for the three months ended March 31, 2005 to 2,803 boe/d for the three months ended March 31, 2006. The increase in production was mainly due to Grand's successful drilling program. Twenty-four wells drilled in 2005 came on production, with eight of them commencing production during the first quarter of 2006. Forty-seven percent of production in the first quarter of 2006 came from East Central Alberta, 45 percent from West Central Alberta and 8 percent from Southeast Saskatchewan.

Grand's production increased by 3 percent from 2,727 boe per day in the fourth quarter of 2005 to 2,803 boe per day in the first quarter of 2006. Production volumes were affected by the shut in of a third party facility in Pine Creek in late December 2005, which in turn shut in Grand's 14-21-056-20W5 well until March 21, 2006, when it came back on through our own newly built dehydration unit. This loss in production was offset by the commencement of production in the first quarter from eight wells that were drilled in 2005.



Petroleum and Natural Gas Sales

Three months ended March 31
2006 2005 % Change
------------------------------------------------------------------------
Revenue
Crude oil $ 7,207,016 $3,491,196 106
Natural gas 4,437,173 952,854 366
NGL 749,738 50,238 1,392
------------------------------------------------------------------------
Total $12,393,927 $4,494,288 176
------------------------------------------------------------------------
------------------------------------------------------------------------

Average Sales Price
Crude oil ($/bbl) $ 49.74 $ 46.96 6
Natural gas ($/mcf) $ 7.90 $ 6.97 13
NGL ($/bbl) $ 54.54 $ 42.94 27
------------------------------------------------------------------------
Combined average ($/boe) $ 49.12 $ 45.73 7
------------------------------------------------------------------------
------------------------------------------------------------------------


Revenue from petroleum and natural gas sales, before royalties and transportation costs, totaled $12,393,927 for the three months ended March 31, 2006, compared with $4,494,288 for the same period in 2005. Revenues increased due to higher production and higher prices. Revenue during the first quarter of 2006 decreased $3.3 million or 22% from the fourth quarter of 2005 due to a 22% decrease in the realized price received, offset by a three percent increase in production.

In the three months ended March 31, 2006, crude oil prices averaged $49.74 per bbl, natural gas prices averaged $7.90 per mcf and natural gas liquids prices averaged $54.54 per bbl. This compares to $46.96 per bbl, $6.97 per mcf and $42.94 per bbl respectively, for the three months ended March 31, 2005. The Corporation sells all its oil and natural gas on the spot market, and therefore both the historical prices received and future prices expected fluctuate with the prevailing market prices of crude oil and natural gas. In April 2006 the Corporation entered into a costless collar contract for the period of July 1, 2006 to December 31, 2006 for 500 barrels per day with a floor price of US$65.00 per bbl WTI and a ceiling price of US$85.00 per bbl WTI.



Royalties

Three months ended March 31
2006 2005 % Change
------------------------------------------------------------------------
Royalties
Crown $ 1,356,572 $ 132,272 908
Freehold $ 749,514 282,858 165
GORR $ 248,380 77,732 220
------------------------------------------------------------------------
Total $ 2,354,466 $ 492,862 373
------------------------------------------------------------------------
------------------------------------------------------------------------

Average percent of total sales
Crown 10.9% 3.0% 260
Freehold 6.0% 6.3% (5)
GORR 2.0% 1.7% 18
------------------------------------------------------------------------
Total 19.0% 11.0% 71
------------------------------------------------------------------------
------------------------------------------------------------------------


Royalties for the three months ended March 31, 2006 totalled $2,354,466 net of Alberta Royalty Tax Credit, compared to $492,862 for the three months ended March 31, 2005. Royalties as a percentage of sales decreased in the first quarter of 2006 compared to the fourth quarter of 2005 as a greater proportion of lower royalty production came from East Central Alberta in the first quarter of 2006 than in the fourth quarter of 2005.

Royalties as a percentage of sales increased to 19.0 percent for the three months ended March 31, 2006 from 11.0 percent for the three months ended March 31, 2005 due to increased production from Grand's West Central Alberta core area, which has higher royalty obligations. In the three months ended March 31, 2006, 45 percent of Grand's production came from West Central Alberta, compared to 7 percent in the first quarter of 2005.



Production Expenses

Three months ended March 31
2006 2005 % Change
------------------------------------------------------------------------

Production expenses $ 2,991,933 $1,680,220 78
Transportation expenses $ 249,698 $ 101,944 145
Overhead recoveries - operating (55,500) (50,750) 9
Water disposal income (8,664) (9,222) (6)
------------------------------------------------------------------------
Total $ 3,177,467 $1,722,192 85
------------------------------------------------------------------------
------------------------------------------------------------------------


Production expenses for the three months ended March 31, 2006 increased to $3,177,467 from $1,722,192 for the three months ended March 31, 2005. The 85 percent increase was due to the 157 percent increase in petroleum and natural gas production which was partially offset by a reduction of costs per unit of production to $11.60 per boe from $16.52 per boe in the first quarter of 2005. Production expenses in West Central Alberta averaged $7.58 per boe, in East Central Alberta $16.18 per boe and in Southeast Saskatchewan $7.45 per boe. During the first quarter of 2006, production expenses per boe were consistent with the fourth quarter of 2005. East Central Alberta is expected to continue to incur production expenses on the order of $16.00 per boe, due primarily to maintenance and repairs on older wells. West Central Alberta and Southeast Saskatchewan production expenses should remain around $7.50 per boe, but might decrease with the expected onset of higher-impact wells.



Operating Netbacks

Three months ended March 31
($/boe) 2006 2005 % Change
------------------------------------------------------------------------

Average sales price $ 49.12 $ 45.73 7
Royalties (9.33) (5.01) 86
Production expense (11.60) (16.52) (30)
Transportation expense (0.99) (1.00) (1)
------------------------------------------------------------------------
Average operating netback $ 27.20 $ 23.20 17
------------------------------------------------------------------------
------------------------------------------------------------------------


Grand's average operating netback for the three months ended March 31, 2006 was $27.20 per boe, compared to $23.20 per boe for the three months ended March 31, 2005. The higher netback was due to higher commodity prices and lower production expenses per boe, partially offset by the 30 percent increase in royalties. The higher royalties were due to the onset of production from Grand's West Central Alberta area, which has higher royalty obligations. Quarter-over-quarter operating netbacks dropped by 21% from $34.33 per boe to $27.20 per boe due mainly to the lower average oil and natural gas prices, offset slightly by lower royalties and operating costs per boe.



General and Administrative Expense (G&A)

Three months ended March 31
2006 2005 % Change
------------------------------------------------------------------------

General and administrative
expense $ 1,007,680 $ 669,842 50
Overhead recoveries - capital (176,617) (169,110) 4
Capitalized general and
administrative expense (166,909) (127,378) 31
------------------------------------------------------------------------
Net general and administrative
expense $ 664,154 $ 373,354 78
Per unit of production ($/boe) $ 2.63 $ 3.80 (31)
------------------------------------------------------------------------
------------------------------------------------------------------------


Net G&A expense for the three months ended March 31, 2006 totalled $664,154, compared to $373,354 for the three months ended March 31, 2005. On a unit-of-production basis, however, G&A expense decreased to $2.63 per boe from $3.80 per boe in the respective quarters. Grand expects that for the balance of 2006 G&A per boe will average approximately $2.50 or less. The most significant components of the increase to overall G&A expenses are employee and consultant compensation and office rent. Grand capitalizes the salaries of geological and geophysical employees and consultants.

Depletion, Depreciation and Accretion

For the three months ended March 31, 2006, depletion, depreciation and accretion totalled $6,044,088 or $23.96 per boe, compared to $2,080,838 or $21.17 per boe for the three months ended March 31, 2005. Total costs subject to depletion and depreciation in the first three months of 2006 include approximately $6.3 million relating to future development costs estimated to complete oil and natural gas wells for which proved reserves have been assigned. Undeveloped land with a cost of approximately $3.3 million was excluded from the costs subject to depletion. Undeveloped land is included in the depletion and deprecation calculation through amortization over a period of five years. For the three months ended March 31, 2006, accretion of the asset retirement obligation was $79,066 and depletion and depreciation totalled $5,965,022.

Income Taxes

At December 31, 2004, Grand recorded a future tax asset of $3,180,535 on the balance sheet and corresponding future tax recovery of $2,922,488 on the income statement, with the difference of $258,047 recorded to share capital as the tax effect of the share issue costs. Grand's future tax asset was created at December 31, 2004 from tax pools acquired with the amalgamation with RightsMarket Inc. During the three month period ended March 31, 2006, Grand recorded Large Corporation Tax of $2,450. In May and June of 2005, Grand completed two flow-through share issues and in the first quarter of 2006 renounced $11.8 million of Canadian Exploration Expense to shareholders. As a result of the renunciation, share capital was reduced by $4,003,938, with a corresponding entry to the balance sheet to eliminate the future tax asset of $193,409 and create a future tax liability of $3,810,529. A future income tax recovery of $49,401 was booked to the income statement, with the offset reducing the liability to $3,761,128.

Net Earnings and Cash Flow

For the three month period ended March 31, 2006 Grand recorded a net loss of ($202,842) or ($0.01) per share including a future tax recovery of $49,401, compared to ($164,229) or ($0.01) per share for the three months ended March 31, 2005, including a future tax recovery of $152,529. Cash flow from operations increased to $6,040,969 or $0.24 per fully diluted share for the three months ended March 31, 2006 from $1,898,017 or $0.10 per share for the three months ended March 31, 2005. The increase in cash flow is due to higher production and commodity prices and lower operating costs, however was partially offset by higher royalties per boe.



Capital Expenditures

East West
Central Central
2006 Capital Expenditures Saskatchewan Alberta Alberta Total
------------------------------------------------------------------------

Land and property
acquisitions 4,404 64,804 114,809 184,017
Geological and geophysical 62,597 712,825 1,143,249 1,918,671
Drilling and completions 477,899 2,709,338 1,660,334 4,847,571
Equipment and facilities 1,219,950 1,520,084 1,811,393 4,551,428
Administrative 189,106
------------------------------------------------------------------------
Total 1,764,850 5,007,051 4,729,785 11,690,793
--------------------------------------------
--------------------------------------------


For the three months ended March 31, 2006 the Corporation's capital expenditures totalled $11,690,793. Approximately 41 percent of the total spent in the Corporation's West Central Alberta area, 44 percent in the Corporation's East Central Alberta area and 15 percent spent in Saskatchewan.

During the first quarter, the Corporation drilled nine gross (7.6 net) wells, resulting in seven (5.6 net) oil wells and two (2.0 net) D&A wells. Three (2.6 net) of these wells were in West Central Alberta, four (4.0 net) were in East Central Alberta and two (1.0 net) wells were in Southeast Saskatchewan. Additional equipment and facilities costs were incurred to bring on production from wells drilled in the fourth quarter of 2005. During the quarter Grand also spent $1.1 million to build a dehydration unit at Pine Creek in West Central Alberta. The unit will enable the Corporation to produce the 14-21-056-20W5 Pine Creek well at unrestricted rates through its own facility, thereby increasing sales and reducing operating costs. As well, all additional Pine Creek wells will be produced through this unit.

Liquidity and Capital Resources

For the three months ended March 31, 2006, Grand's capital expenditures of $11.7 million were funded by cash flow from operations and the Corporation's bank line. Grand has access to a $30.0 million revolving loan facility and a $7.5 million acquisition and development loan. In addition, Grand has contractual obligations for office rent totaling $220,234 (2006 - $152,942; 2007 - $67,292). In May, 2006 the bank increased the revolving loan facility to $35,500,000 while maintaining the $7,500,000 million acquisition and development loan.

Commodity prices and production volumes have the largest impact on Grand's ability to generate adequate cash flow from operations to meet its obligations. A prolonged decrease in commodity prices would negatively affect cash flow from operations and would also likely result in a reduction in the size of available bank loans. Normal production declines, without additional production through drilling or acquisitions, would negatively impact cash flow even in times of high commodity prices. This could also result in a reduction of bank lines available, as well as access to capital markets.

At this time the Corporation expects to spend approximately $50 million on capital expenditures in 2006, including funds spent in the first quarter. The Corporation may adjust its capital expenditure program depending on the outlook for commodity prices. The Corporation believes that internally-generated cash flow from operations and incremental bank debt should be sufficient to finance current operations and planned capital spending in 2006. Other sources of financing, including equity offerings, may be considered.

Share Capital

Grand is authorized to issue an unlimited number of common shares as well as first preferred shares and second preferred shares, all without nominal or par value. To date, no preferred shares have been issued. The Corporation's share capital at March 31, 2006 is outlined below:



Shares Amount
------------------------------------------------------------------------
Balance, December 31, 2005 23,693,523 $32,474,271
Tax effect of flow-through shares issued May and
June, 2005 (4,003,938)
Exercise of stock options 271,667 426,618
Transferred from contributed surplus on exercise
of stock options 176,137
------------------------------------------------------------------------
Balance, March 31, 2006 23,965,190 $29,073,088
------------------------------------------------------------------------
------------------------------------------------------------------------


During the first quarter of 2006, the Corporation issued 110,000 stock options to employees and directors. The options vest over two years and are exercisable into common shares at an average price of $4.93.

The number of outstanding shares at May 24, 2006 was 23,965,190.



BALANCE SHEETS

As at March 31, 2006 December 31, 2005
(unaudited) ($) ($)
------------------------------------------------------------------------

Assets
Current assets
Cash - -
Accounts receivable 12,298,796 9,876,601
Prepaids and deposits 717,492 627,132
------------------------------------------------------------------------
13,016,288 10,503,733

Future income tax asset - 193,409

Property, plant and equipment 64,499,806 58,652,978
------------------------------------------------------------------------
77,516,094 69,350,120
------------------------------------------------------------------------

Liabilities and Shareholders'
Equity
Current liabilities
Accounts payable and accrued
liabilities 19,760,155 15,704,653
Bank debt (note 2) 14,587,261 10,907,002
------------------------------------------------------------------------
34,347,416 26,611,655

Asset retirement obligation 4,273,000 4,077,474

Future income tax liability 3,761,128 -

Shareholders' equity
Share capital (note 3) 29,073,088 32,474,271
Contributed surplus (note 4) 1,146,073 1,068,489
Retained earnings 4,915,389 5,118,231
------------------------------------------------------------------------
35,134,550 38,660,991
------------------------------------------------------------------------

Commitment (note 6)
Subsequent event (notes 2 and 7)

------------------------------------------------------------------------
77,516,094 69,350,120
------------------------------------------------------------------------

See accompanying notes to the financial statements.


STATEMENT OF OPERATIONS AND RETAINED EARNINGS


Three months ended March 31, 2006 2005
(unaudited) ($) ($)
------------------------------------------------------------------------

Revenue
Petroleum and natural gas sales 12,393,927 4,494,288
Royalty expenses, net of Alberta
Royalty Tax Credit (2,354,466) (492,862)
Interest income 195 1,335
------------------------------------------------------------------------
10,039,656 4,002,761
------------------------------------------------------------------------
Expenses
Production 2,927,769 1,620,248
Transportation 249,698 101,944
General and administrative 664,154 373,354
Interest 150,019 9,198
Stock-based compensation (note 3(e)) 253,721 133,937
Depletion and depreciation 5,965,022 2,010,421
Accretion 79,066 70,417
------------------------------------------------------------------------
10,289,449 4,319,519
------------------------------------------------------------------------
Net loss for the period before taxes (249,793) (316,758)
Current tax expense (2,450) -
Future income tax recovery 49,401 152,529
------------------------------------------------------------------------

Net loss for the period (202,842) (164,229)
Retained earnings, beginning
of period 5,118,231 2,985,787

------------------------------------------------------------------------
Retained earnings, end of period 4,915,389 2,821,558
------------------------------------------------------------------------
Earnings per share
Basic (0.01) (0.01)
Diluted (0.01) (0.01)
------------------------------------------------------------------------
Weighted average number of shares
outstanding
Basic 23,715,523 18,552,523
Diluted 24,877,817 19,220,342
------------------------------------------------------------------------
See accompanying notes to the financial statements.


STATEMENT OF CASH FLOWS


Three months ended March 31, 2006 2005
(unaudited) ($) ($)
------------------------------------------------------------------------

Cash provided by (used in):
Operations
Net income for the period (202,842) (164,229)
Add items not affecting cash:
Future income tax recovery (49,401) (152,529)
Stock-based compensation 253,721 133,937
Depletion and depreciation 5,965,022 2,010,421
Accretion 79,066 70,417
Abandonment expenditures (4,597) -
------------------------------------------------------------------------
6,040,969 1,898,017
Change in non-cash working capital (1,204,235) (357,567)
------------------------------------------------------------------------
4,836,734 1,540,450
------------------------------------------------------------------------

Investing
Expenditures on property,
plant and equipment (11,690,793) (9,293,938)
Acquisitions of property, plant
and equipment - (3,282)
Change in non-cash working
capital 2,747,182 2,232,453
------------------------------------------------------------------------
(8,943,611) (7,064,767)
------------------------------------------------------------------------

Financing
Issue of capital stock for cash 426,618 -
Share issue costs (note 3(b)) - 1,000
Bank indebtedness 3,680,259 3,678,299
------------------------------------------------------------------------
4,106,877 3,679,299
------------------------------------------------------------------------
Decrease in cash - (1,845,018)
Cash, beginning of period - 1,845,018
------------------------------------------------------------------------
Cash, end of period - -
------------------------------------------------------------------------

See accompanying notes to the financial statements.


Notes to Financial Statements

Three months ended March 31, 2006 and March 31, 2005

1. BASIS OF PRESENTATION

The interim financial statements of Grand Petroleum Inc. (the "Company") have been prepared by management in accordance with Canadian generally accepted accounting principles (GAAP). The preparation of interim financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the interim financial statements and accompanying notes. Actual results could differ from those estimates. The interim financial statements have, in management's opinion, been properly prepared using careful judgments within reasonable limits of materiality.

These interim financial statements should be read in conjunction with the most recent annual audited financial statements for the year ended December 31, 2005. The significant accounting policies follow those of the most recently reported annual financial statements.

2. BANK LOAN

The Company has a revolving demand credit facility with a Canadian chartered bank in the amount of $30,000,000. The facility bears interest at a rate ranging from the bank prime rate plus 0.125 percent to 1.250 percent. The interest rate is adjusted quarterly depending upon the Company's debt to cash flow ratio. As at march 31, 2006 the rate was prime plus 0.125 percent.

The facility is secured by a $15,000,000 debenture with a floating charge over all assets of the Company, a $50,000,000 supplemental debenture and a general security agreement. The Company also has available a $7,500,000 non-revolving acquisition development demand loan. This facility bears interest at bank prime rate plus 0.75 percent per annum, with a fee of 0.25 percent on principle amounts drawn on the loan.

The facilities are subject to a semi-annual review. This review includes a reserve borrowing base re-determination, including any completed acquisitions, and an assessment of the Company's financial position and operations.

In May, 2006 the bank increased the revolving loan facility to $35,500,000 while maintaining the $7,500,000 million acquisition and development loan.

3. SHARE CAPITAL

a) Authorized

Unlimited number of common shares without par value

Unlimited number of first preferred shares, of which none has been issued

Unlimited number of second preferred shares, of which none has been issued




b) Issued and Outstanding
Shares Amount
($)
------------------------------------------------------------------------
Common shares
Balance December 31, 2005 23,693,523 32,474,271
Exercise of stock options 271,667 426,618
Transfer from contributed surplus on
exercise of stock option - 176,137
Tax effect of flow-through share
offerings, 2005 - (4,003,938)

------------------------------------------------------------------------
Balance March 31, 2006 23,965,190 29,073,088
------------------------------------------------------------------------


c) Stock Options

The Company has adopted a stock option plan (the "Plan") for directors, senior officers, employees and key consultants of the Company. Options granted pursuant to the Plan will not exceed a term of five years, and are granted at an option price and on other terms that the directors determine are necessary to achieve the goal of the Plan and in accordance with regulatory policies. Options vest one-third immediately, one-third one year later, and one-third one year after that. As at March 31, 2006, there were 1,808,333 stock options outstanding with an exercise price between $1.00 and $5.00.



The following table sets forth a reconciliation of the Plan activity to
March 31, 2006:

Weighted average
exercise price
Options outstanding ($)
------------------------------------------------------------------------

Balance December 31, 2005 1,975,000 1.89
Granted 110,000 4.93
Cancelled (5,000) 2.32
Exercised (271,667) 1.57
------------------------------------------------------------------------
Balance March 31, 2006 1,808,333 2.39
------------------------------------------------------------------------

Weighted average
remaining contractual
Exercise price Options outstanding life (years)
------------------------------------------------------------------------

$1.00 - $1.50 760,000 2.8
$1.51 - $2.25 140,000 2.9
$2.26 - $2.32 568,333 3.7
$2.33 - $2.90 90,000 4.0
$2.91.-.$5.00 250,000 4.7
------------------------------------------------------------------------
$1.00 - $2.90 1,808,333 3.40
------------------------------------------------------------------------


d) Flow-through Shares

Pursuant to the May and June 2005 flow-through share offerings, the Company renounced $11,818,700 of qualifying expenditures effective December 31, 2005. All of the total qualifying expenditures of the May issue of $6,006,000 and the June issue of $5,812,700 were expended by December 31, 2005.

e) Stock-based Compensation

The Company has calculated its stock-based compensation expense using the Black-Scholes option pricing model to estimate the fair value of stock options issued at the date of the grant. The weighted average fair market value per option granted in the three months ended March 31, 2006 and 2005 and the assumptions used in their determination are as follows:



Three months ended March 31 2006 2005
------------------------------------------------------------------------

Weighted average fair value per option $2.65 $1.06
Risk-free interest rate (%) 5 5
Average Volatility (%) 54 40
Expected life (years) 5 5
------------------------------------------------------------------------


4. CONTRIBUTED SURPLUS
March 31, December 31,
2006 2005
------------------------------------------------------------------------

Balance, beginning of period $ 1,068,489 $ 280,029
Stock-based compensation expense 253,721 788,460
Transfer to share capital on
exercise of stock options (176,137) -
------------------------------------------------------------------------
Balance, end of period $ 1,146,073 $ 1,068,489
------------------------------------------------------------------------


5. SUPPLEMENTAL CASH FLOW INFORMATION
Three months ended
March 31, 2006 March 31, 2005
------------------------------------------------------------------------

Accounts receivable (2,422,195) 361,581
Prepaid expenses (90,360) (135,424)
Accounts payable and accrued
liabilities 4,055,502 2,371,891
------------------------------------------------------------------------
Change in non-cash working
capital from investing 2,747,182 2,232,453
------------------------------------------------------------------------
Change in non-cash working
capital from operations (1,204,235) (257,567)
------------------------------------------------------------------------

The following cash payments have been included in the determination of
earnings:

2006 2005
------------------------------------------------------------------------
Interest paid 150,019 9,198
Taxes paid - -
------------------------------------------------------------------------


6. COMMITMENT

The Company is committed to payments under an operating lease for office space through April 30, 2007 totaling $220,234 (2006 - $152,942; 2007 - $67,292).

7. SUBSEQUENT EVENT

In April 2006, the Company entered into a costless collar contract for the period of July 1, 2006 to December 31, 2006 for 500 bbls/day with a floor price of US$65.00 per bbl WTI and a ceiling price of US$85.00 per bbl WTI.

Certain information set forth in this press release contains forward-looking statements. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, reliance should not be placed on forward-looking statements. Grand'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 benefits that Grand will derive therefrom. Grand disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The TSX Venture Exchange has neither approved nor disapproved the contents of this press release.

Contact Information

  • Grand Petroleum Inc.
    Andrew Hogg
    President and CEO
    (403) 231-8403
    or
    Grand Petroleum Inc.
    Brenda Galonski
    Vice President Finance and CFO
    (403) 231-8402
    Website: www.grandpetroleum.com