NuLoch Resources Inc.
TSX VENTURE : NLR.A
TSX VENTURE : NLR.B

NuLoch Resources Inc.

May 16, 2006 20:08 ET

NuLoch Announces First Quarter 2006 Results

CALGARY, ALBERTA--(CCNMatthews - May 16, 2006) - NuLoch Resources Inc. (TSX VENTURE:NLR.A) (TSX VENTURE:NLR.B) was incorporated on May 13, 2005 and commenced operations on July 1, 2005. Production averaged 286 boe/d in the first quarter of 2006 and, currently, is approximately 300 boe/d.



Highlights
-----------------------------------------------------------------------
Q1 2006 Q4 2005 Q3 2005
------- ------- -------
Production - daily average
Oil and NGL (bbls/d) - 4 1
Natural gas (mcf/d) 1,713 268 76
-------- -------- --------
Total oil equivalent (boe/d)(1) 286 49 14

Average sales prices
Oil and NGL (per bbl) $62.82 $59.57 $53.85
Natural gas (per mcf) $ 7.13 $12.16 $ 8.84

Petroleum and natural gas revenue $ 1,100,798 $ 319,986 $ 66,401

Funds flow from
(used in) operations(2) 426,537 100,317 (133,457)
Per share - basic 0.03 0.01 (0.01)
Per share - diluted 0.03 0.01 (0.01)

Net earnings (loss) (7,463) 421,317 (1,318,457)
Per share - basic - 0.04 (0.12)
Per share - diluted - 0.03 (0.12)

Working capital (deficiency) (825,057) (3,407,474) 5,974,666
Unused line of credit 4,000,000 4,000,000 -

Capital expenditures $ 2,479,317 $ 9,482,457 $ 1,606,649

Common shares
Class A, end of period 10,762,695 7,712,695 7,712,695
Class B, end of period 652,500 652,500 652,500
Options, end of period 822,500 822,500 822,500
Basic, weighted average combined 12,850,223 11,758,195 10,826,804
Diluted, weighted average 13,435,954 12,317,881 9,464,990
-----------------------------------------------------------------------
(1) Six mcf of natural gas is considered equivalent to 1 barrel of oil.
(2) Changes in cash flow from operating activities before changes in
non-cash operating working capital.


Management's Discussion and Analysis

This interim management's discussion and analysis (MD&A) for the three months ended March 31, 2006, prepared as at May 16, 2006, is an update to the MD&A provided for the period from inception on May 13, 2005 to December 31, 2005. This MD&A should be read in conjunction with the unaudited interim financial statements for the three months ended March 31, 2006 and with the 2005 annual report which contains the audited financial statements for the period ended December 31, 2005.

The financial statements, and extracts of those statements provided within this MD&A, were prepared in Canadian dollars using Canadian generally accepted accounting principles (GAAP). Certain other information with respect to the Company is available on SEDAR at www.sedar.com.

NuLoch Resources Inc. (NuLoch or the Company) was incorporated under the laws of the Province of Alberta on May 13, 2005. No operations were undertaken in the period from incorporation until the end of the second quarter on June 30, 2005 and, consequently, no discussion or analysis can be presented with respect to that period.

Plan of Arrangement

On July 1, 2005 a plan of arrangement (the Plan) involving Enerplus Resources Fund, TriLoch Resources Inc. and NuLoch became effective and marked the commencement of operations for the Company. Pursuant to the Plan, Enerplus acquired TriLoch and virtually all of its assets in exchange for units of Enerplus. TriLoch received shares in NuLoch that were distributed to Class A shareholders of TriLoch and NuLoch received certain property and equipment previously held by TriLoch.



Q1 2006 Overview

Selected Financial Information
Q1 2006 Q4 2005 Q3 2005
------------- ------------- -------------
Net revenue, including
interest income $ 863,819 $ 282,152 $ 83,048
Net earnings (loss) (7,463) 421,317 (1,318,457)
Per share,
basic $ - $ 0.04 $ (0.12)
diluted $ - $ 0.03 $ (0.12)


During the fourth quarter of 2005, the Company drilled 42 shallow gas wells at Enchant, Alberta and nine of them produced during December. Completion operations and tie-ins continued through the first quarter of 2006 and all 38 wells capable of production were on-stream at March 31, 2006. Production peaked at approximately 500 boe/d within the quarter and averaged 286 boe/d throughout the quarter.

Capital Expenditures

Most of the capital program was invested in the Enchant shallow gas project. Completion and tie-in operations, totalling approximately $2 million, were undertaken in early 2006 to place the balance of the successful wells on-stream.



Capital Expenditures
Three months ended March 31, 2006
-----------------------------------------------------------------------
Drilling and completions $ 1,346,613
Equipment 812,676
Geoscience 167,903
Capitalized G&A 148,018
Administrative assets 4,107
-------------
$ 2,479,317
-------------
-------------

In the second quarter, the Company plans to commence drilling 5 (3.1
net) natural gas wells on various Mannville prospects in the Enchant
area.

Selected Quarterly Information

The following tables present selected operations and cash flows
information for the three-month periods ended March 31, 2006 and
December 31, 2005.

Selected Information from Statements of Operations
-----------------------------------------------------------------------
Q1 2006 Q4 2005
------------- -------------
Revenue:
Petroleum and natural gas $ 1,100,798 $ 319,986
Royalties, net of ARTC (249,405) (70,933)
Interest 12,426 33,099
------------- -------------
863,819 282,152
Expenses:
Operating 192,962 30,391
General and administrative 216,341 164,444
Interest 40,979 -
Depletion and depreciation 417,000 79,000
Asset retirement accretion 8,000 2,000
------------- -------------
Net earnings (loss) before income taxes (11,463) 6,317

Future income tax reduction (4,000) (415,000)
------------- -------------
Net earnings (loss) $ (7,463) $ 421,317
------------- -------------
------------- -------------
Net earnings (loss) per share
Basic $ - $ 0.04
Diluted $ - $ 0.03
------------- -------------
------------- -------------


Selected Information from Statements of Cash Flows
-----------------------------------------------------------------------
Q1 2006 Q4 2005
------------- -------------
Cash provided by (used in):

Operating:
Net earnings (loss) $ (7,463) $ 421,317
Items not involving cash:
Depletion and depreciation 417,000 79,000
Asset retirement accretion 8,000 2,000
Stock-based compensation 13,000 13,000
Future income tax reduction (4,000) (415,000)
------------- -------------
426,537 100,317
Change in non-cash working capital (4,827,699) 6,034,711
------------- -------------
(4,401,162) 6,135,028
Issuance of share capital, net 4,635,197 -
Capital expenditures (2,479,317) (9,482,457)
------------- -------------
Decrease in cash $ (2,245,282) $ (3,347,429)
------------- -------------
------------- -------------

Revenue

Production, Prices and Revenue
-----------------------------------------------------------------------
Q1 2006 Q4 2005 Q3 2005
------- ------- -------
Production - daily average
Oil and NGL (bbls/d) - 4 1
Natural gas (mcf/d) 1,713 268 76
-------- -------- --------
Total oil equivalent (boe/d) 286 49 14

Average sales prices
Oil and NGL (per bbl) $62.82 $59.57 $53.85
Natural gas (per mcf) $ 7.13 $12.16 $ 8.84

Petroleum and natural gas revenue $1,100,798 $319,986 $66,401


The Company's production operations commenced on July 1, 2005. In 2005, production consisted of two (1.4 net) natural gas wells at Shouldice, Alberta and, starting in early December, the first nine wells of the Company's 42-well shallow gas program at Enchant, Alberta. Rates from Shouldice have declined to nominal amounts while the Enchant shallow gas property achieved a peak production rate of approximately 500 boe/d (3 mmcf/d) when all 38 successful wells were tied-in during the first quarter of 2006. The current production rate is approximately 300 boe/d.

The Company anticipates continuing strength in the markets for oil and natural gas through 2006 and into 2007. Natural gas is expected to be the primary focus of the Company's development program in 2006. The price of natural gas achieved levels well in excess of $10.00 per mcf at AECO during the fourth quarter of 2005. In the first quarter of 2006 prices have retreated and NuLoch's average sales price was $7.13 per mcf. Prices at AECO have fallen further to average approximately $6.50 per mcf in April 2006 and reflect the seasonality inherent in the natural gas markets. The Company anticipates prices will recover through the balance of 2006 and average $7.50-$8.00 per mcf at AECO over the year.

Royalties

NuLoch's second White Specks (SWS) shallow natural gas program at Enchant is a farm-in project on Crown mineral leases that provides for the payment of overriding royalties to the farmors based on 15 percent of gross revenue. The average combined Crown and other royalty rate for the Company, net of ARTC, was 23 percent in the first quarter of 2006 and is expected to remain at that level throughout the year. ARTC totalled $35,528 in the quarter, being 25 percent of eligible Crown royalties payable.



Royalties
-----------------------------------------------------------------------
Q1 2006 % Q4 2005 %
---------- ---- ---------- ----
Petroleum and natural gas revenue $1,100,798 100 $ 319,986 100

Crown royalties $ 142,113 13 $ 15,319 5
ARTC (35,528) (3) (3,830) (1)
Freehold royalties 6,189 1 29,458 9
Overriding royalties 136,631 12 29,986 9
---------- ---- ---------- ----
Royalties, net of ARTC $ 249,405 23 $ 70,933 22
---------- ---- ---------- ----
---------- ---- ---------- ----


Operating Expenses

Operating costs are difficult to forecast and can vary significantly depending on such factors as production rates, reservoir quality, water content and available infrastructure. The Company's target is to maintain average operating costs below $10.00 per boe of production. In the first quarter of 2006, operating costs averaged $7.50 per boe, compared to $6.83 per boe in the three-month period ended December 31, 2005.

Interest Income

In the first quarter of 2006, the Company had excess funds on hand that earned interest totalling $12,426. Very little additional interest income is expected in 2006 as funds are deployed in the capital expenditure program.

Interest Expense

Interest expense was not incurred in 2005. In 2006, the Company expects to draw on its bank line of credit and will incur Federal Part XII.6 tax - characterized as interest - with respect to $4.9 million of renouncements pursuant to flow-through share commitments that are expected to be met in the year. In the first quarter, interest expense totalled $40,979.

General and Administrative (G&A) Expense

The Company has seven employees at its leased head office in Calgary and uses external consultants on an as-needed basis to assist with the regular operation of the business.



G&A
-----------------------------------------------------------------------
Q1 2006 Q4 2005
------------- -------------
Gross overhead costs $ 351,359 $ 284,800
Amounts capitalized (148,018) (133,356)
Stock-based compensation 13,000 13,000
------------- -------------
$ 216,341 $ 164,444
------------- -------------
------------- -------------


Given the modest rates of production achieved in 2005 during the Company's start-up phase, presentation of a rate of G&A per boe is not meaningful. The average net rate for G&A in the first quarter of 2006 was $8.41 per boe. The Company may see significant increases in gross G&A in 2006 as the scope of operations expands, but achieve a decrease in G&A costs per unit of production as production continues to increase as planned.

Depletion and depreciation

In the first quarter of 2006, the rate of depletion and depreciation with respect to petroleum and natural gas properties was $15.86 per boe compared to $15.73 in the fourth quarter of 2005.

Income Taxes

The Company does not expect to incur any current income or capital taxes in 2006. In the first quarter, the Company renounced $7,250,000 in eligible Canadian Exploration Expense with respect to flow-through shares issued in 2005. Approximately $2.3 million was incurred in 2005 and as the balance of the expenditures are made in 2006 there will be a tax obligation equivalent to interest on the amount unspent at the end of each month after January 2006. The income tax effect of the renouncement, being $2,440,000, was recorded in the first quarter of 2006 as a reduction in share capital and increase in future income tax liability.

Funds Flow and Net Loss

In 2005, the Company was in the early stages of developing its oil and natural gas production business. As such, funds flow from operations was negative for the six months ended December 31, 2005 primarily because the limited amount of net production revenue did not cover G&A expenses.

Funds flow from operations was positive in the first quarter of 2006 as production from the Enchant SWS shallow natural gas project contributed substantial revenue. Funds flow from operations totalled $426,537, representing a 325 per cent increase over the $100,317 recorded in the fourth quarter of 2005.

The Company incurred a small net loss in the first quarter totalling $7,463 on net revenues of $863,819.

Liquidity and Capital Resources

On November 8, 2005 the Company entered into a lending agreement with a Canadian chartered bank in the amount of $4 million for the purpose of developing the Company's shallow natural gas prospect at Enchant, Alberta. The facility is demand in nature and subject to a first charge on all of the Company's assets. The borrowing base is expected to be re-evaluated by the bank in the second quarter of 2006 based on forecasts of the Company's reserves, production and cash flows.

The Company renounced Canadian Exploration Expense tax deductions to shareholders and has committed itself to incurring qualifying expenditures in the amount of $7,250,000 prior to December 31, 2006. Approximately $3.5 million of this total has been incurred to March 31, 2006.

On February 22, 2006 the Company issued, pursuant to a private placement, 3,050,000 Class A common shares at $1.65 per share for gross proceeds of $5,032,500.

The Company's capital program has been established at $13.7 million for 2006 and cash provided by operating activities is budgeted to provide a significant portion of the funding. The Company is mindful of the current weakness in Canadian natural gas markets due to seasonal factors, historically high levels of natural gas in storage and the rising value of the Canadian dollar as compared to the US dollar. A shortfall in available funds may be satisfied with bank borrowings or further equity issues if appropriate. If these or other sources of funding are insufficient, or cannot be obtained with acceptable terms, then prudent reductions in the capital program may be warranted.

Outstanding Share Data

The Class A and Class B common shares of the Company trade on the TSX Venture Exchange under the symbol NLR.A and NLR.B, respectively. As of the date of this MD&A there are 10,762,695 Class A common shares and 652,500 Class B common shares outstanding. There are 822,500 options to purchase Class A common shares outstanding.

Risk Factors

The activities of the Company are inherently risky due to the nature of its involvement in the exploration, development and production of oil and natural gas and its present stage of development. A discussion of these risks can be found on pages 14 through 17 of the Company's annual report for the period ended December 31, 2005.

Advisories

Use of Barrels of Oil Equivalent (boe)

Disclosure provided herein in respect of boe units may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf of natural gas to 1 bbl of crude oil is based on an energy equivalency conversion method primarily applicable at the burner tip and may not represent a value equivalency at the wellhead.

Non-GAAP Measurement - Funds Flow

Funds flow from operations, calculated as cash flow from operating activities before changes in non-cash working capital, is used by the Company as a key measure of performance. Funds flow from operations does not have a standardized meaning prescribed by Canadian GAAP and therefore may not be comparable with the calculation of similar measures for other companies. Funds flow from operations as presented is not intended to represent operating profits for the period, nor should it be viewed as an alternative to cash provided by operating activities, net earnings or other measures of financial performance calculated in accordance with GAAP. Many of the Company's peers in the oil and natural gas industry use the same definition and, therefore, disclosure herein enhances comparability with those peers. Funds flow from operations per share is calculated using the same share bases which are used in the determination of earnings per share.

Forward-Looking Statements

Certain statements in this document or incorporated herein by reference may constitute "forward-looking statements". These forward-looking statements can generally be identified as such because of the context of the statements, including words indicating that the Company "believes", "anticipates", "expects", "plans" or words of a similar nature. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions which will, among other things, impact demand for and market prices of the Company's products; industry capacity; the ability of the Company to implement its business strategy, including exploration and development activities; the ability of the Company to complete its capital programs; successful negotiations with bankers and other third parties; the success of exploration and development activities; production levels; government regulations and the expenditures required to comply with them (especially safety and environmental laws and regulations); asset retirement obligations; and other circumstances affecting revenues and expenses.



NULOCH RESOURCES INC.
Balance Sheets
(unaudited)

As at March 31, December 31,
2006 2005
------------- -------------
Assets

Current assets:
Cash and cash equivalents $ 459,958 $ 2,705,240
Accounts receivable 320,744 737,968
Prepaid expenses and other assets 120,210 2,847
------------- -------------
900,912 3,446,055

Property and equipment (note 3) 12,294,423 10,232,106
Future income tax asset - 555,000
------------- -------------
$ 13,195,335 $ 14,233,161
------------- -------------
------------- -------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and
accrued liabilities $ 1,725,969 $ 6,853,529

Future income tax liability 1,747,000 -
Asset retirement obligations 404,000 396,000

Shareholders' equity:
Share capital (note 4) 10,183,969 7,854,772
Contributed surplus (note 4(d)) 39,000 26,000
Deficit (904,603) (897,140)
------------- -------------
9,318,366 6,983,632

Commitment (note 5)
------------- -------------
$ 13,195,335 $ 14,233,161
------------- -------------
------------- -------------

See accompanying notes to financial statements


NULOCH RESOURCES INC.
Statement of Operations and Deficit
For the three months ended March 31, 2006
(unaudited)



Revenue:
Petroleum and natural gas $ 1,100,798
Royalties, net of Alberta Royalty Tax Credit (249,405)
Interest 12,426
-------------
863,819

Expenses:
Operating 192,962
General and administrative 216,341
Interest 40,979
Depletion and depreciation 417,000
Asset retirement accretion 8,000
-------------
875,282

-------------
Loss before income taxes (11,463)

Future income tax reduction 4,000
-------------
Net loss (7,463)

Deficit, beginning of period (897,140)
-------------
Deficit, end of period (904,603)
-------------
-------------

Net loss per share (note 4(e)):

Basic and diluted $ -

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


See accompanying notes to financial statements



NULOCH RESOURCES INC.
Statement of Cash Flows
For the three months ended March 31, 2006
(unaudited)


Cash provided by (used in):

Operating:
Net loss $ (7,463)
Items not involving cash:
Future income tax reduction (4,000)
Depletion and depreciation 417,000
Asset retirement accretion 8,000
Stock-based compensation 13,000
-------------
426,537
Change in non-cash operating working capital (138,796)
-------------
287,741

Financing:
Issue of share capital, net of issue costs 4,635,197

Investing:
Property and equipment (2,479,317)
Change in non-cash investing working capital (4,688,903)
-------------
(7,168,220)

-------------
Decrease in cash and cash equivalents (2,245,282)

Cash and cash equivalents, beginning of period 2,705,240
-------------
Cash and cash equivalents, end of period $ 459,958
-------------
-------------

Supplemental cash flow information (note 6)


See accompanying notes to financial statements



NULOCH RESOURCES INC.
Notes to Financial Statements
For the three months ended March 31, 2006
(unaudited)


1. Basis of presentation

These interim financial statements have been prepared by management of NuLoch Resources Inc. (the Company) in accordance with Canadian generally accepted accounting principles using the same accounting policies as the financial statements for the period ended December 31, 2005. The disclosures contained herein are incremental to, and should be read in conjunction with, those annual financial statements.

2. Nature of business

The Company is incorporated under the laws of the Province of Alberta. The Company's activities are related to exploration for and development of petroleum and natural gas. The Company was incorporated on May 13, 2005 and commercial operations commenced on July 1, 2005.



3. Property and equipment

Accumulated
depletion and Net book
March 31, 2006 Cost depreciation value
-----------------------------------------------------------------------
Petroleum and natural
gas properties $ 13,837,364 1,640,000 $ 12,197,364
Administrative assets 124,059 27,000 97,059
------------- ------------- -------------
$ 13,961,423 1,667,000 $ 12,294,423
------------- ------------- -------------
------------- ------------- -------------


During the three months ended March 31, 2006, general and administrative costs of $148,018 directly related to the acquisition, exploration and development of petroleum and natural gas reserves were capitalized.

At March 31, 2005, costs associated with undeveloped or unproved petroleum and natural gas properties totalling $168,000 have been excluded from the calculation of depletion and depreciation (December 31, 2005 - nil).

Future development and asset retirement costs in the amount of $8,567,000 associated with proved reserves have been included in the calculation of depletion and depreciation (December 31, 2005 - $10,616,000).

4. Share capital

(a) Authorized

An unlimited number of Class A, Class B and Class C shares have been authorized.

Class B shares are exchangeable for Class A shares. The number of Class A shares obtained upon conversion of each Class B share will be equal to $10.00 divided by the greater of $1.00 and the 30-day average closing price for Class A common shares immediately prior to the effective date of conversion. Conversion may be effected by the Company in 2009 or 2010 or, if not converted before 2011, then at the option of the Class B shareholder in January 2011 or otherwise automatically on February 1, 2011.



(b) Issued and outstanding
Common
Shares Amount
------------- -------------
Class A common shares
Balance, December 31, 2005 7,712,695 1,728,892

Issued pursuant to private placement 3,050,000 5,032,500
Share issue costs (397,303)
Tax effect of share issue costs 134,000
Tax effect of flow-through
renunciation (note 5) (244,000)
------------- -------------
Balance, March 31, 2006 10,762,695 6,254,089
------------- -------------

Class B common shares
Balance, December 31, 2005 652,500 6,125,880

Tax effect of flow-through
renunciation (note 5) (2,196,000)
------------- -------------
Balance, March 31, 2006 652,500 3,929,880
------------- -------------


Total share capital, March 31, 2006 $ 10,183,969
-------------
-------------

(c) Stock option plan

The Company maintains a stock option plan that authorizes the board of
directors to issue stock options to directors, officers, employees or
other service-providers of the Company. The options vest at the rate of
one-third annually over three years and expire after five years.
Options are issued at strike prices equal to or greater than the market
price of the Company's Class A shares on the date of grant.

Weighted
Average
Exercise
Options Price
---------------------
Balance, December 31, 2005 822,500 $0.35
Granted - -
---------- --------
Balance, March 31, 2006 822,500 $0.35
---------- --------
---------- --------

At March 31, 2006 the outstanding options have a remaining life of 4.3
years and are unvested.

(d) Contributed surplus

Balance, December 31, 2005 $ 26,000
Stock-based compensation expense 13,000
-------------
Balance, March 31, 2006 $ 39,000
-------------
-------------


(e) Per share amounts

Per share amounts have been calculated on the weighted average number of shares outstanding after giving effect to the potential conversion of Class B shares into Class A shares at 1:5.9 based on the average closing price of Class A shares of $1.69 in the 30 trading days prior to March 31, 2006. Options, when the exercise price is less than the average market price of the underlying security, are dilutive to net earnings per share and notionally increase the weighted average number of Class A common shares outstanding.



The weighted average numbers of shares for the period ended March 31,
2006 are as follows:

Class A common shares 9,000,473
Class B common shares 652,500
Additional Class B assumed converted 3,197,250
-------------
Basic shares outstanding 12,850,223
Stock option dilution 585,731
-------------
Diluted shares outstanding 13,435,954
-------------
-------------
Stock options are anti-dilutive to net loss per share and are excluded
from that calculation.


5. Commitment

In February 2006 the Company renounced tax deductions to shareholders that totalled $7,250,000. The Company has a commitment to incur these qualifying resource expenditures prior to December 31, 2006. As at March 31, 2006, approximately $3,500,000 of qualifying expenditures have been incurred. The income tax effect of the renouncement, being $2,440,000, was recorded in the three months ended March 31, 2006 as a reduction in share capital and increase in future income tax liability.

6. Supplemental cash flow information

A cash payment of $10,000 was made in respect of interest during the three months ended March 31, 2006. No cash payments for taxes have been made by the Company.

7. Bank loan

The Company maintains a demand revolving operating credit facility with a Canadian chartered bank in the amount of $4,000,000. Borrowings under the facility bear interest at the bank's prime rate and are secured by a demand fixed and floating charge debenture conveying a first charge on all of the assets of the Company. The facility is subject to regular review by the bank. The facility was not utilized at March 31, 2006.

The TSX Venture Exchange does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • NuLoch Resources Inc.
    James N. McIndoe
    President and CEO
    (403) 920-0455
    (403) 920-0457 (FAX)
    Email: nuloch@nuloch.ca
    or
    NuLoch Resources Inc.
    2200, 444 - 5th Avenue SW
    Calgary, Alberta T2P 2T8