Rock Energy Inc.
TSX : RE

Rock Energy Inc.

May 11, 2006 17:00 ET

Rock Energy Reports Results for the Quarter Ended March 31, 2006

CALGARY, ALBERTA--(CCNMatthews - May 11, 2006) - Rock Energy Inc. (TSX:RE) is pleased to announce the financial and operating results for Rock Energy Inc. for the fiscal quarter ended March 31, 2006:



CORPORATE SUMMARY

------------------------------------------------------------------------
------------------------------------------------------------------------
FINANCIAL Three months ended Three months ended
March 31, 2006 March 31, 2005
------------------------------------------------------------------------
Oil and gas revenue ('000) $ 9,824 $1,159

Cash flow from operations ('000)(1) $ 3,404 $ 392
Per share - basic $ 0.17 $ 0.04
- diluted $ 0.17 $ 0.04

Net income ('000) $ (1,074) $ 51
Per share - basic $ (0.05) $ 0.01
- diluted $ (0.05) $ 0.01

Capital expenditures, net ('000) $ 9,728 $2,138


As at As at
March 31, 2006 March 31, 2005
------------------------------------------------------------------------
Working capital ('000) $(30,766) $10,297

Common shares outstanding 19,637,321 9,259,453
Options outstanding 1,310,332 532,387


OPERATIONS Three months ended Three months ended
March 31, 2006 March 31, 2005
------------------------------------------------------------------------
Average daily production
Crude oil and NGLs (bbls/d) 936 176
Natural gas (mcf/d) 9,946 795
Barrels of oil
equivalent (boe/d) 2,594 309

Average product prices
Crude oil (CDN$/bbl) $ 32.43 $ 40.63
NGLs (CDN$/bbl) $ 54.31 $ 47.98
Natural gas (CDN$/mcf) $ 7.76 $ 6.95
BOEs (CDN$/boe) $ 42.08 $ 41.65

Field netback (CDN$/boe) $ 18.27 $ 22.43
------------------------------------------------------------------------
------------------------------------------------------------------------

Note (1) Cash flow from operations and cash flow from operations per
share are non GAAP terms that represent cash generated from operating
activities before changes in non-cash working capital. We consider it
a key measure as it demonstrates our ability to generate the cash flow
necessary to fund future growth through capital investment. Cash flow
from operations may not be comparable with the calculation of similar
measures for other companies. Cash flow from operations per share is
calculated using the same share basis which is used in the determination
of net income per share.


PRESIDENT'S MESSAGE

The first quarter of 2006 has operationally been a very successful period for our company as our production grew 22% from the previous quarter (739% from the prior year). Access to equipment allowed us to accelerate our drilling program and success at land sales added to our inventory of drilling opportunity.

Rock was able to complete the drilling of 10 (7.8 net) wells resulting in 7 (7.0 net) heavy oil wells, 2 (0.7 net) light oil wells and 1 (0.1 net) gas well, generating an overall success rate of 100%. We had originally planned to drill 4-6 wells during this period but this acceleration of activity and significant success has provided a solid start to the year. The drilling success in the first quarter has confirmed another 12-14 operated follow up locations in two separate heavy oil pools, and 3-4 non-operated follow up locations in another light oil pool. In addition we were successful at land sales during the quarter (in the Musreau, Wapiti, and Waskahigan areas) which when combined with our existing land base will provide 3-5 operated and up to 5 non-operated drilling and re-completion activities in the second half of the year in the West Central Alberta region.

During the quarter Rock retained Scotia Waterous to facilitate our rationalization program. We have made available up to 1,100 boe per day of production for swap and sale, but do not expect to be a net seller of more than 250 boe per day. This step will allow us to accelerate the consolidation of our working interests into our core areas of growth. The information memorandum was made available the week of April 17, 2006, and proposals are due on May 30, 2006.

Production increased to 2,594 boe/d this quarter up from 2,120 boe/d in the fourth quarter of 2005. Currently Rock's estimated production is 2,350 boe/day (520 bbl/day of heavy oil, 250 bbl/day of light oil and NGL's, and 9.5 mmcf/day of gas), however we have another 450 boe per day of production curtailed due to spring break up. The majority of this shut in production is expected to come on stream in June, 2006, and we expect production to continue building as we conclude the start-up period of our heavy oil wells, and resume our drilling program.

Financially, cash flow from operations of $3.4 million ($0.17 per basic and diluted share) increased by 763% compared to the same period last year but net income fell to a loss of $1.1 million ($0.05 per basic and diluted share). The decrease in net income is primarily due to an increase in our depletion rate as a result of the acquisitions completed last year.

Capital expenditures for the quarter were $9.7 million, versus a budgeted amount of $5.3 million, which resulted in an increase in total debt to $30.8 million. The increase in total debt has been created as a result of the acceleration in capital spending (some second quarter projects were completed in the first quarter and we were successful at land sales in West Central Alberta) combined with a reduction in expected cash flow during the same period due to lower prices for gas and heavy oil.

With the operational success Rock experienced in the first quarter, the Company is able to reduce the total number of heavy oil wells to be drilled during the remainder of the year though the Company still expects to meet our previous production guidance for exit rates. While maintaining the original capital budget of $30 million, the funds available through the reduction in heavy oil wells would allow Rock to direct more spending to the operated gas projects in the West Central core area, and increase the land budget. This adjustment to the allocation of capital spending will add to our inventory of projects for 2007 and accelerate the development of gas and light oil production. At the present time Rock has a solid inventory of projects for 2006 and 2007, and the upcoming rationalization program will provide us the opportunity to balance our capital spending and growth prospects with our total debt. Once we know the financial and operational impact of the rationalization program we will provide a further update to our guidance.

In summary Rock has experienced significant operational and drilling success in the first quarter of this year and secured a significant portfolio of opportunity. An acceleration of our capital spending program combined with softer commodity prices has pushed our total debt at March 31, 2006 beyond 1.5 times current cash flow. During the balance of the year we will restore our debt to current cash flow ratio to 1.5 times or less through our rationalization program, and/or by managing our capital expenditures. Rock has charted a path to continue to deliver production growth, consolidate our operations, maintain fiscal responsibility and build value for our shareholders.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Rock Energy Inc. ("Rock" or the "Company") is a public energy company engaged in the exploration for and development and production of crude oil and natural gas, primarily in Western Canada. Rock's corporate strategy is to grow and develop an oil and gas exploration and production company through internal operations and acquisitions.

Rock evaluates its performance based on net income, operating netback, cash flow from operations and finding and development costs. Cash flow from operations is used by the Company to analyze operations, performance, leverage and liquidity. Operating netback is a benchmark used in the oil and gas industry to measure the contribution of the oil and natural gas operations following the deduction of royalties, transportation costs, and operating expenses. Finding and development cost is another benchmark used in the oil and gas industry to measure the capital costs incurred by the Company to find and bring reserves on stream.

Rock faces competition in the oil and gas industry for resources, both technical personnel and third party services, and capital financing. The Company is addressing these issues through the addition of personnel with the expertise to develop opportunities on existing lands and control both operating and administrative cost structures. Rock also seeks to obtain the best commodity price available based on the quality of our produced commodities.

The following discussion and analysis is dated May 10, 2006 and is management's assessment of Rock Energy Inc.'s historical financial and operating results, together with future prospects, and should be read in conjunction with the unaudited interim consolidated financial statements of Rock Energy Inc. for the three months ended March 31, 2006 and the consolidated financial statements for the fiscal year-ended December 31, 2005. The discussion provided herein is incremental to that included in management's discussion and analysis in respect of its audited consolidated financial statements for the fiscal year-ended December 31, 2005.

Basis of Presentation

Financial measures referred to in this discussion, such as cash flow from operations and cash flow from operations per share, are not prescribed by generally accepted accounting principles ("GAAP"). Cash flow from operations is a key measure that demonstrates the ability to generate cash to fund expenditures. Cash flow from operations is calculated by taking cash provided by operations from the consolidated statement of cash flows and adding back changes in non-cash working capital. Cash flow from operations per share is calculated using the same share basis which is used in the determination of net income per share. These non GAAP financial measures may not be comparable to similar measures presented by other companies. These financial measures are not intended to represent operating profits for the period nor should they be viewed as an alternative to cash provided by operating activities, net income or other measures of financial performance calculated in accordance with GAAP.

All barrels of oil equivalent ('boe") conversions in this report are derived by converting natural gas to oil in the ratio of six thousand cubic feet ("mcf") of gas to one barrel ("bbl") of oil. Certain financial values are presented on a boe basis and such measurements may not be consistent with those used by other companies. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of six mcf to one barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Certain statements and information contained in this document, including but not limited to management's assessment of Rock's future plans and operations, production, reserves, revenue, commodity prices, operating and administrative expenditures, wells drilled, acquisitions and dispositions, cash flow from operations, capital expenditure programs and debt levels, contain forward-looking statements. All statements other than statements of historical fact may be forward looking statements. These statements, by their nature, are subject to numerous risks and uncertainties, some of which are beyond Rock's control including the effect of general economic conditions, industry conditions, regulatory and taxation regimes, volatility of commodity prices, currency fluctuations, the availability of services, imprecision of reserve estimates, geological, technical, drilling and processing problems, environmental risks, weather, the lack of availability of qualified personnel or management, stock market volatility, the ability to access sufficient capital from internal and external sources and competition from other industry participants for, among other things, capital, services, acquisitions of reserves, undeveloped lands and skilled personnel that may cause actual results or events to differ materially from those anticipated in the such forward looking statements. Such forward-looking statements, although considered reasonable by management at the time of preparation, may prove to be incorrect and actual results may differ materially from those anticipated in the statements made and should not unduly be relied on. These statements speak only as of the date of this document. Rock does not intend and does not assume any obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

All financial amounts are in thousands of Canadian dollars unless otherwise noted.

Outlook

Rock issued guidance on March 17, 2006 for projected 2006 results. Guidance for the Company is now being updated to reflect ongoing activity levels, impact of spring breakup on production, pricing changes and increased costs in the industry. The table below provides Rock's updated guidance.



------------------------------------------------------------------------
------------------------------------------------------------------------
New Previous
Guidance Guidance Change
------------------------------------------------------------------------
2006 Production (boe/d)
Annual 2,600 - 2,800 2,800 - 3,000 (7%)
Exit 3,200 - 3,400 3,200 - 3,400 0%
------------------------------------------------------------------------
2006 Cash Flow
------------------------------------------------------------------------
Annual - $ $16.7 - $18.0 $20.5 - $22.5
million million (19%)
------------------------------------------------------------------------
Annual - $per share $0.85 - $0.92 $1.04 - $1.14 (19%)
------------------------------------------------------------------------
Capital Budget
------------------------------------------------------------------------
2006 expenditures $30 million $30 million 0%
Wells Drilled 25 - 30 35 - 40 (27%)
------------------------------------------------------------------------
Total Year End Debt $37.8 - $36.5 $31.5 - $33.5
million million 14%
------------------------------------------------------------------------
Pricing
------------------------------------------------------------------------
Oil - WTI US$65.00/bbl US$58.00/bbl 12%
Gas - AECO $7.00/mcf $8.00/mcf (13%)
Cdn/US dollar 0.90 0.86 5%
------------------------------------------------------------------------
------------------------------------------------------------------------


Cash flow from operations estimates are negatively impacted by lower gas prices and a stronger Canadian dollar, though this reduction has been partially offset by higher oil prices. The forecasted exit production rates have been maintained while the annual averages have declined 200 boe per day to reflect delays in bringing new production on stream during spring breakup. With the drilling success Rock experienced in the first quarter, the Company has decided to reduce the total number of heavy oil wells to be drilled during the remainder of the year though the capital budget currently remains the same as additional spending has been directed toward the West Central core area, including increasing spending on land. This adjustment to the allocation of capital spending will add to the inventory of projects for 2007. Projected year end debt to annualized fourth quarter cash flow is expected to reach a ratio of 1.6 times, before any proceeds from the rationalization program. Proceeds from the rationalization program will first be applied to reduce the debt, so that the ratio of debt to current cash flow falls to less than 1.5 times. Once we know the financial and operational impact of the rationalization program we will provide a further update to our guidance



Production

------------------------------------------------------------------------
------------------------------------------------------------------------
Production by Product 3 Months 3 Months
Ended Ended Quarterly
03/31/06 03/31/05 Change
------------------------------------------------------------------------
Gas (mcf/d) 9,946 795 1,151%
Oil (bbl/d) 183 71 158%
Heavy Oil (bbl/d) 679 82 728%
NGL (bbl/d) 74 23 222%
------------------------------------------------------------------------
boe/d (6:1) 2,594 309 739%
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
------------------------------------------------------------------------
Production by Area 3 Months 3 Months
Ended Ended Quarterly
03/31/06 03/31/05 Change
------------------------------------------------------------------------
West Central Alberta (boe/d) 1,295 N.A. N.A.
Plains (boe/d) 698 96 627%
Other (boel/d) 601 213 182%
------------------------------------------------------------------------
boe/d (6:1) 2,594 309 739%
------------------------------------------------------------------------
------------------------------------------------------------------------


Production for the quarter ended March 31, 2006 has increased over prior year levels due to the acquisitions completed in the second quarter of 2005, successful gas drilling in the West Central core area (particularly in Musreau) and heavy oil additions from the Plains core area. Current production levels are approximately 2,350 boe per day with an additional 450 boe per day of production shut in due to road bans and facility constraints. Both gas and heavy oil production levels are expected to increase in the second half of the year as shut in and behind pipe production comes on stream and drilling operations resume after spring break up.



Product Prices

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months
Realized Product Prices Ended Ended Quarterly
03/31/06 03/31/05 Change
------------------------------------------------------------------------
Gas ($/mcf) 7.76 6.95 12%
Oil ($/bbl) 60.61 58.89 3%
Heavy Oil ($/bbl) 24.84 24.91 (0)%
NGL ($/bbl) 54.31 47.98 13%
------------------------------------------------------------------------
boe (6:1) 42.08 41.65 1%

Average Benchmark Prices
Gas - NYMEX Daily Spot (US$/mcf) 7.71 6.42 20%
Gas - AECO C Daily Spot ($/mcf) 7.50 6.89 9%
Oil - WTI Cushing (US$/bbl) 63.48 49.84 27%
Oil - Edmonton light ($/bbl) 68.96 61.45 12%
Heavy Oil - Llyodminster blend ($/bbl) 39.71 37.13 7%
US$/Cdn$ exchange rate 0.866 0.815 6%
------------------------------------------------------------------------
------------------------------------------------------------------------


Revenue

The vast majority of the Company's revenue is derived from oil and gas operations. Other income for the first quarter of 2006 is primarily royalty revenue where as in 2005 it primarily represents interest income on cash balances.



------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months
Ended Ended Quarterly
03/31/06 03/31/05 Change
------------------------------------------------------------------------
Oil and Gas Revenue ('000) $9,824 $1,159 748%

Other Income ('000) $45 $34 32%
------------------------------------------------------------------------
------------------------------------------------------------------------

Increased production resulted in an increase to oil and gas revenue
for the first quarter of 2006 in comparison to the prior year period.


Royalties

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months
Ended Ended Quarterly
03/31/06 03/31/05 Change
------------------------------------------------------------------------
Royalties ('000) $2,862 $271 956%
As percentage of oil and
gas revenue 29.1% 23.4% 24%
Per boe (6:1) $12.26 $9.73 26%
------------------------------------------------------------------------
------------------------------------------------------------------------


Royalties for the quarter ended March 31, 2006 are higher on an absolute, percentage and per boe basis in comparison to the same quarter of 2005, mainly as a result of higher production, particularly for heavy oil, and higher prices increasing the underlying rate. Royalty rates for the remainder of the year have been budgeted at 25% of oil and gas revenue.



Operating Expense

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months
Ended Ended Quarterly
03/31/06 03/31/05 Change
------------------------------------------------------------------------
Operating expense ('000) $2,617 $ 251 943%
Transportation costs ('000) 78 13 500%
------------------------------------------------------------------------
$2,695 $ 264 921%
Per boe (6:1) $11.55 $9.49 22%
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating expenses have increased in the first quarter of 2006 over the same period in 2005 due to higher production levels and higher unit costs. The per boe operating costs have increased over these time periods due to higher cost properties acquired in the second quarter of 2005 and the increased level of heavy oil operations. Heavy operating oil costs per boe have continued to decrease from the high rates experienced in the third quarter of 2005. Overall operating costs for the first quarter of 2006 are slightly above budgeted levels and expected to come down to the budgeted level of $10.00 per boe over the course of the year. Transportation costs have increased primarily as a result of the properties acquired in the second quarter of 2005.



General and Administrative (G&A) Expense

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months
G&A Expense Ended Ended Quarterly
03/31/06 03/31/05 Change
------------------------------------------------------------------------
Gross ('000) $ 1,207 $ 436 177%
Per boe (6:1) $ 5.17 $ 15.66 (67)%
Capitalized ('000) $ 558 $ 162 244%
Per boe (6:1) $ 2.39 $ 5.83 (59)%
Net ('000) $ 649 $ 274 137%
Per boe (6:1) $ 2.78 $ 9.83 (72)%
------------------------------------------------------------------------
------------------------------------------------------------------------


G&A expenses increased on an absolute basis in the first quarter of 2006 over 2005 due to staff bonuses paid out during the quarter and overall higher staffing levels associated with greater levels of activity. Increased production levels have reduced G&A expenses on a per boe basis. The Company capitalizes certain G&A expenses based on personnel involved in exploration and development activities, including certain salaries and related overhead costs. G&A expenses are expected to continue to fall on a per boe basis with growth in production.



Interest Expense

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months
Ended Ended Quarterly
03/31/06 03/31/05 Change
------------------------------------------------------------------------
Interest expense ('000) $ 243 $ nil N.A.
Per boe (6:1) $ 1.04 $ nil N.A.
------------------------------------------------------------------------
------------------------------------------------------------------------

Interest incurred in the quarter ended March 31, 2006 is as a result
of bank borrowings.

Depletion, Depreciation and Accretion (DD&A)

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months
Ended Ended Quarterly
03/31/06 03/31/05 Change
------------------------------------------------------------------------
D&D expense ('000) $ 4,635 $ 294 1,477%
Per boe (6:1) $ 19.85 $ 10.57 88%
------------------------------------------------------------------------
Accretion expense ('000) 33 6 450%
Per boe (6:1) $ 0.14 $ 0.20 (30)%
------------------------------------------------------------------------
------------------------------------------------------------------------


The depletion and depreciation expense and boe rate for the first quarter ended March 31, 2006 were higher compared to the same quarter in 2005 primarily due to higher production and the higher cost base of the properties acquired in the second quarter of 2005.

Accretion expense represents the change in the time value of the asset retirement obligation ("ARO") over the applicable period. The underlying ARO may be increased over a period based on new obligations incurred from drilling wells or constructing facilities. Similarly this obligation can also be reduced as a result of abandonment work undertaken and reducing future obligations. The ARO obligation increased during the quarter $116 thousand as a result of drilling new wells.

Taxes

The Company began paying capital taxes in the second quarter of 2005 as its capital base increased following the acquisitions. Rock does not have a current income tax payable and does not expect to pay current income taxes in 2006 as, on a consolidated basis, the Company has estimated resource pools and loss carry forwards available at December 31, 2005 of $64 million.



Cash flow from Operations and Net Income

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months
Ended Ended Quarterly
03/31/06 03/31/05 Change
------------------------------------------------------------------------
Cash flow from Operations ('000) $ 3,404 $ 392 768%
Per boe (6:1) $ 14.58 $ 14.10 3%
Per share - basic $ 0.17 $ 0.04 325%
- diluted $ 0.17 $ 0.04 325%

Net Income ('000) $ (1,074) $ 51 (2,206)%
Per boe (6:1) $ (4.60) $ 1.84 (350)%
Per share - basic $ (0.05) $ 0.01 (600)%
- diluted $ (0.05) $ 0.01 (600)%

Weighted average shares outstanding
- basic 19,637,321 9,259,453 112%
- diluted 19,713,671 9,333,067 111%
------------------------------------------------------------------------
------------------------------------------------------------------------


Shares outstanding have increased in the first quarter 2006 compared to the first quarter of 2005 primarily due to the acquisitions completed in the second quarter of 2005.

Cash flow from operations improved over the prior year period due to higher production levels partially offset by higher operating costs, royalties and interest expenses. Net income was also negatively impacted by the increase in depletion and depreciation charges, which are primarily related to the acquisitions in the second quarter of 2005.



Capital Expenditures

------------------------------------------------------------------------
------------------------------------------------------------------------
(all amounts '000) 3 Months 3 Months
Ended Ended Quarterly
03/31/06 03/31/05 Change
------------------------------------------------------------------------
Land $ 2,308 $ 545 323%
Seismic 479 454 6%
Drilling and completion 5,516 155 3,459%
Capitalized G&A 558 162 244%
Facilities 46 810 (94)%
------------------------------------------------------------------------
Total operations $ 8,907 $ 2,126 319%
------------------------------------------------------------------------
Property acquisitions Nil Nil N.A.
Well site facilities inventory 754 Nil N.A.
Office equipment 67 12 458%
------------------------------------------------------------------------
Total $ 9,728 $ 2,138 355%
------------------------------------------------------------------------
------------------------------------------------------------------------


During the first quarter of 2006 the Company drilled 10 (7.8 net) wells all of which were successful. Of these wells 7 (7.0 net) were drilled in our Plains core area and 3 (0.8 net) were drilled in our West Central core area. Plains drilling focused on heavy oil targets while the West Central drilling resulted in 2 (0.7 net) light oil wells and 1 (0.1 net) gas well. Production from the heavy oil operations are expected to be on stream towards the end of the second quarter following spring break up as 6 of the 7 operations have already been equipped. The light oil and gas operations are expected to be on production in the third quarter of this year. Additional production tied in at Musreau since the beginning of the year should be on stream in the third quarter as operations are de-bottlenecked. Rock was active during the quarter acquiring land and seismic which has set up several operated drilling locations for the second half of the year in our West Central core area targeting gas. Rock's current capital budget for 2006 is $30 million, which anticipates drilling 15 - 20 wells in the remainder of the year and spending an additional $5 million on land.

Liquidity and Capital Resources

Rock currently projects capital expenditures for the remainder of the year of approximately $20 million and cash flow from operations of approximately $15 million. The Company intends to primarily fund capital expenditures in excess of cash flow of $5 million and its current working capital deficit in excess of bank lines of approximately $4 million through proceeds from the asset rationalization process. Rock anticipates selling approximately 250 boe per day of production prior to the end of July 2006. The Company will continue to monitor capital, debt and cash flow levels and make adjustments necessary in order to restore and maintain a projected debt to cash flow level of 1.5 to 1 or less.

The Company has a demand operating loan facility with a Canadian chartered bank. The facility is subject to the bank's valuation of the Company's oil and gas assets and the initial credit available is $27 million. The facility bears interest at the bank's prime rate or at prevailing banker's acceptance rate plus an applicable bank fee. The facility also bears a standby charge for un-drawn amounts. The facility is secured by a first ranking floating charge on all real property of the Company, its subsidiary and partnership and a general security agreement. The next interim review for the facility is scheduled to be completed by July 31, 2006. As at May 10, 2006 approximately $26.3 million was drawn under the facility.



Selected Quarterly Data

The following table provides selected quarterly information for Rock.

------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 3 Months 3 Months 3 Months
Ended Ended Ended Ended Ended
03/31/06 12/31/05 09/30/05 06/30/05 03/31/05
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
------------------------------------------------------------------------
Production
(boe/d) 2,594 2,120 1,343 693 309

Oil and gas
revenues
('000) $ 9,824 $ 11,760 $ 7,031 $ 2,924 $ 1,159

Price
realizations
($/boe) $ 42.08 $ 60.29 $ 56.90 $ 46.36 $ 41.65

Royalties
($/boe) $ 12.26 $ 13.67 $ 11.61 $ 10.39 $ 9.73
Operating
expense
($/boe) $ 11.55 $ 11.83 $ 13.19 $ 8.62 $ 9.49
Field
netback
($/boe) $ 18.27 $ 34.79 $ 32.10 $ 27.35 $ 22.43

Net G&A
expense
('000) $ 649 $ 526 $ 329 $ 282 $ 274

Stock-based
compensation
('000) $ 280 $ 257 $ 131 $ 55 $ 42

Cash flow
from
operations
('000) $ 3,404 $ 6,020 $ 3,552 $ 1,469 $ 392
Per share
- basic $ 0.17 $ 0.31 $ 0.18 $ 0.11 $ 0.04
- diluted $ 0.17 $ 0.31 $ 0.18 $ 0.11 $ 0.04

Net income
('000) $ (1,074) $ 747 $ 634 $ 77 $ 51
Per share
- basic $ (0.05) $ 0.04 $ 0.03 $ 0.01 $ 0.01
- diluted $ (0.05) $ 0.04 $ 0.03 $ 0.01 $ 0.01

Capital
expenditures
('000) $ 9,728 $ 7,768 $ 7,920 $ 66,411 $ 2,138
------------------------------------------------------------------------
------------------------------------------------------------------------

As at As at As at As at As at
03/31/06 12/31/05 09/30/05 06/30/05 03/31/05
------------------------------------------------------------------------
Working
capital
('000) $(30,766) $(24,442) $(22,643) $(18,093) $10,297
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
------------------------------------------------------------------------
3 Months 3 Months 3 Months
Ended Ended Ended
12/31/04 09/30/04 06/30/04
(unaudited) (unaudited) (unaudited)
------------------------------------------------------------------------
Production (boe/d) 201 165 171

Oil and gas revenues ('000) $ 863 $ 653 $ 662

Price realizations ($/boe) $ 46.48 $ 42.90 $ 42.54

Royalties ($/boe) $ 3.73 $ 14.70 $ 11.08
Operating expense ($/boe) $ 8.48 $ 9.15 $ 7.67
Field netback ($/boe) $ 34.27 $ 19.05 $ 23.79

Net G&A expense ('000) $ 361 $ 227 $ 160

Stock-based compensation ('000) $ 58 $ 51 $ 46

Cash flow from operations ('000) $ 404 $ 237 $ 276
Per share - basic $ 0.04 $ 0.03 $ 0.03
- diluted $ 0.04 $ 0.03 $ 0.03

Net income ('000) $ 183 $ 85 $ 145
Per share - basic $ 0.02 $ 0.01 $ 0.02
- diluted $ 0.02 $ 0.01 $ 0.02

Capital expenditures ('000) $ 3,852 $ 1,063 $ 1,019
------------------------------------------------------------------------
------------------------------------------------------------------------
As at As at As at
12/31/04 09/30/04 06/30/04
------------------------------------------------------------------------
Working capital ('000) $12,043 $14,497 $15,323
------------------------------------------------------------------------
------------------------------------------------------------------------


Production has grown steadily over the past six quarters as the Company's grass roots exploration development activities have gained momentum and the property acquisitions in the second quarter of 2005 were closed. Cash flow from operations in the first quarter of 2006 decreased by 43% from the fourth quarter of 2005 to $3.4 million ($0.17 per basic and fully diluted share) and net income decreased to a loss of $1.1 million ($0.05 per basic and fully diluted share). These reductions in financial performance are primarily due to significantly lower gas price realizations ($7.76/mcf compared to $12.06/mcf in the prior quarter), and though oil prices improved during the period, heavy oil differentials widened. At the present time the futures market for gas prices has them recovering in the fourth quarter of 2006, and heavy oil differentials have already narrowed significantly, currently generating a wellhead price of over $45.00/bbl compared to the $24.84/bbl we received during the first quarter of 2006. Operating expenses per boe generally started to increase from the second quarter of 2005 due to the higher cost nature of the properties acquired and from the start up of heavy oil operations, which tend to have higher cost for the first several months of operations. Over the last three quarters operating costs per boe have started to trend down. The field netback had been rising with stronger product prices more than offsetting higher royalties and operating expenses. However the decrease in gas prices and the higher component of heavy oil as a percentage of production in the first quarter of 2006 has reduced the field netback per boe. We expect that the field netback per boe will remain below the levels seen in the last half of 2005 until gas prices improve.

Contractual Obligations

In the course of its business the Company enters into various contractual obligations including the following:

- royalty agreements,

- processing agreements,

- right of way agreements, and

- lease obligations for leased premises.

Obligations with a fixed term for the remainder of 2006 and the next five years are as follows:



------------------------------------------------------------------------
------------------------------------------------------------------------
2006 2007 2008 2009 2010 2011
------------------------------------------------------------------------
Office lease
premises ('000) $ 342 $676 $895 $828 $828 $828
Demand bank
loan ('000) $26,316
------------------------------------------------------------------------
------------------------------------------------------------------------


Outstanding Share Data

Subsequent to March 31, 2006 the Company issued 45,000 stock options. At the date of this report there are 19,637,321 common shares outstanding and 1,355,332 options to purchase common shares outstanding.




ROCK ENERGY INC.
Consolidated Balance Sheets

March 31, 2006 and December 31, 2005
(unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
(all amounts in '000) March 31, 2006 December 31, 2005

------------------------------------------------------------------------
Assets

Current Assets:
Cash and cash equivalents $ 219 $ 145
Accounts receivable 6,265 7,094
Prepaids 589 385
------------------------------------------------------------------------
7,073 7,624

Property, plant and equipment 105,114 95,270
Accumulated depletion and depreciation (13,526) (8,892)
------------------------------------------------------------------------
91,588 86,378

Goodwill 5,602 5,602

------------------------------------------------------------------------
$ 104,263 $ 99,604
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current Liabilities:
Accounts payable and accrued liabilities $ 11,523 $ 9,090
Bank debt (note 4) 26,316 22,976
------------------------------------------------------------------------
37,839 32,066

Future tax liability 4,777 5,204
Asset retirement obligation (note 5) 2,264 2,115

Shareholders' Equity:
Share capital (note 2) 57,326 57,369
Contributed surplus (note 2) 734 453
Retained earnings 1,323 2,397
------------------------------------------------------------------------
59,383 60,219

------------------------------------------------------------------------
$ 104,263 $ 99,604
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.


ROCK ENERGY INC.
Consolidated Statements of Income and Retained Earnings
(unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
(all amounts in '000 except per Three months Three months
share amounts) ended ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Revenues
Oil and gas revenue $ 9,824 $ 1,159
Royalties, net of ARTC (2,862) (271)
Other income 45 34
------------------------------------------------------------------------
7,007 922
Expenses:
Operating 2,695 264
General and administrative 649 274
Interest 243 -
Stock based compensation (note 3) 280 42
Depletion, depreciation and accretion 4,668 299
------------------------------------------------------------------------
8,535 879
------------------------------------------------------------------------
(Loss) Income before income taxes (1,528) 43

Taxes
Current (recovery) (note 6) - (8)
Capital 16 -
Future taxes (note 6) (470) -
------------------------------------------------------------------------
Net (loss) income for the period (1,074) 51

Retained earnings, beginning of period 2,397 887

------------------------------------------------------------------------
Retained earnings, end of period $ 1,323 $ 938
------------------------------------------------------------------------
------------------------------------------------------------------------

Basic and diluted (loss) earnings per
share (note 2) $ (0.05) $ 0.01
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.


ROCK ENERGY INC.
Consolidated Statements of Cash Flows
(unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
(all amounts in '000) Three months Three months
ended ended
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Cash provided by (used in):

Operating:
Net (loss) income for the period $ (1,074) $ 51
Add: Non-cash items:
Depletion, depreciation and accretion 4,668 299
Stock-based compensation 280 42
Future taxes (recovery) (470) -
------------------------------------------------------------------------
3,404 392
Changes in non-cash working capital 777 (1,232)
------------------------------------------------------------------------
4,181 (840)

Financing:
Bank debt 3,340 -
------------------------------------------------------------------------
3,340 -

Investing:
Property, plant and equipment (9,728) (2,138)
Changes in non-cash working capital 2,281 (290)
------------------------------------------------------------------------
(7,447) (2,428)

------------------------------------------------------------------------
Increase/(decrease) in cash and cash
equivalents 74 (3,268)

Cash and cash equivalents, beginning of
period 145 8,632

------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 219 $ 5,364
------------------------------------------------------------------------
------------------------------------------------------------------------

Interest and cash taxes paid and received:
Interest paid $ 243 -
Interest received - $ 34
Cash taxes paid $ 16 -
Cash taxes received - $ 8
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.


Notes to the Consolidated Financial Statements

For the Period Ended March 31, 2006 (all amounts in '000 unless otherwise stated)

These unaudited interim consolidated financial statements include the accounts of Rock Energy Inc. ("Rock" or the "Company") and its wholly-owned subsidiary, Rock Energy Ltd. These unaudited interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the audited financial statements for the year-ended December 31, 2005. The disclosures herein are incremental to those included with the annual consolidated financial statements. These unaudited interim consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company's annual report for the year-ended December 31, 2005.

1. Acquisition of ELM/Optimum/Qwest

On March 14, 2005 the Company agreed to acquire in two separate closings from 14 different entities (six private companies and eight drilling fund partnerships) petroleum and natural gas properties mainly through their various subsidiary companies. The transactions have been accounted for using the purchase method with the results of operations for each transaction included in the Financial Statements from the date of acquisition.

The first closing of the Elm/Optimum Properties occurred on April 7th, 2005. The Company purchased all of the outstanding shares of 1143734 Alberta Ltd. and assets were purchased directly from three private entities and four drilling fund partnerships. The second closing of the Qwest properties occurred on June 17th, 2005. The Company purchased all of the outstanding shares of 1156168 Alberta Ltd., 1159203 Alberta Ltd. and 1140511 Alberta Ltd. As a result of the acquisition the prior period financial statements will not be comparable to the current period.



2. Share Capital and Contributed Surplus

Authorized:

Unlimited number of voting common shares, without stated par value.
300,000 preference shares, without stated par value.

Common Shares issued:

------------------------------------------------------------------------
Number Consideration
('000)
------------------------------------------------------------------------
Issued and outstanding on
December 31, 2005 19,637,321 $57,369
------------------------------------------------------------------------
Future tax effect of flow-through
share renouncements (43)
------------------------------------------------------------------------
Issued and outstanding on March 31, 2006 19,637,321 $57,326
------------------------------------------------------------------------


As of March 31, 2006 Rock had fulfilled the required drilling and exploration activities pursuant to the flow through share commitments and renounced all expenditures in February 2006.

Per share amounts:

Per share amounts have been calculated on the weighted average number of shares outstanding. The weighted average shares outstanding of the three month period ended March 31, 2006 was 19,637,321 (March 31, 2005 - 9,259,453).

In computing the diluted per share amount for the three month period ended March 31, 2006 an additional 76,350 shares (March 31, 2005 - 73,614) shares were added to the weighted average number of shares outstanding for the dilutive effect of employee stock options.

Stock options:

The Company has a stock option plan ("Plan") under which it may grant options to directors, officers and employees for the purchase of up to 10% of the issued and outstanding common shares of the Company. Options are granted at the discretion of the board of directors. The exercise price, vesting period and expiration period are also fixed at the time of grant at the discretion of the board of directors. The options vest yearly in one-third tranches beginning on the first anniversary of the grant date and expire one year after vesting. The following tables summarize the stock options outstanding at March 31, 2006.



------------------------------------------------------------------------
Weighted
Number Average
Of Exercise
Options Price
------------------------------------------------------------------------
December 31, 2005 1,120,332 $4.51
Granted 190,000 $4.64
------------------------------------------------------------------------
March 31, 2006 1,310,332 $4.53
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Outstanding Options Exercisable Options
------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Exercise Of Exercise Years to Of Exercise
Prices Options Price Expiry Options Price
------------------------------------------------------------------------
$3.39 - 3.90 342,388 $3.51 1.4 155,778 $3.47
$4.00 - 5.11 967,944 $4.89 2.5 - -
------------------------------------------------------------------------
1,310,332 $4.53 2.2 155,778 $3.47
------------------------------------------------------------------------


Contributed Surplus:

The contributed surplus as at March 31, 2006 of $734 increased $281 for stock based compensation charges.

3. Stock Based Compensation

Options granted are accounted for using the fair value method. The fair value of the 190,000 common share options granted during the three months ended March 31, 2006 was estimated to be $351. The fair value of these common share options as at the grant dates is determined using a Black-Scholes option pricing model and the following assumptions:



Risk free interest rate: 5.25 - 5.50% Expected volatility: 50 - 55%
Expected life: 3 year average Expected dividend yield: 0%


4. Bank Debt

The Company has a demand operating facility with a Canadian chartered bank subject to the bank's valuation of the Company's oil and gas properties. The current limit under the facility is $27 million. The facility is secured by a first ranking floating charge on all real property of the Company, its subsidiary and partnership and a general security agreement. The facility bears interest at the bank's prime rate or at prevailing banker's acceptance rate plus an applicable bank fee it also bears a standby charge for un-drawn amounts. The next interim review for the facility is to be completed by July 31, 2006.

5. Asset Retirement Obligation

The asset retirement obligation result from net ownership interests in petroleum and natural gas assets including well sights, gathering systems and processing facilities. The Company estimates the total undiscounted amount of cash flows required to settle its asset retirement obligation at March 31, 2006 at approximately $3,430 (December 31, 2005 - $3,385). A credit adjusted risk free rate of 8% was used to calculate the fair value of the asset retirement obligation.



The following table outlines a reconciliation of the asset retirement
obligation:


------------------------------------------------------------------------
Asset retirement obligation March 31, December 31,
2006 2005
------------------------------------------------------------------------
Opening balance $ 2,115 $ 500
Liabilities incurred during period 116 1,583
Accretion 33 76
Actual retirement costs - (44)
------------------------------------------------------------------------
Closing balance $ 2,264 $ 2,115
------------------------------------------------------------------------


6. Income Taxes

The provision for income taxes in the consolidated statements of income and retained earnings varies from the amount that would be computed by applying the expected tax rate to net income before income taxes. The expected tax rate used was 35.62% (March 31, 2005: 37.62%). The principal reasons for differences between such "expected" income tax expense and the amount actually recorded are as follows:



------------------------------------------------------------------------
March 31, March 31,
2006 2005
------------------------------------------------------------------------
Net (loss) income before taxes $(1,528) $ 43
Statutory income tax rate 35.64% 37.62%
------------------------------------------------------------------------
Expected income taxes (544) 16
Add (deduct):
Stock-based compensation 100 16
Non-deductible crown charges 315 57
Resource allowance (169) (36)
Change in Rate (182) -
Other 10 -
Change in valuation allowance - (53)
------------------------------------------------------------------------
Provision (recovery) for income taxes (470) Nil
Current tax recovery of prior period - (8)
Large Corporation Tax 16
------------------------------------------------------------------------
Provision (recovery) for income taxes $ (454) $ (8)
------------------------------------------------------------------------


Advisory

This press release contains forward-looking statements that involve known and unknown risks, uncertainties, assumptions and other factors, some of which are beyond Rock's control, that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Rock believes that the expectations reflected in those forward-looking statements are reasonable at the time made but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in, or incorporated by reference into, this press release should not be unduly relied upon. These statements speak only as of the date of such information, as the case may be, and may be superseded by subsequent events. Rock does not intend, and does not assume any obligation, to update these forward-looking statements.

This press release contains references to barrels of oil equivalent (boe), boes maybe misleading, particularly if used in isolation. A boe conversion of 6 mcf to 1 barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Contact Information

  • Rock Energy Inc.
    Allen Bey
    President & CEO
    (403) 218-4380
    or
    Rock Energy Inc.
    Peter D. Scott
    Vice President, Finance & CFO
    (403) 218-4380
    Website: www.rockenergy.ca