Valiant Energy Inc.
TSX : VLE

Valiant Energy Inc.

May 15, 2006 09:10 ET

Valiant Energy Releases Q1 Results and Provides a Summary of Recent Activity

CALGARY, ALBERTA--(CCNMatthews - May 15, 2006) - Valiant Energy Inc. (TSX:VLE) ("Valiant" or the "Company") releases the results of its March 31, 2006 first quarter results.

Valiant is a new exploration and development company, now reporting its third quarter of operations since inception on July 7, 2005. During this short time frame, production has increased 400% (300 boe/d to a current level of approximately 1,200 boe/d), reserves have increased by 69% to a December 31, 2005 balance of 2.2 mmboe and cash flow has grown by 350% from July, 2005 ($180,000/month) to March, 2006 ($625,000/month).

In its three key properties at Niton, Leaman and Bigstone in Alberta, Valiant has moved from the exploration and deliniation phase of reservoir development to the development of programs for downspacing and infill drilling. The result is a drilling inventory of over 75 locations and substantial potential production additions. In addition the Company is continuing to drill exploratory wells with high reward potential, including two recent wells in the Peace River Arch area of Alberta.

Our results for the first quarter and a summary of our recent activity are provided below:

Highlights

- Valiant drilled 6 (2.28 net) wells in the quarter resulting in 3 (1.33 net) oil wells, 1 (0.25 net) gas well and 2 (0.82 net) dry holes.

- Valiant drilled, cased and completed three (1.33 net) wells in the Niton area. These wells have been tied in for production during May and are expected to produce at a stabilized rate of approximately 220 boe/d (100 boe/d net).

- Valiant completed the water injection system at its Leaman, Alberta property in order to reduce future operating costs.

- Valiant completed a 3D seismic program over its Leaman Pekisko pool resulting in additional drilling opportunities.

- Valiant drilled an exploratory Banff gas well in the Grand Prairie area during the quarter. In April this well was cased with completion operations commencing in May 2006.

- Valiant is currently drilling an exploratory Beaverhill Lake well in the Puskwaskau area of northwest Alberta. This is a high risk, high reward prospect in which Valiant is participating for 20% of the drilling costs and will be entitled to 48% of the revenue after payout of a successful well.

- Cash flow for the quarter was $1.677 million ($0.10 per share) compared to $2.693 million ($0.16 per share) in Q4 2005. The decrease was attributable primarily to lower realized prices for natural gas which reduced revenue by $1.53 million compared to Q4 2005.



Q1 Results

Production

Q1 2006 Q4 2005 Q3 2005
------------------------------------------------------------------------

Natural gas (mmcf/d) 3,192 2,815 1,549
Oil and liquids (bbls/d) 683 749 410
Barrels of oil equivalent (boe/d) 1,215 1,219 668


- Natural gas production increased in the Bigstone, Alberta area as two new wells brought on stream in December produced as expected for the entire first quarter.

- Oil production declined in the Leaman, Alberta area as the production characteristics of the wells moved from flush production to a more mature production profile. Oil production increased in the Niton area to 280 boe/d net as Valiant drilled and placed on production three (1.33 net) wells in the second quarter.



Revenue

Q1 2006 Q4 2005 Q3 2005
------------------------------------------------------------------------

Cash flow from operations ($000's) 1,677 2,693 1,655
Per basic share ($) 0.10 0.16 0.11
Net loss ($000's) (1,051) (202) (62)
Per basic share ($) (0.06) (0.01) (0.00)


- Revenue for the quarter was $4.96 million compared to $6.26 million in Q4 2005. The decrease in revenue and the resultant decrease in cash flow and earnings results from a 35% drop in natural gas prices from an average of $11.36 in Q4 2005 to $7.06 in Q1 2006.

- The impact of lower gas prices was a decrease of $1.5 million in natural gas revenues from Q4 2005 levels. This was partially offset by higher oil prices.

- Production remained constant between Q1 2006 and Q4 2005.



Capital Expenditures

Q1 2006 Q4 2005 Q3 2005
------------------------------------------------------------------------

Capital expenditures ($000's) 7,354 10,658 10,533
Net wells drilled
Completions 1.46 3.75 4.35
Dry 0.82 2.00 0.25
Net success rate 64% 65% 95%


- During Q1 2006 the Company drilled and completed three (1.33 net) oil wells in the Niton, Alberta area and one (0.25 net) gas well in the Bigstone, Alberta area. The oil wells commenced production in the second quarter of 2006 and the gas well is expected to commence production in the third quarter 2006.

Liquidity

The net debt and working capital at March 31, 2006 was $13.3 million. The company has a borrowing base line of credit of $16.0 million. Our next review of the borrowing base is expected to be early in Q3 2006.

Recent Operations

Niton - Valiant now has interests ranging from 33 percent to 55 percent in seven wells producing light oil from the Rock Creek formation, with current net production of approximately 280 boe/d. Valiant drilled three (1.33 net) wells in the first quarter and tied in these wells. Initial production additions are 225 boe/d (100 net) of light oil. The company has several additional drilling locations on its lands, some of which will require downspacing approval from the EUB. Further development of this pool has the potential to add 700 boe/d of net initial production to Valiant.

Leaman - Valiant has had an 83 percent drilling success rate to date at the Leaman property, targeting Pekisko oil and Basal Quartz natural gas. The Company has now installed central fluid handling and gas conservation facilities for the Leaman pool, as well as water injection facilities to enhance oil recoveries and reduce operating costs. Current production is approximately 500 boe/d from this area. During Q1 2006 the Company completed and evaluated a 3D seismic program over the Pekisko pool. The seismic indicates several potential drilling locations on Company lands.

Peace River Arch - During December 2005, Valiant drilled a well (100 percent working interest) in the Progress area. This well was tied in during the quarter and production commenced in early Q2 at over 100 boe/d. Additional development locations are being considered. In the Grande Prairie area, the Company initiated the drilling of a Banff Formation exploratory test (35 percent working interest and 61 percent revenue interest) at 02/6-3-72-4W6 during Q1 2006. The well was cased in Q2 2006 and completion will be undertaken in May 2006. In April, Valiant spudded a high risk, high reward exploratory well targeting the Beaverhill Lake and Granite Wash formations in the Puskwaskau area. The well will be drilled to an anticipated depth of 3200 metres.

Bigstone - At Bigstone the Company drilled, cased and completed its fourth well into a Gething natural gas pool. The well is expected to be tied in during the second quarter. Net production from this area is 160 boe/d of natural gas. Valiant believes this Gething pool is an ideal candidate for downspacing. Many analogous pools in the area have been downspaced to four wells per section. Valiant will be working with its partner to obtain downspacing approval as it believes at least 16 additional wells could be drilled during next winter's drilling season if approval is obtained. There is the potential to add an incremental 800 boe/d of production net to Valiant from the Bigstone property.

Outlook

Valiant has an extensive inventory of exploration and development drilling locations. These will provide a ready supply of opportunities to continue Valiant's track record of drilling success. Valiant will focus in the near term on continued development of its light oil, high netback operations in the Niton area and its resource gas project at Bigstone in central Alberta. In addition, it will also be drilling or evaluating high impact exploratory wells in the Peace River Arch areas of Grand Prairie and Puskwaskau in northwest Alberta.

Valiant is a Calgary, Alberta based oil and gas exploration and production company whose shares trade on the Toronto Stock Exchange under the trading symbol "VLE".

FORWARD LOOKING STATEMENTS

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

A barrel of oil equivalent (boe) is derived by converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil and may be misleading, particularly if used in isolation. A boe conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)

Valiant Energy Inc. ("Valiant" or "the Company") is an exploration and development company pursuing conventional oil and natural gas production and reserves through exploration and development in Alberta and British Columbia.

Commencement of Operations

Valiant commenced operations on July 7, 2005 following the acquisition of undeveloped lands and certain properties in Alberta and in British Columbia from Forte Resources Inc. ("Forte"). Production from these acquired properties was approximately 300 boe/d at the commencement of operations.

Valiant commenced trading on the Toronto Stock Exchange on July 12, 2005 under the symbol "VLE"

Information is presented in the Management's Discussion and Analysis (MD&A) under the following headings which represent operations for the respective periods as follows:



------------------------------------------------------------------------
Heading Represents operations for:
------------------------------------------------------------------------
Q1 The 90 day period ended March 31, 2006
------------------------------------------------------------------------
2005 The 178 day period from July 7, 2005 to December 31, 2005
------------------------------------------------------------------------
Q4 The 92 day quarter ended December 31, 2005
------------------------------------------------------------------------
Q3 The 86 day quarter from July 7, 2005 to September 30, 2005
------------------------------------------------------------------------


Amounts presented on a daily basis are calculated based on the number of days in the respective periods.

This MD&A describing the financial condition and the results of operations should be read in conjunction with the audited consolidated financial statements for the period ended December 31, 2005 together with the accompanying notes. Readers should be aware that historical results are not necessarily indicative of future performance. Additional information relating to the Company can be viewed or downloaded at www.valiantenergy.ca or www.sedar.com

Production information is commonly reported in units of barrel of oil equivalent ("boe") which may be misleading, particularly if used in isolation. For purposes of computing such units, barrel of oil equivalent amounts have been calculated using an energy equivalence conversion rate of six thousand cubic feet of natural gas to one barrel of oil (6:1). The conversion ratio of 6:1 is based on an energy equivalency conversion method, which is primarily applicable at the burner tip and does not represent a value equivalence at the wellhead.

The financial information presented has been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). The reporting and measurement currency is the Canadian dollar.

Forward Looking Statements

The information herein contains forward-looking statements and assumptions. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "protect", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe", "would" and similar expressions. Such statements and assumptions also include those relating to guidance, results of operations and financial condition, capital spending, financing sources, commodity prices, costs of production and the magnitude of oil and gas reserves. By their nature, forward-looking statements are subject to numerous known and unknown risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, actual results may differ materially from those predicted. Valiant is exposed to numerous operational, technical, financial and regulatory risks and uncertainties, many of which are beyond its control and may significantly affect anticipated future results.

Operations may be unsuccessful or delayed as a result of competition for services, supplies and equipment, mechanical and technical difficulties, ability to attract and retain employees on a cost-effective basis, commodity and marketing risk and seasonality. The Company is subject to significant drilling risks and uncertainties including the ability to find oil and natural gas reserves on an economic basis and the potential for technical problems that could lead to well blowouts and environmental damage. The Company is also exposed to risks relating to the inability to obtain timely regulatory approvals, surface access, access to third party gathering and processing facilities, transportation and other third party related operational risks. Furthermore, there are numerous uncertainties in estimating the Company's reserve base due to the complexities in estimated future production, costs and timing of expenses and future capital. Financial risks Valiant is exposed to include, but are not limited to, access to debt or equity markets and fluctuations in commodity prices, interest rates and the Canadian/US dollar exchange rate. The Company is subject to regulatory legislation, the compliance with which may require significant expenditures and non-compliance with which may result in fines, penalties or production restrictions. For additional information on risk factors, refer to Valiant's annual information form, which will be posted at www.sedar.com prior to March 31, 2006.

The forward looking statements contained herein are as of May 11, 2006 and are subject to change after this date. 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, undue reliance should not be placed on forward-looking statements. Except as required by law, Valiant disclaims any intention or obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.



Non-GAAP Measures

Valiant management uses and reports certain measures not prescribed by generally accepted accounting principles (referred to as "non-GAAP measures") in the evaluation of operating and financial performance. Cash flow from operations, which is expressed before asset retirement expenditures and changes in non-cash working capital, is used by the Company to analyze operating performance, leverage and liquidity. Operating netback, which is calculated as average unit sales prices less royalties and operating expenses, and corporate netback, which further deducts administrative and interest expense, represent net cash margin calculations for every barrel of oil equivalent sold. Net debt and working capital, which is current assets less current liabilities and bank debt, is used to assess efficiency and financial strength. Cash flow from operations, operating netback, corporate netback and net debt and working capital do not have any standardized meanings prescribed by Canadian GAAP and therefore may not be comparable with the calculation of a similar measure for other companies. The Company uses these terms as an indicator of financial performance because such terms are often utilized by investors to evaluate junior producers in the oil and natural gas sector.



Selected Quarterly Information
2006 2005
------------------------------
Q1 Q4 Q3(1)
------------------------------------------------------------------------
Production
Natural gas (mcf/d) 3,192 2,815 1,549
Oil and natural gas liquids (bbls/d) 683 749 410
Barrels of oil equivalent (boe/d) 1,215 1,219 668

Financial ($000s except as indicated)
Petroleum and natural gas revenue 4,960 6,263 3,293
Revenue net of royalties 3,786 4,372 2,681

Cash flow from operations 1,677 2,693 1,655
Per share basic ($) 0.10 0.16 0.11
Per share diluted ($) 0.10 0.16 0.10

Net earnings (loss) (1,051) (202) (62)

Total assets 64,301 61,296 50,309
Capital expenditures 7,354 10,658 10,533
Net debt and working capital (deficiency) (13,294) (7,619) (5,228)
Total liabilities 21,719 15,813 10,919

Shares outstanding (000s) 17,277 17,277 16,186

Per unit information
Natural gas revenue ($/mcf) 7.06 12.33 8.95
Oil and natural gas liquids revenue ($/bbl) 47.71 44.53 54.18
Oil equivalent revenue ($/boe) 45.38 55.87 53.98

Operating netback ($/boe) 24.60 29.31 33.79

Net wells drilled
Natural gas 0.25 1.07 1.23
Oil 1.33 2.68 3.12
Dry 0.82 2.00 0.25
------------------------------
Total 2.50 5.75 4.60

Net success rate (%) 64% 65% 95%

Undeveloped land holdings (net acres) 92,000 90,000 88,000
Average Working Interest 59% 57% 57%
------------------------------------------------------------------------


Q1 Highlights

- negotiated a $16.0 million revolving credit facility at an interest rate of lender's prime plus 0.25%.

- incurred capital expenditures of $7.4 million on land, geological and geophysical, drilling, completion and equipping.

- drilled 6 (2.50 net) wells resulting in 1 (0.25 net) gas well, 3 (1.33 net) oil wells and 2 (0.82 net) dry wells.

- commenced drilling of a seventh (0.35 net) well in the Grande Prairie area. The well was cased subsequent to March 31, 2006 with completion operations expected in May, 2006. Valiant receives 61% of production revenue while incurring 35% of the capital costs of this well.

- initiated work to equip and connect 5 (2.4 net) wells of which two commenced production in Q2 and the remaining three are expected to be on production later in Q2.

- completed water injection facilities at Leaman which eliminates water handling and processing fees, thus lowering operating costs in that area.

- completed a 3D seismic program at our Leaman property resulting in additional prospective drilling locations

- experienced a decline in gas prices from an average of $12.70 to $7.38 (AECO 30 day spot) reducing Valiant's revenue and cash flow by $1.5 million ($1.1 million net of royalties).


Operating results

Valiant's operating results are summarized in the table below. Highlights of Q1 operations for Valiant were:

- production remained constant with increased gas production due to successful drilling in the Bigstone area offsetting lower oil production in the Leaman area.

- gas prices declined in Q1 2006 as the 30 day Spot AECO price fell from $12.70 in January to $7.38 in March, a 42% decline.

- maintained operating costs at $10.04 per boe during Q1 2006 compared to $9.70 per boe in Q4 2005.

- paid bonuses to staff of $460,000 in Q1 2006, accounting for 38% of Q1 2006 G&A expenses. G&A expenses without the bonuses would be $5.13/boe, which is comparable to Q4 2005.

- incurred higher interest costs as debt levels increased.




Q1 2006 Q4 2005 Q3 2005
---------------------------------------------
$000's $/boe $000's $/boe $000's $/boe
------------------------------------------------------------------------
Revenue
Oil and liquids 2,933 47.71 3,071 44.53 2,021 54.18
Natural gas 2,027 42.36 3,192 73.98 1,272 53.67
--------------------------------------------
4,960 45.38 6,263 55.87 3,293 53.98
--------------------------------------------
Cash expenditures
Royalties 1,174 10.74 1,891 16.86 612 10.03
Operating 1,097 10.04 1,087 9.70 620 10.16
General and administrative 901 8.24 565 5.04 383 6.28
Interest 110 1.01 27 0.24 23 0.38
--------------------------------------------
3,282 30.03 3,570 31.84 1,638 26.85
--------------------------------------------
Corporate net back 1,678 15.35 2,693 24.03 1,655 27.13

Non cash expenditures
Stock based compensation 168 1.54 169 1.51 168 2.75
Depletion, depreciation &
accretion 3,004 27.48 2,608 23.27 1,512 24.79
Future income taxes
(benefit) (443) (4.05) 118 1.05 37 0.61
--------------------------------------------
Net (loss) (1,051) (9.62) (202) (1.80) (62) (1.02)
--------------------------------------------
--------------------------------------------


Revenue

Oil and gas revenue for Q1 2006 declined by $1.3 million from Q4 2005 due to three factors:

- lower oil and liquids production which declined from 749 bbls/d to 683 bbls/d.

- weaker natural gas prices in February and March 2006.

- a higher differential on our medium gravity oil in February 2006.

The relative impact of these factors is demonstrated in the table below:



Medium Liquids and Natural
$000's Gravity Oil Light Oil Gas Total
------------------------------------------------------------------------
Q4 2005 revenue 2,262 809 3,192 6,263
Price impact (94) 269 (1,513) (1,338)
Production impact (417) 104 348 35
-----------------------------------------------
Q1 2005 revenue 1,751 1,182 2,027 4,960
-----------------------------------------------
-----------------------------------------------


Production of oil and liquids declined as wells produced beyond their initial periods of flush production. Gas production increased as additional Bigstone wells tied in during December 2005 produced for the entire quarter.



Production

Production for the recent quarters was as follows:

Q1/06 Q4/05 Q3/05
------------------------------------------------------------------------
Oil and natural gas liquids (bbls/d) 683 749 410
Natural gas (mmcf/d) 3,192 2,815 1,549
Oil equivalent (boe/d) 1,215 1,219 668

The Company's average prices realized as compared to benchmark prices
were as follows:

$/bbl
---------------------------
Crude Oil and Liquids Q1/06 Q4/05 Q3/05
------------------------------------------------------------------------
Edmonton light 69.36 71.65 77.05
Company average 47.71 44.53 54.18
---------------------------
Differential (21.65) (27.12) (22.87)
---------------------------
---------------------------


Valiant realizes a lower price than Edmonton light price because the Leaman Pekisko oil pool produces medium gravity oil. The differential declined to an average of $21.65 in Q1 2006 from prior quarters because production of medium gravity oil declined as a portion of total production and in absolute terms. The differential between Edmonton light and medium gravity oil has declined significantly from its February and March highs.



$/mcf
------------------------------
Natural Gas Q1/06 Q4/05 Q3/05
------------------------------------------------------------------------
AECO daily spot 7.34 11.36 9.30
Company average 7.06 12.33 8.94
------------------------------
(0.28) 0.97 (0.36)
------------------------------
------------------------------


The Company's natural gas is sold in the spot market and the prices received are generally tied to the AECO daily spot rate subject to adjustments for heating content.



Royalties

Royalty expense relative to revenue is analyzed in the following table:

$000's
------------------------------
Q1/06 Q4/2005 Q3/2005
------------------------------------------------------------------------
Revenue 4,960 6,263 3,293
Royalties (net of ARTC) 1,174 1,891 612
% 24 30 19
------------------------------


The ARTC is subject to an annual limit which is substantially earned in the first quarter of the year. The maximum ARTC for Alberta companies is $0.5 million which Valiant achieved in Q1, lowering the effective royalty rate compared to Q4 2005.



Operating Costs
Q1/06 Q4/05 Q3/05
----------------------------------------------------
$000's $/boe $000's $/boe $000's $/boe
------------------------------------------------------------------------
Production expense 568 5.21 490 4.37 474 7.77
Facility fees and
transportation 529 4.83 597 5.33 146 2.39
----------------------------------------------------
1,097 10.04 1,087 9.70 620 10.16
----------------------------------------------------



Water trucking and water processing costs for our Leaman property were eliminated as a new water injection well became fully operational in March, 2006. Therefore, future quarters will benefit from lower operating costs.



General and Administrative ("G&A")

An analysis of G&A costs by their nature is provided in the table below:

Q1/06 Q4/05 Q3/05
----------------------------------------------------
$000's % $000's % $000's %
------------------------------------------------------------------------
Human resource
costs 572 42 458 51 358 51
Bonuses 460 34
Corporate and
general 317 24 437 49 347 49
----------------------------------------------------
1,349 100 895 100 705 100


Recoveries from
partners (109) 10 (174) 19 (127) 18
Portion capitalized (339) 24 (156) 18 (195) 28
----------------------------------------------------
Net expense 901 66 565 63 383 54
----------------------------------------------------
----------------------------------------------------


G&A without the bonuses would have been $5.13/boe which is comparable to Q4 2005 of $5.04/boe.

General and administrative costs are reduced by amounts charged to joint venture partners on a cost recovery basis and by capitalized costs. Capitalized general and administrative costs represent the direct cost of geological salaries (including bonuses and stock compensation expense) and services that are related to the Company's exploration program and are therefore capitalized as part of the cost of oil and gas properties and deducted from general and administrative expense.

Interest and Financing

Interest on Valiant's revolving loan is variable with a current rate at lender's prime plus 0.25%. Commitment and facility fees account for the rest of this expense.

Interest and financing costs were higher in Q1 2006 than prior quarters as bank debt was a larger component of Valiant's capital base.

Stock Based Compensation

Performance shares were issued to employees, directors and certain service providers. The performance shares (and stock options for more recently hired and future employees) are intended to be market competitive and provide the appropriate balance of short and long term employee incentives.



Depletion, Depreciation and Accretion (DD&A)

Q1/06 Q4/05 Q3/05
------------------------------
$000's $000's $000's
------------------------------------------------------------------------
Depletion of oil and gas assets 2,968 2,558 1,476
Depreciation of office and other assets 16 23 18
Accretion of retirement obligation 20 27 18
------------------------------
Total 3,004 2,608 1,512
------------------------------
$/ boe 27.48 23.27 24.79
------------------------------
------------------------------


Depletion expense is driven by production volumes, the capital cost base and reserve levels. The DD&A rate was $27.48/boe for this period and reflects the cost of the initial Forte acquisition of $26.28/boe.

Income Tax

In March 2006, the Company renounced $6.0 million of Canadian exploration expense ("CEE") expenditures pursuant to its flow through share agreement. By March 31, 2006 approximately $4.2 million of eligible expenditures had been incurred, with the balance to be incurred by December 31, 2006.



Capital expenditures and capital assets (000's)

Q1/06 Q4/05 Q3/05
------------------------------------------------------------------------
Land acquisitions and lease retention 395 783 1,134
Geological and geophysical 588 275 227
Drilling 2,550 4,375 3,546
Completion 1,577 2,389 1,750
Facilities and equipment 1,905 2,639 3,669
General and administrative capitalized 339 156 195
Other - 41 12
------------------------------
Capital expenditures 7,354 10,658 10,533
Acquisition from Forte - - 35,100
Asset retirement costs 66 275 112
------------------------------
Total additions 7,420 10,933 45,745
Capital assets - opening 52,603 44,194 -
Depletion and depreciation (2,984) (2,524) (1,551)
------------------------------
Capital assets - closing 57,039 52,603 44,194
------------------------------
------------------------------


Capital expenditures in Q1/06 related to the following:

- Drilling of 2.5 net wells: 0.25 net gas wells, 1.33 net oil wells and 0.82 dry wells at an average cost of approximately $1 million each. A seventh well was in progress at March 31, 2006.

- Acquiring 1,850 net acres of land.

- Completed a water injection system at Leaman at a cost of $0.6 million which will lower future operating costs in the area.

- Shot 3D seismic at Leaman at a cost of $0.5 million.

- Initiated equipping and tie-in of 5 gross (2.29 net) wells.

Liquidity

A review in Q1 2006 of Valiant's revolving line of credit resulted in an increase in the credit facility limit to $16 million. The Company meets its loan covenants which include quarterly tests of the working capital ratio and debt to trailing cash flow ratio. The Company also borrows by way of a Guaranteed Note (equivalent to banker's acceptance) with its lender which is subject to a stamping fee but lower overall borrowing costs than prime based lending. At March 31, 2006 the total debt and working capital deficiency was $13.3 million. The credit facility limit will be reviewed again in Q3 2006 in light of more production history for new wells. Valiant is reviewing its 2006 capital program and anticipates funding its 2006 capital program with the remaining credit line, funds from operations and equity issues as appropriate.



Contractual Obligations

The Company's office lease expires in 2009 and requires the following
payments:

------------------------------------------------------------------------
($000's) 2006 2007 2008 2009 Total
------------------------------------------------------------------------
(unaudited) 298 298 298 99 993
------------------------------------------------------------------------


Off-Balance Sheet Arrangements, Related Party Transactions and Financial Instruments

The Company has not entered into any off-balance sheet transactions, derivative or hedging contracts or any related party transactions.

Critical Accounting Estimates

Management is required to make judgments, assumptions and estimates in the application of generally accepted accounting principles that may have a significant impact on the financial results of the Company. The Company's significant accounting policies are described in Note 2 to the audited consolidated financial statements at December 31, 2005 and are discussed in our MD&A for Q4 2005.

New Standards in 2006 and 2007

In 2005, the Canadian Institute of Chartered Accountants issued the following new Handbook Sections: Section 1530, Comprehensive Income; Section 3251, Financial Instruments - Recognition and Measurement; and Section 3865, Hedges. The effective date for adoption for all sections is for fiscal years beginning on or after October 1, 2006.

These new accounting standards require that all financial instruments be recorded on the balance sheet at fair value and changes in fair value, be included in earnings, except for derivative financial instruments designated as hedges, for which changes in fair value will be included in comprehensive income.

The future impact of these new accounting policies will depend on the extent of derivative, hedging and other arrangements which Valiant may contract in the future. Thus, the impact cannot be determined at this time.

Business Risks

The business of exploration, development and acquisition of oil and gas reserves involves a number of business risks inherent in the oil and gas industry which may impact Valiant's results. These business risks can be generally grouped into two major areas: operational risks, which includes environmental risks, and financial risks.

Operationally, the Company faces risks associated with finding, developing and producing oil and gas reserves. The Company attempts to control operating risks by:

- maintaining a disciplined approach to implementation of the exploration and development program

- hiring experienced technical staff

- concentrating the exploration activity on regions where the Company has experience and expertise.

- striving for ownership levels and operator status which allows Valiant to manage costs, timing and sales of production.

Recoverable reserves and their future net cash flow are based on estimates of commodity prices, projected production and future operating costs. All of these estimates may vary from actual results. The Company has its reserves evaluated annually by an independent engineering firm and reviews the reserve estimates with the Board of Directors.

Environmental risks are also associated with field operations. The Company has health and safety programs and procedures, and an environmental standards policy. These policies and procedures are designed to protect and maintain the environment with respect to all company operations on behalf of the shareholders, employees and public. Valiant regularly reviews its environmental liability, property, drilling and general liability insurance with its independent insurance broker to ensure appropriate limits and terms.

The Company is also exposed to financial risks in the form of commodity prices, interest rates, the Canadian to U.S. dollar exchange rate and inflation. Valiant manages commodity price risks by focusing its capital program on areas that will generate acceptable rates of return even at lower commodity prices. The Company periodically considers derivative or hedging options but to date has chosen not to enter any such contracts.

Outlook

Several factors continue to impact 2006 operations:

Product Prices

Natural gas prices declined steadily in Q1 in response to mild winter weather conditions in North America and high natural gas storage levels. Overall, oil prices strengthened but the differential for medium gravity crude oil spiked in February 2006 demonstrating its volatility. While the differential for medium gravity oil has since narrowed, the decline in natural gas prices increased uncertainty regarding anticipated 2006 cash flows and funds available to support the 2006 capital program.

Service Costs and Availability

Service costs have increased substantially due to high activity levels and competition for those services.

Land Availability

Prices for land at crown land sales in the Company's areas of operations have increased by more than 50% over the prior year. As well companies with land are less inclined to farm out properties on terms acceptable to Valiant.

Regulatory Environment

High activity levels also impact regulatory processes and lead to longer lead times to obtain well licenses, approvals and other required permits. This is exacerbated by more activist land owners objecting to drilling operations, further increasing the costs and the delays.

Summary

The current environment can be summarized as follows:

- product price uncertainty in the near term, particularly for natural gas

- increasing costs

- longer lead time to plan and execute exploration and development activities

Valiant's Approach

The second quarter is generally a time of reduced capital expenditures as the industry experiences winter break up and road bans. Valiant does not anticipate spending more than $5.0 during the second quarter.

The near term activity during Q2 2006 will be as follows:

- completion of the Grande Prairie 6-3 well.

- tie in of three wells at Niton.

- drilling the exploratory well at Puskwaskau.

Natural gas price uncertainty is occurring at a time when Valiant's inventory of drilling prospects has reached very high levels. The current inventory includes over 90 potential wells with an associated expenditure of over $60.0 million. The majority of these wells are in the Company's core areas:

Niton, Alberta - Valiant has applied to regulatory authorities for downspacing approval, which should allow an additional 5 wells to be drilled for light oil in addition to the 9 locations that can be drilled under current spacing. Full development of this pool has the potential to add 700 boe/d of additional light oil production net to Valiant.

Bigstone, Alberta - Valiant is working with its partner to prepare a downspacing application for its Gething natural gas pool in this area. Reduced spacing has been granted for several similar off-setting pools in this area. It is anticipated final approval will take several months. Valiant believes that 2 more wells can be drilled without downspacing approval and ultimately 14 wells could be drilled once approval has been obtained. Full development of this pool has the potential to add 800 boe/d of natural gas production net to Valiant.

Leaman, Alberta - Valiant's 3D seismic program completed over the Pekisko B pool in Q1 indicates several additional drilling locations. We will monitor netbacks and production levels from our current wells to determine the pace of development. Ultimately, there is potential for 15 additional wells at Leaman.

The development phase of Valiant's three major properties will require extensive capital. The pace of development will depend upon the Company's cash flow, borrowing limits and access to equity. Given current conditions in natural gas markets and equity markets, Valiant anticipates a measured approach focusing initially on its Niton light oil pool where it currently achieves its highest netbacks.



Consolidated Financial Statements of

VALIANT ENERGY INC.

March 31, 2006


VALIANT ENERGY INC
CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
(unaudited) (note 1)
------------------------------------------------------------------------
Three Months
ended
March 31, 2006
$000's
------------------

REVENUE
Oil and gas 4,960
------------------------------------------------------------------------

EXPENSES
Royalties (net of Alberta Royalty Tax Credits) 1,174
Production 1,097
General and administrative (note 3) 901
Stock based compensation (note 6) 168
Interest (note 4) 111
Depletion, depreciation and accretion expense (note 3) 3,003
------------------------------------------------------------------------
6,454
------------------------------------------------------------------------

LOSS BEFORE INCOME TAXES (1,494)

Future income tax benefit (note 7) 443
------------------------------------------------------------------------

LOSS FOR THE PERIOD (1,051)
DEFICIT BEGINNING OF PERIOD (264)
------------------------------------------------------------------------
DEFICIT END OF PERIOD (1,315)
------------------------------------------------------------------------
Loss per common share
Basic and diluted ($/share) (0.06)
------------------------------------------------------------------------
Weighted average number of common shares outstanding
Basic and diluted 17,276,609
------------------------------------------------------------------------

See accompanying notes


VALIANT ENERGY INC
CONSOLIDATED BALANCE SHEET
(unaudited)
------------------------------------------------------------------------
March 31, 2006 December 31, 2005
ASSETS $000's $000's
------------------------------------------------------------------------

CURRENT
Accounts receivable 6,880 6,715
Prepaid expenses 109 129
------------------------------------------------------------------------
6,989 6,844
------------------------------------------------------------------------

Future income taxes (note 7) 273 1,849

Capital assets (note 3) 57,039 52,603

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

64,301 61,296
------------------------------------------------------------------------
------------------------------------------------------------------------
LIABILITIES

CURRENT
Accounts payable and accrued liabilities 13,123 12,847
Revolving bank loan (note 4) 7,160 1,616
------------------------------------------------------------------------
20,283 14,463

Asset retirement obligation (note 5) 1,436 1,350
------------------------------------------------------------------------
21,719 15,813
------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Share capital (note 6) 43,392 45,410
Contributed surplus (note 6) 505 337
Deficit (1,315) (264)
------------------------------------------------------------------------
42,582 45,483

64,301 61,296
------------------------------------------------------------------------
------------------------------------------------------------------------

On behalf of the Board

Tom MacKay Doug Baker
Director Director

See accompanying notes


VALIANT ENERGY INC
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited) (note 1)
------------------------------------------------------------------------
Three Months
ended
March 31, 2006
$000's
------------------
OPERATING ACTIVITES
Loss for the period (1,051)
Add items not requiring cash:
Depletion, depreciation and accretion 3,003
Future income tax benefit (443)
Stock-based compensation expense 168
------------------------------------------------------------------------
1,677
Net change in non-cash working capital (note 9) 3,589
------------------------------------------------------------------------
Cash provided by operating activities 5,266
------------------------------------------------------------------------

FINANCING
Cash provided by increase in bank loan 5,544
------------------------------------------------------------------------

INVESTING
Capital assets (7,354)
Net change in non-cash working capital (note 9) (3,456)
------------------------------------------------------------------------
Cash used in investing activities (10,810)
------------------------------------------------------------------------

NET CHANGE IN CASH POSITION -
------------------------------------------------------------------------
CASH BEGINNING AND END OF PERIOD -
------------------------------------------------------------------------

Supplementary Information
Interest and financing costs paid 110
------------------------------------------------------------------------
Taxes paid -
------------------------------------------------------------------------
------------------------------------------------------------------------


See accompanying notes


VALIANT ENERGY INC.
Notes to the Consolidated Financial Statements
For the Period Ended March 31, 2006


1. ORGANIZATION

Valiant Energy Inc. ("Valiant" or the "Company") was incorporated on May 31, 2005 under the laws of the Province of Alberta by Articles of Incorporation and commenced operations on July 7, 2005. The Company is engaged in the exploration and development of petroleum and natural gas properties. The Company was essentially dormant between May 31, 2005 and July 7, 2005.

2. ACCOUNTING POLICIES

These unaudited interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), and follow the same accounting policies as for the financial statements for the fiscal year ended December 31, 2005. These notes are incremental to, and should be read in conjunction with, the audited consolidated financial statements for the fiscal period ended December 31, 2005.



3. CAPITAL ASSETS

March 31, December 31,
2006 2005
$000's $000's
-------------------------
Petroleum and natural gas properties 63,762 56,343
Office furniture and equipment 335 335
-------------------------
64,097 56,678

Accumulated depletion and depreciation (7,058) (4,075)
-------------------------
57,039 52,603
-------------------------
-------------------------


The Company capitalized general and administrative costs of $339,000 for the quarter ended March 31, 2006 relating to exploration and development activity.

Costs attributed to undeveloped land of $8,889,000 for the quarter ended March 31, 2006 have been excluded from the calculation of depletion and depreciation.

The test for impairment of the petroleum and natural gas properties was calculated at March 31, 2006 based upon management's estimates of future oil and gas prices with reference to benchmark prices in the futures market, and reputable industry forecasts.

4. REVOLVING BANK LOAN

The Company has a demand revolving credit facility with a limit of $16 million. The facility is secured by a general security agreement and an unlimited first floating charge debenture covering all of the Company's assets. The new facility bears interest at the lender's prime plus 0.25%, provided prescribed financial ratios are maintained and increasing to lender's prime plus 0.4% otherwise.

5. ASSET RETIREMENT OBLIGATION

At March 31, 2006, the estimated total undiscounted amount required to settle the asset retirement obligation was $2,511,000. This obligation will be settled based on the operating lives of the underlying assets, which currently are estimated to be from 2 to 25 years with the majority of costs expected to occur between 2015 and 2020. Estimated costs have been determined using an inflation rate of 2.0 % and have been discounted using a credit adjusted risk free rate of 8.0%.



Changes to the asset retirement obligation were as follows:

Three months ended
March 31, 2006
$000's
-------------------
Asset retirement obligation, beginning of period 1,350
Liabilities incurred through operations 66
Liabilities settled -
Accretion 20
------------------------------------------------------------------------
Asset retirement obligation, end of period 1,436
------------------------------------------------------------------------


6. SHARE CAPITAL

Authorized

The Company is authorized to issue an unlimited number of voting common
shares, an unlimited number of non voting common shares and 2 million
performance shares. The Company is also authorized to issue an unlimited
number of first preferred shares, issuable in series.




Issued Three months ended
March 31, 2006
Common shares # $000's
-------------------------
Balance at December 31, 2005 17,276,609 45,394
Income tax effect of flow through
expenditures renounced (i) - (2,018)
Balance at March 31, 2006 17,276,609 43,376
-------------------------

Performance shares (ii)
Balance at December 31, 2005 1,580,000 16
Changes during the period - -
-------------------------
Balance at March 31, 2006 1,580,000 16
-------------------------
Share Capital - Balance at March 31, 2006 43,392
------------

Contributed surplus
------------------------------------------------------------------------
Balance at December 31, 2005 337
Fair value of share options and performance
shares granted 168
------------
Balance March 31, 2006 505
------------
------------


(i) Flow Through

On October 19, 2005 the Company issued 1,091,000 flow through common shares at $5.50 per share for gross proceeds of $6,001,000. The hold period under applicable securities laws expired February 19, 2006. Under the look back provision governing flow-through shares, the Company renounced, in March 2006, expenditures of $6 million of which approximately $4.2 million had been incurred at March 31, 2006.

(ii) Performance shares

Valiant granted 1,580,000 performance shares for $0.01 per share to employees, directors and certain service providers in 2005 which are convertible to common shares based upon a prescribed formula.

The performance shares have a four year life and vest 1/3 annually over a three year period. None were exercisable at March 31, 2006 and none were cancelled or exercised since the date of issue.

(iii) Stock options

Under the stock option plan, options vest 1/3 annually over a three year period and an option's maximum term is five years. In 2005, 20,000 options were granted at an exercise price of $4.20. None were exercisable at March 31, 2006 and none were cancelled or exercised since the date of issue.

The number of performance shares and stock options is limited to 10% of the issued and outstanding common shares.

The fair value of the performance shares and stock options were estimated at the grant dates using the Black-Scholes option-pricing model with a risk free interest rate of 4%, the expected life (4 years for performance shares and 5 years for stock options) and 60% volatility. The stock based compensation expense and increase to contributed surplus for the three months ended March 31, 2006 is $168,000. The weighted average fair value of stock options and performance shares granted in 2005 was $1.26 per unit.

7. PROVISION FOR INCOME TAXES

The provision for future income taxes varies from the amounts that would be computed by applying the effective Canadian federal and provincial income tax rates to the income before income taxes as follows:



Three months ended
March 31, 2006
$000's
------------
Loss before income taxes (1,494)

Expected income tax benefit at 35.62% (532)
Increases (decreases) from
Non-deductible crown charges less resource allowance 27
Stock based compensation 44
Attributed Canadian Royalty Income (27)
Income tax rate reductions 22
Other 23
------------
Future income tax benefit (443)
------------
------------

8. COMMITMENTS, GUARANTEES AND CONTINGENCIES

Payments under the Company's office lease are required as follows:

$000's
-----------
2006 298
2007 298
2008 298
2009 99


9. CHANGES IN NON-CASH WORKING CAPITAL

Three months ended
March 31, 2006
$000's
------------------------------------------------------------------------
Operating activities
Accounts payable and accrued liabilities 2,405
Accounts receivable 1,164
Prepaid expenses 20
------------
3,589
------------

Investing activities
Accounts payable and accrued liabilities (2,127)
Accounts receivable (1,329)
------------
(3,456)
------------

Total 132
------------
------------


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