Welton Energy Corporation
TSX : WLT
TSX : WLT.WT
TSX : WLT.DB

Welton Energy Corporation

May 11, 2006 19:30 ET

Welton Energy Corporation Reports 288% Increase in Production from Prior Year

CALGARY, ALBERTA--(CCNMatthews - May 11, 2006) - Welton Energy Corporation (TSX:WLT) (TSX:WLT.WT) (TSX:WLT.DB) is pleased to present its financial and operating results for the three months ended March 31, 2006.



Operational and Financial Highlights Three months ended
(thousands, except per share amount) March 31
------------------------------------------------------------------------
2006 2005 Change(%)
------------------------------------------------------------------------
------------------------------------------------------------------------
Average Daily Production
Crude oil (bbls/d)
Heavy oil 513 - -
Light oil 35 - -
Natural gas liquids (bbls/d) 75 96 (22)
Natural gas (Mcf/d) 2,151 942 128
Total (boe/d)(3) 981 253 288
------------------------------------------------------------------------
Wells drilled (gross/net)
Natural Gas 4/1.1 - -
Oil 2/0.5 - -
Dry 2/0.7 - -
Total 8/2.3 -(1) -
------------------------------------------------------------------------
Undeveloped land holdings
Gross acres 140,600 71,462 97
Net acres 43,167 15,128 185
------------------------------------------------------------------------
Oil and gas revenues ($000s) 3,397 1,108 207
------------------------------------------------------------------------
Funds flow from operations(2) ($000s) 875 363 141
Per share - basic ($) 0.02 0.02 -
Per share - diluted ($) 0.02 0.02 -
------------------------------------------------------------------------
Income (loss) ($000s) (641) 1,546 (142)
Per share - basic ($) (0.02) 0.07 (129)
Per share - diluted ($) (0.02) 0.06 (133)
------------------------------------------------------------------------
Capital expenditures 6,591 1,822 262
------------------------------------------------------------------------
Shares outstanding (000s)
Weighted average - basic 38,618 23,438
Weighted average - diluted 39,690 24,094
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) There was no drilling activity in Q1 - 2005.
(2) Funds flow as presented (before changes in non-cash working capital)
does not have any standardized meaning prescribed by Canadian GAAP
and therefore it may not be comparable with the calculation of
similar measures for other entities.
(3) Boe may be misleading, particularly if used in isolation. In
accordance with National Instrument 51-101, a boe conversion rate
for natural gas of 6 mcf to 1 bbl has been used. This ratio is based
on an energy equivalency conversion method primarily applicable at
the burner tip and does not represent a value equivalency of the
representative commodity at the wellhead.


Message to Shareholders

We are pleased to report on the Company's operations for the three months ended March 31, 2006 and to date. Management's Discussion and Analysis of the Company's financial results for the first quarter of 2006 is provided with the comparative financial statements for the period.

Key Achievements of 2006 to Date

- Increasing first quarter average production to 981 boe/d, an increase of 288% over the quarter a year earlier and 18% higher than the previous quarter.

- Nearly tripling Welton's undeveloped land base compared to the first quarter a year ago, to approximately 43,000 net acres.

- Continued drilling success in our Karr gas exploration area and at the Mantario heavy oil property.

- Successfully closing the Company's $10.5 million 8% convertible debenture issue.

Operations and Corporate

Saskatchewan

During the quarter, Welton and its partners drilled one vertical and three horizontal wells at Mantario East. Two of the horizontal wells were placed on production in the first quarter, the third horizontal was placed on production in mid April. One vertical well is being completed and will be placed on production as spring weather conditions permit. Routine remedial and production optimization work has also resumed to restore production from existing wells which have been temporarily shut in due to inaccessibility.

Mantario East continues to be of major importance to the Company and we envision continuing active development of and exploration near this prolific heavy oil and natural gas field. An active development and exploration drilling program has commenced. Welton's interests range from 12.5% to 25% in the area.

In May 2006, Welton drilled its first well on recently acquired land (100% interest), on trend to the southeast of our Mantario property. This well will be plugged and abandoned.

Alberta

Two wells were drilled in Majeau Lake during the first quarter, with one currently being evaluated as a potential gas well, and the other abandoned. Additional drilling is being assessed for this summer and fall. Welton's interests range from 32% to 100% in over 13,000 net acres in this area.

At Karr a deep gas well in which Welton holds a 20% interest was successfully flow tested late last year at rates up to 7.2 mmcfe/d (gross), and is slated to be placed on production through Welton's Karr facilities during mid 2006.

Additionally, two Karr deep gas exploration wells were drilled over the recent winter season (both 40% Welton interest). One well was production tested at approximately 1.8 mmcf/d (gross) and is to be tied in and placed on production next winter when access is again available. The second well is standing cased, waiting on further evaluation and possible tie-in next winter.

Water injection is underway at the Brazeau waterflood project. Additional sources of water are being acquired to allow injection to be increased to full target rates during 2006, and waterflood response will be closely monitored to determine when oil production can be commenced. We are forecasting that modest initial rate production will begin by early 2007. Welton owns 94.75% of this long-life project and is the operator.

Corporate Transaction

Welton acquired a private company in January 2006 to obtain undeveloped acreage held on a number of prospects in Alberta and Saskatchewan. This acquisition added approximately 29,000 gross (18,000 net) acres to Welton's landholdings, bringing total undeveloped acreage for the Company to approximately 141,000 gross (43,000 net) acres at the end of the first quarter.

Convertible Debentures Offering

Welton closed its $10.5 million convertible debenture offering in February 2006. The debentures have an annual coupon rate of 8% paid quarterly, and are convertible into Welton common shares at the option of the holder until January 15, 2009, at a price of $1.55 per share.

Outlook

Welton has achieved an excellent start to 2006, having drilled eight wells with six successful and one waiting on completion. We estimate that these new wells coupled with production optimization at our properties could contribute approximately 500 boe/d of additional production during 2006. However, due to the shutting-in of our original Karr well due to increased water to gas production and unfavourable weather, which has caused drilling delays and production downtime in other core properties, it is expected that second quarter's production will likely be lower than the first quarter.

The company has cash flow and debt capacity to fund an extensive 2006 capital program. Welton also enjoys large tax shields of approximately $41 million in tax pools and loss carryforwards.

During the balance of 2006 and into 2007, Welton's full-cycle management and technical team will continue to optimize current operations and develop new projects and acquisition opportunities that will complement our existing assets. We anticipate being able to increase production, reserves, and profitability significantly through execution of our program.

Welton's Board and Management own a substantial portion of the Company's securities, and remain committed to our objective of increasing shareholder value over the medium term.



Respectfully submitted on behalf of the Board of Directors

Signed: Raymond R. Pether Signed: Donald A. Engle

Raymond R. Pether Donald A. Engle
Chief Executive Officer President


Management's Discussion and Analysis

The following discussion and analysis has been prepared by management, and reviewed and approved by the Board of Welton Energy Corporation ("Welton" or the "Company"). The following supplementary information provides an analysis of the operations and financial results of the Company based upon accounting principles generally accepted in Canada. It should be read in conjunction with the December 31, 2005 audited financial statements and accompanying notes. This discussion and analysis is based on information available to May 10, 2006. All amounts are in thousands of Canadian dollars unless otherwise noted.

Non-GAAP Measurements

In the Management's Discussion & Analysis ("MD&A") references are made to terms commonly used in the oil and gas industry that are not defined by generally accepted accounting principals ("GAAP") in Canada and are referred to as non-GAAP measures. Such non-GAAP measures should not be considered an alternative to, or more meaningful than GAAP measures as indicators of the Company's financial or operating performance. The non-GAAP measures presented are not standardized measures and therefore may not be comparable to the calculation of similar measures for other entities. The following non-GAAP measures are used in this MD&A:

1) "Funds flow from operations" and "funds flow" equal funds flow from
operations before changes in non-cash working capital related to operating activities. The reconciliation between net income and funds flow from operations can be found in the Consolidated Statements of Cash Flows. The Corporation also presents "funds flow per share", whereby funds flow from operations is divided by the weighted average number of shares outstanding to determine per share amounts.

2) "Netbacks" equal total revenue (net of marketing fees) per boe less royalties per boe, and operating costs (including transportation) per boe.

Natural gas reserves and volumes are converted to barrels of oil equivalent (boe) on the basis of six thousand cubic feet (mcf) of gas to one barrel (bbl) of oil. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

All references to dollar values refer to Canadian dollars, unless otherwise stated.

Forward-Looking Statements

This report contains certain "forward-looking statements" within the meaning of such statements under applicable securities law. Forward-looking statements are frequently characterized by words such as "plan", "expect", "estimate", "believe" and other similar words, or statements that certain events or conditions "may" or "will" occur. By their nature, forward-looking statements involve assumptions and are subject to a variety of risks and uncertainties, including, but not limited to, those associated with resource definition, the possibility of project cost overruns or unanticipated costs and expenses, regulatory approvals, fluctuating oil and gas prices, and the ability to access sufficient capital to finance future development, reservoir performance and drilling results. Although the Company believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. The Company does not undertake any obligation to update publicly or to revise any of the included forward-looking statements as a result of new information, future events or otherwise, subsequent to the date of this report. The reader is cautioned not to place undue reliance on forward-looking statements.

Additional information relating to the Company can be found on its website at www.weltonenergy.com or through the SEDAR system at www.sedar.com.

Q1 - 2006 Highlights

- Average production for the first quarter increased 288% to 981 boe/d from 253 boe/d in the prior year as the Company produces from over 45 wells (versus one well in the same period of 2005).

- Welton lowered operating costs to $13.27/boe from $23.05/boe for a reduction of 42%.

- Increased cash flow from operations by 141% on a dollar basis to $875,000 ($0.02 per share) compared to $363,000 ($0.02 per share) in the prior year.

- Drilled 8 wells, 4 at Mantario including 3 horizontal wells.

- Increased net undeveloped acreage by 185% to 43,167 acres (2005 - 15,128 acres).

- Completed $10.5 million Convertible Debenture financing.

Production

For the first quarter 2006, the Company produced an average of 981 boe/d comprised of 56% oil and 44% natural gas and natural gas liquids ("NGLs"). The following table sets out the average daily production values.



Three months ended
March 31
2006 2005 Change(%)
------------------------------------------------------------------------
Crude oil (bbl/d)
Heavy oil 513 - -
Light oil 35 - -
Natural gas liquids (bbl/d) 75 96 (22)
Natural gas (mcf/d) 2,151 942 128
------------------------------------------------------------------------
Total boe/d 981 253 288
------------------------------------------------------------------------
------------------------------------------------------------------------


Production during the year was greatly influenced by the development of the Company's Mantario property partially offset by the payout of a Karr gas well. At the time of acquisition in September 2005, the Mantario heavy oil properties were producing approximately 225 boe/d from 6 wells and by the first quarter 2006 this project was producing 550 boe/d from 18 wells. In addition, a full quarter of production from two liquids rich gas wells at Ricinus which were tied-in for production in late December 2005, also contributed to overall quarter over quarter increases.

In January 2006, the original Karr well's working interest was reduced from 75% to 40% and resulted in production decreases of approximately 120 boe/d for the quarter.



Commodity Prices

The following table represents relevant quarterly average benchmarks:

Three months ended
March 31
2006 2005 Change(%)
------------------------------------------------------------------------
Crude Oil
West Texas Intermediate ("WTI" - US$/bbl) $63.45 $56.61 12
Bow River Heavy oil (Cdn$/bbl) $40.39 $44.83 (10)
------------------------------------------------------------------------
Natural Gas
AECO (Cdn$/Mcf) $ 9.27 $ 8.45 10
------------------------------------------------------------------------
------------------------------------------------------------------------


Crude oil prices continue to have significant volatility. Constant political risk, particularly from Iran and Nigeria, are significant factors affecting this commodity's price, and the related crude oil inventories. Overall prices remained strong with an average WTI price of US$63.45/bbl for the first quarter, up 12% from the same period last year.

Natural gas prices (AECO Hub in Alberta) have fallen from the monthly average highs of $12.34/Mcf in November 2005 as prices have retreated due to a warmer winter than expected and higher than average storage levels. Overall, the monthly average was $9.27/Mcf for the first quarter of 2006 versus $8.45/Mcf in 2005.

Heavy oil prices averaged lower at $40.39/bbl in 2006 versus the prior year at $44.83/bbl. This represents an overall decrease of 10% from 2005. In 2006, monthly heavy oil differentials have started a modest trend of narrowing over the quarter and decreased to $24.70/bbl by March 2006 from $29.18/bbl in December 2005. Supply disruptions to the U.S. Gulf coast and the reversing of two major pipelines for Canadian crude has created more U.S. demand for oil, thus contributing to narrowing the heavy oil differential by quarter end, a trend that is forecasted to continue through the remainder of 2006.



Average Realized Sales Prices
Three months ended
March 31
2006 2005 Change(%)
------------------------------------------------------------------------
Crude oil ($/bbl) $29.66 - -
Natural gas ($/Mcf) $ 7.90 $ 7.11 11
Natural gas liquids ($/bbl) $57.80 $57.47 1
Total ($/boe) $39.31 $48.66 (19)
------------------------------------------------------------------------
------------------------------------------------------------------------


The Company's average realized sale price for the first quarter of 2006 decreased 19% to $39.31/boe as compared to $48.66/boe for 2005. Overall, modest increases in natural gas prices and NGLs were more than offset by a production mix that has become significantly more weighted towards heavy oil. The Company had not hedged any of its production for the first quarter 2006, nor does the Company have any of its future production hedged.



Production Revenue Three months ended
March 31
($ thousands) 2006 2005 Change(%)
------------------------------------------------------------------------
Crude oil 1,463 - -
Natural gas 1,529 603 154
Natural gas liquids 388 505 (23)
------------------------------------------------------------------------
Total(1) 3,380 1,108 205
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Total production revenue excludes $17 of sulphur revenue for 2006.


The Company's production revenue increased 205% to $3,380. The increase in total revenue can be attributable primarily to volume increases as well as modest price increases. Crude oil revenues were $1,463 due to heavy oil production from the Mantario property, compared to nil in 2005 when there was no oil production.



Netbacks Three months ended
March 31
($/boe) 2006 2005 Change(%)
------------------------------------------------------------------------
Oil, NGL and natural gas revenue $ 39.31 $ 48.66 (19)
Royalty expense (net of ARTC) 7.92 1.10 620
Production expenses 13.27 23.05 (42)
------------------------------------------------------------------------
Netback $ 18.12 $ 24.51 (26)
------------------------------------------------------------------------
------------------------------------------------------------------------


For the first quarter 2006, the Company realized a netback of $18.12/boe or a 26% decrease versus $24.51/boe for the same period in 2005. Revenue decreases on a per boe basis were due to the production mix for Welton shifting to 56% oil and particularly heavy oil from Mantario, and 44% natural gas and natural gas liquids (2005 production was 100% natural gas and NGLs) where the former commodity currently receives comparatively lower prices.

Royalties for the Company include all royalties to provincial governments, freeholders and other override royalties, and are net of the Alberta Royalty Tax Credit (ARTC), a tax rebate received from the Alberta government for eligible crown royalties paid in the year. As a percentage of revenue, royalties for 2006 are 20% versus 2% in 2005. The Company received a provincial deep-well royalty holiday for the Karr well which contributed to lower royalty rates for 2005, but was fully consumed in 2005. Overall royalty rates are higher due to relatively higher commodity prices partially offset by three recently drilled horizontal oil wells, drilled at the Company's Mantario property which will receive royalty holidays in Saskatchewan.

Unit operating expenses continue to decrease on a quarterly basis as a result of operational optimizations and adding relatively lower production cost heavy oil wells versus production from higher cost sour gas operations at Karr. Welton's original Karr well is currently shut-in and may be approaching its economic limit due to higher operating costs and current natural gas prices, and thus is under review. Consequently, quarter-over-quarter per unit operating expenses were $13.27/boe in 2006 or a 42% decrease, compared to $23.05/boe for the same period in 2005. These improvements have been offset partially by strong inflationary pressures for services and overall higher energy costs which contribute to higher trucking, electricity and fuel costs utilized in field operations.



2005 2006
($/boe) Q1 Q2 Q3 Q4 Q1
------------------------------------------------------------------------
Operating expenses $23.05 $21.87 $16.07 $15.49 $13.27
------------------------------------------------------------------------
------------------------------------------------------------------------


General and Administrative
Three months ended
March 31
($ thousands, except per boe amounts) 2006 2005 Change(%)
------------------------------------------------------------------------
General and administrative 559 237 136
Overhead recoveries and capitalized
overhead (77) (28) 175
------------------------------------------------------------------------
Net 482 209 130
Per boe $5.46 $9.22 (41)
------------------------------------------------------------------------
Stock-based compensation expense 56 1 -
Per boe $0.63 - -
------------------------------------------------------------------------
------------------------------------------------------------------------


General and administrative costs increased to $559 or 136% in 2006 from $237 in 2005 as a result of the Company employing additional technical and accounting staff to handle the substantial increases in the Company's operations. Additional fees for maintaining Welton as a public entity, 4 public stock exchange listings for the Company's warrants, rights (rights offering closed with completion of convertible debentures), convertible debentures and commons shares as well as rent for additional office space to accommodate the Company's expanding operations all contributed to higher costs. Overhead recoveries and capitalized overhead of $77 were recognized in the first quarter of 2006 (2005 - $28) an increase of 175%, and consisted of recoveries of Company overhead costs related to its operated drilling activities primarily in Majeau. Capitalized overhead is recognized for technical staff dedicated to the Company's capital program and geological reviews of new core areas.

For the first quarter of 2006, on a per boe basis, general and administrative expenses declined by 41% to $5.46 per boe from $9.22 per boe in 2005 as production volume increases more than offset dollar cost increases.

Stock-based compensation expense is the amortization over the vesting period of the fair value of stock options granted to employees, directors and key consultants of the Company. The fair value of all options granted is estimated at the date of grant using the Black-Scholes option pricing model. The non-cash compensation expense for the three months ended March 31, 2006 increased to $56 from $1 for the same period in 2005. The increase is a function of additional options being granted to new staff to facilitate the significant growth of the Company, with options vesting equally over a three-year period pursuant to the Company's stock option plan and a higher average fair value option price.

The Company also utilizes the services of Brompton Limited ("BL"), a related party, for certain senior management services, certain accounting and administrative staff and related expenses. For the first quarter 2006 fees of $34 (2005 - $36) were paid to BL.



Interest and Financing Charges
Three months ended
March 31
($ thousands) 2006 2005 Change(%)
------------------------------------------------------------------------
Interest and loan fees on bridge loan 172 - -
Interest on debentures 74 - -
Amortization of debenture issue costs 9 - -
Accretion of debentures 14 - -
------------------------------------------------------------------------
Total interest and financing charges 269 - -
------------------------------------------------------------------------
------------------------------------------------------------------------


The Company incurred $172 of interest and loan fees in the first quarter for 2006 versus nil in the prior year. The Company incurred interest on its $10.5 million bridge loan facility at 6% as well as a 1% loan fee and accrued interest for one month on the Company's recently issued 8% convertible debentures for the same amount. The bridge facility was put in place in September 2005 when Welton acquired its Mantario property, and was renewed in December 2005 at the same terms as the original loan, including the 1% loan fee. The bridge loan was fully repaid in February 2006 with the closing of the Company's convertible debenture financing.



Depreciation, Depletion and Accretion
Three months ended
March 31
($ thousands, except per boe amounts) 2006 2005 Change(%)
------------------------------------------------------------------------
Depletion and depreciation 1,649 599 175
Per boe $18.68 $26.31 (29)
------------------------------------------------------------------------
Accretion expense 18 2 800
Per boe $0.20 $0.09 122
------------------------------------------------------------------------
------------------------------------------------------------------------


For the period ending March 31, 2006, depletion and depreciation expense for the Company's oil and gas properties amounted to $1,649 (2005 - $599) or $18.68 (2005 - $26.31) per boe. Overall dollar increases were attributed to much higher production volumes in the quarter than in 2005. On a per boe basis the decrease from the prior year is primarily a result of adding lower cost proved reserve additions than in previous periods.

Accretion expense for the quarter ended March 31, 2006 was $18 compared to $2 for the same quarter of 2005. The accretion expense has increased significantly compared to the prior year due to the increase in the asset retirement obligation. At March 31, 2006, the Company has recorded an asset retirement obligation of $927 (2005 - $100). This amount is the net present value of the total future asset retirement costs of $2,042 (2005 - $135). The total costs were determined by management based on the Company's working interest in its wells and facilities, estimated costs to abandon and reclaim those wells and facilities and the estimated timing of the costs to be incurred in future periods. The liability has increased significantly from the prior year due to the large number of wells added over this year. Also, increasing costs from oil field service providers contributed to the increased obligation. The asset retirement obligation has increased from $860 at December 2005 due to the addition of liabilities for new wells drilled in the first quarter of 2006.

Income Taxes

The Company has $30 in current income tax expense relating to capital taxes and Saskatchewan resource taxes. The Company has no other current taxes because it has the ability to utilize its non-capital loss carry forwards of $20,600. These losses will expire over four years from 2007 to 2010.

Income

Net loss for the three months ended March 31, 2006 was $641 (2005 - $1,546 income) or $0.02 (2005 - $0.06 income) per diluted share. Compared to the prior year, higher production volumes were more than offset by higher depletion costs, production costs, interest and general and administrative costs which contributed to a loss from operations compared to the prior year. Also, during the first quarter of 2005 a tax benefit related to previously unrecognized future tax losses of $1,784 was recognized.



Capital Expenditures

Three months ended
March 31
($ thousands, except per share amount) 2006 2005 Change(%)
------------------------------------------------------------------------
Exploration drilling 2,447 288 750
Development drilling 2,384 271 780
Production equipment 701 856 (18)
Land and seismic 9 404 (98)
Corporate acquisitions 980 - -
Other 70 3 -
------------------------------------------------------------------------
Total 6,591 1,822 262
------------------------------------------------------------------------
------------------------------------------------------------------------


For the first quarter of 2006, a total of $6,591 in capital was spent versus $1,822 for 2005, an increase of 262%. During that time, the Company had an active winter drilling season as compared to the same period in 2005 when no wells were drilled or completed. In Mantario, Welton drilled 4 developmental wells, including 3 horizontal wells. Further, 2 of the horizontal wells were completed and tied-in during the quarter and the third horizontal was completed and tied-in in mid-April and the fourth well is expected to be completed and tied-in late in the second quarter. At Majeau 2 wells were drilled with 1 well being completed and 1 well abandoned. At Karr, Welton had 2 exploration wells drilled, with one being completed in the quarter. The other Karr well is scheduled for completion in winter 2006. The Company successfully reactivated a Wabamun well in the quarter, but weather and road restrictions delayed the tie-in for this well, which is now expected to be producing by the end of the second quarter.

In February 2006, the Company completed an agreement to purchase all of the issued and outstanding common shares of a private oil and gas company, the principal assets of which are high working interest exploration lands in Saskatchewan and Alberta. The acquisition significantly increases Welton's existing undeveloped land base, adding approximately 29,000 gross (18,000 net) acres. In addition, approximately 8,000 acres of royalty interest lands were also included in the acquisition. A drilling program on some of the Saskatchewan lands will commence in the second quarter of 2006, with follow-up drilling and a seismic program contingent upon success.

Liquidity and Capital Resources

Convertible Debentures

On February 27, 2006 the Company issued $10,500 principal amount of 8% secured Convertible Debentures. The debentures bear interest from the date of issue, which is paid quarterly in arrears commencing June 30, 2006. The debentures are convertible at the option of the holder at any time into fully paid common shares at a conversion price of $1.55 per share. The debentures mature on January 15, 2009. The proceeds of this offering were used to repay the $10,500 note payable to Brompton Financial Limited ("BFL"), a related party. The original financing was required to complete the acquisition of Era Oil & Gas Corporation on September 2, 2005.

For financial statement purposes the debentures have been classified as debt, net of the fair value of the conversion feature at the date of issue, which has been classified as part of shareholders' equity. The value of the debt was calculated as the present value of the principal and interest payments with the remainder of the value attributed to the conversion feature and recorded as equity.

Note Financings and Banking Facility

In September 2005, in order to complete the acquisition of the Mantario properties, Welton obtained $10,500 of financing from its principal shareholder, BFL, and parties related to BFL by way of a 6% secured note due December 1, 2005 and payment of a 1% financing fee. In addition, BFL agreed that, if Welton elected to repay the note from the proceeds of a rights offering, BFL and its related parties would subscribe for their proportionate share of the rights and, in addition, would subscribe for any rights not subscribed for by other shareholders. For this latter standby commitment BFL was paid a fee of $83. In December 2005, the note payable was extended to March 1, 2006 on the same terms as noted above because the rights offering had not yet closed. On February 27, 2006 the note payable was repaid by Welton principally from the convertible debenture financing (see above).

At March 31, 2006 the Company had in place banking arrangements which were completely undrawn with a Canadian chartered bank. The arrangements include a $5,500 demand loan facility and a $1,000 acquisition and development facility. The demand loan facility bears interest at bank prime rate plus 0.5%, and is secured by a $25,000 fixed charge Debenture and a floating charge over all assets of the Company.

For the first quarter of 2006 the Company's sources of cash totalled $15,540 versus cash requirements of $17,185. Consequently, the cash on hand decreased by $1,645 to $2,396.



Funds Flow Three months ended
March 31
($ thousands) 2006 2005
------------------------------------------------------------------------
Sources
Funds flow from operations 875 363
Issue of common shares, net 120 993
Issuance of convertible debentures 10,500 -
Issuance of flow-through shares, net - 1,250
Working capital 4,045 -
------------------------------------------------------------------------
15,540 2,606
------------------------------------------------------------------------
Uses
Oil and natural gas property expenditures 5,611 1,822
Repayment of notes 10,500 -
Working capital - 458
Deferred financing charges 81 -
Acquisitions 980 -
Asset retirement expenditures 13 -
------------------------------------------------------------------------
17,185 2,280
------------------------------------------------------------------------
(Decrease)/Increase in cash (1,645) 326
------------------------------------------------------------------------
------------------------------------------------------------------------


Working Capital

On March 31, 2006, the Company had negative working capital of $5,163 versus negative working capital of $9,969 at December 31, 2005. The improvement is primarily due to the BFL Note payable being refinanced by long term convertible debentures (see above).

Contractual Obligations

The Company has obligations to renounce qualifying tax deductions under the flow-through share agreements it has entered into described in the Income Tax section. The Company has an obligation to renounce remaining qualifying expenditures of $1,192 for the December 2005 flow-through share issuance during 2006. The Company has an obligation to incur qualifying expenditures totalling $7,999 during 2006 to meet its flow-through share obligations. As at March 31, 2006 the Company has satisfied $4,982 of this obligation and has until the end of 2006 to incur the remaining qualifying expenditures.

As a result of a corporate acquisition in 2005, the Company assumed a commitment for a Net Profits Interest Agreement ("NPI") for the Brazeau River waterflood project. The Company's costs to be deducted from revenues in calculating the NPI include the Corporation's share of capital and operating costs and overhead expenses. Costs not recovered in a period are carried forward to subsequent periods until recovered, plus applicable interest. The NPI is non-recourse and is thus restricted to only net profits from the Brazeau River waterflood property, and no other assets of the Company. The NPI is treated like all other royalties and is not a liability of the Company, but is included in the calculation of reserves.

Related Party Transactions

Certain management functions of the Company have been provided by Brompton Limited ("BL"), the parent company of BFL. The types of services and fees charged are discussed in the General and Administrative costs discussion. For the Company's $10,500 Note Payable (see section above Note Financings) Welton has paid interest of $95 and loan and stand-by fees of $70 in the first quarter of 2006 to BFL. No such loans existed for the first quarter of 2005.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Selected Quarterly Financial Information



2006 2005 2004
($thousands,
except per
share amount) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
-----------------------------------------------------------------------
Production revenue 3,380 4,316 2,642 1,339 1,108 1,087 1,642 803
Net income (loss) (641) 744 (532) (265)1,546 1,189 538 (95)
Per share amounts:
Basic
Net income (loss) (0.02) 0.01 (0.02)(0.01) 0.07 0.08 0.03 (0.01)
Diluted
Net income (loss) (0.02) 0.02 (0.02)(0.01) 0.06 0.07 0.03 (0.01)
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Welton Energy Corporation
Consolidated Balance Sheet (Unaudited)
(in thousands of dollars)

March 31, December 31,
2006 2005
------------------------------------------------------------------------

Assets

Current assets
Cash and cash equivalents $ 2,396 $ 4,041
Accounts receivable 3,270 5,558
Other assets 129 169
------------------------------------------------------------------------
5,795 9,768

Property, plant and equipment (note 4) 47,192 42,146
Deferred financing charges, net 296 225
Future tax asset - 1,065
------------------------------------------------------------------------
$ 53,283 $ 53,204
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities

Current liabilities
Accounts payable and accrued liabilities $ 10,884 $ 9,237
Note payable - related party (note 7) - 10,500
Debenture interest payable (note 7) 74 -
------------------------------------------------------------------------
10,958 19,737

Convertible debentures (note 7) 10,082 -
Future tax liability 1,664 -
Asset retirement obligation (note 5) 927 860
------------------------------------------------------------------------
23,631 20,597

Shareholders' equity
Share capital (note 8) 26,961 29,763
Equity component of debentures (note 7) 432 -
Contributed surplus 5,598 5,542
Deficit (3,339) (2,698)
------------------------------------------------------------------------
29,652 32,607

------------------------------------------------------------------------
$ 53,283 $ 53,204
------------------------------------------------------------------------
------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements


Welton Energy Corporation
Consolidated Statement of Operations and Deficit (Unaudited)
For the three months ended March 31
(in thousands of dollars, except per share amounts)

2006 2005
------------------------------------------------------------------------

Revenues
Production $ 3,397 $ 1,108
Royalty expense (net of ARTC) (700) (25)
Other income 92 15
------------------------------------------------------------------------
2,789 1,098
------------------------------------------------------------------------

Expenses
Depletion, depreciation and accretion 1,667 601
Production 1,169 525
General and administrative 538 210
Interest, financing and bank charges (note 11) 269 -
------------------------------------------------------------------------
3,643 1,336
------------------------------------------------------------------------

Income (loss) before income tax (854) (238)
Provision for (recovery of) income taxes
Current 30 -
Future (243) (1,784)
------------------------------------------------------------------------
(213) (1,784)
Net (Loss) Income (641) 1,546

Deficit, beginning of period (2,698) (4,191)
------------------------------------------------------------------------
Deficit, end of period $ (3,339) $ (2,645)
------------------------------------------------------------------------
------------------------------------------------------------------------

Net (loss) income per common share:
- basic (note 8) $ (0.02) $ 0.07
- diluted (note 8) $ (0.02) $ 0.06
------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements


Welton Energy Corporation
Consolidated Statement of Cash Flows (Unaudited)
For the three months ended March 31
(in thousands of dollars)
2006 2005
------------------------------------------------------------------------
Cash flows related to the following activities:

Operating
(Loss) income $ (641) $ 1,546
Add items not requiring cash:
Depletion, depreciation and accretion 1,667 601
Future income taxes (recoveries) (243) (1,784)
Stock based compensation 56 -
Non-cash financing charges and other 36 -
------------------------------------------------------------------------
Funds flow 875 363
Asset retirement expenditures (13) -
Changes in non-cash working capital relating
to operating activities 2,787 (458)
------------------------------------------------------------------------
3,649 (95)
------------------------------------------------------------------------

Financing
Issuance of common shares, net (note 8) 120 993
Repayment of notes (note 7) (10,500) -
Issuance of flow-through shares, net - 1,250
Issuance of convertible debentures (note 7) 10,500 -
Deferred financing charges (81) -
Changes in non-cash financing working capital 74 -
------------------------------------------------------------------------
113 2,243
------------------------------------------------------------------------

Investing
Oil and natural gas property expenditures (5,611) (1,822)
Corporate acquisitions (note 3) (980) -
Changes in non-cash investing working capital 1,184 -
------------------------------------------------------------------------
(5,407) (1,822)
------------------------------------------------------------------------

Net (decrease) increase in cash (1,645) 326

Cash, beginning of period 4,041 2,642
------------------------------------------------------------------------
Cash, end of period $ 2,396 $ 2,968
------------------------------------------------------------------------
------------------------------------------------------------------------

Supplementary information:
------------------------------------------------------------------------
------------------------------------------------------------------------
Interest paid $ 103 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------
Taxes paid $ - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements



Notes to the Consolidated Financial Statements (Unaudited)
(All amounts in thousands of Canadian dollars, unless otherwise stated)

1. Basis of Presentation

The consolidated financial statements include the accounts of Welton Energy Corporation ("Welton" or "the Company") and its wholly-owned subsidiaries.

2. Summary of Significant Accounting Policies

The Company's principal business activity is in the exploration, development and production of petroleum and natural gas in Western Canada.

The financial statements have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles. The interim unaudited consolidated financial statements have been prepared following the same accounting policies and methods of computation as the consolidated financial statements for the fiscal year ended December 31, 2005. The disclosures included below are incremental to those included with the annual consolidated financial statements. The interim consolidated financial statements 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.

3. Acquisitions

On February 9, 2006 Welton acquired all of the issued and outstanding securities of a private company for total cash consideration of $980 including positive working capital. Welton has accounted for the acquisition using the purchase method of accounting.

The allocation of the purchase price to the fair value of the assets acquired and liabilities assumed is as follows:



Consideration:
Cash $ 959
Transaction costs 21
------------------------------------------------------------------------
$ 980
------------------------------------------------------------------------
Allocation of purchase price:
Undeveloped land $ 1,022
Working capital 9
Future income tax liability (51)
------------------------------------------------------------------------
$ 980
------------------------------------------------------------------------
------------------------------------------------------------------------


4. Property, Plant and Equipment

March 31, 2006 December 31, 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Petroleum and natural gas properties $ 32,633 $ 28,170
Land and seismic 11,377 9,937
Production equipment 9,851 9,106
Other 242 196
------------------------------------------------------------------------
54,103 47,409
------------------------------------------------------------------------
Accumulated depletion and depreciation (6,911) (5,263)
$ 47,192 $ 42,146
------------------------------------------------------------------------
------------------------------------------------------------------------

The calculation of the 2006 depletion and depreciation excludes $13,138
(2005 - $4,581) for undeveloped properties and $411 (2005 - $258) for
the estimated salvage value of production equipment.


5. Asset Retirement Obligation

The asset retirement obligation was estimated by management based on the present value at the credit adjusted risk-free rate of 8.5% of the Company's share of its wells, estimated costs to abandon and reclaim those wells and the estimated timing of the costs to be incurred in future periods. These costs are expected to be incurred over 35 years.



------------------------------------------------------------------------
Opening balance, December 31, 2004 $ 98
Increase in liability due to acquisitions 369
Increase in liability during period 396
Decrease in liability from sale of assets -
Obligations settled (27)
Accretion expense 24
------------------------------------------------------------------------
Balance, December 31, 2005 $ 860
------------------------------------------------------------------------
Increase in liability during period 62
Obligations settled (13)
Accretion expense 18
------------------------------------------------------------------------
Balance, March 31, 2006 $ 927
------------------------------------------------------------------------
------------------------------------------------------------------------


6. Notes Payable and Bank Loan

At March 31, 2006 the Company had banking arrangements which were completely undrawn with a Canadian chartered bank. The arrangements include a $5,500 demand loan facility and a $1,000 acquisition and development facility. The demand loan facility bears interest at bank prime rate plus 0.5%, and is secured by a $25,000 fixed charge Debenture and a floating charge over all assets of the Company.

7. Convertible Debentures

On February 27, 2006 the Company issued $10,500 principal amount of 8% secured Convertible Debentures. The debentures bear interest from the date of issue, which is paid quarterly in arrears commencing June 30, 2006. The debentures are convertible at the option of the holder at any time into fully paid common shares at a conversion price of $1.55 per share. After July 15, 2007 and with the consent of any holder controlling directly or indirectly more than 25% of the outstanding Convertible Debentures, the Convertible Debentures will be redeemable by the Corporation in the event that the weighted average trading price of the Common Shares on the Toronto Stock Exchange exceeds $2.06 for a period of 20 days, on payment of a price equal to par plus any accrued and unpaid interest up to and not including the date of redemption. The debentures mature on January 15, 2009. The proceeds of this offering were used to repay the $10,500 note payable to Brompton Financial Limited, a related party. The original financing was required to complete the acquisition of Era Oil & Gas Corporation on September 2, 2005.

The Convertible Debentures have been classified as debt, net of the fair value of the conversion feature at the date of issue, which has been classified as part of shareholders' equity. The value of the debt was calculated as the present value of the principal and interest payments with the remainder of the value attributed to the conversion feature and recorded as equity. The debt portion will accrete up to the principal balance at maturity. Issue costs have been classified under deferred financing charges and are being amortized based on the term of the Debentures. The accretion, amortization of issue costs and the interest paid are expensed within "interest, financing and bank charges" in the consolidated statement of operations. If the debentures are converted into common shares, that portion of the value of the conversion feature within shareholders' equity will be reclassified to Share Capital along with the principal amount converted. The following table sets forth a reconciliation of the debenture activity.


Debt Equity Principal
As at March 31, 2006 Portion Portion Total Outstanding
------------------------------------------------------------------------
February 27, 2006 Issuance $ 10,068 $ 432 $ 10,500 $ 10,500
Accretion 14 - 14 -
Conversion to common shares - - - -
------------------------------------------------------------------------
Balance, end of period $ 10,082 $ 432 $ 10,514 $ 10,500
------------------------------------------------------------------------
------------------------------------------------------------------------


8. Share Capital

Authorized
An unlimited number of common shares with no par value.



Number of
Shares Amount
Balance, December 31, 2004 23,420 10,017
------------------------------------------------------------------------
Issue of flow-through common shares 6,166 9,249
Issue of common shares 833 1,250
Exercise of stock options 169 143
Issue of common shares with respect to the
acquisition of Infiniti 7,915 11,233
Share issue costs, net of future tax effect
of $180 - (345)
Tax effect of flow-through share
renunciations - (1,784)
------------------------------------------------------------------------
Balance, December 31, 2005 38,503 $ 29,763
------------------------------------------------------------------------
Issue of common shares on exercise of
warrants 157 125
Share issue costs, net of future tax
effect of $2 - (5)
Tax effect of flow-through share
renunciations - (2,922)
------------------------------------------------------------------------
Balance, March 31, 2006 38,660 $ 26,961
------------------------------------------------------------------------


The basic and diluted weighted average numbers of common shares outstanding during the year were 38,618 (2005 - 23,438) and 39,690 (2005 - 24,094) respectively. A total of 1,355 options were excluded from the diluted calculations as they were anti-dilutive. The impact of the convertible debentures has also been excluded from the diluted calculations as it is anti-dilutive.



Number of
Shares Amount
------------------------------------------------------------------------
Common Share Warrants
Balance, December 31, 2004 157 -
------------------------------------------------------------------------
Issuance of warrants pursuant to Infiniti
acquisition 2,291 -
Expiry of warrants (312) -
------------------------------------------------------------------------

Balance, December 31, 2005 2,136 $ -
------------------------------------------------------------------------

Warrants exercised (157) -
Expiry of warrants - -
------------------------------------------------------------------------

Balance, March 31, 2006 1,979 $ -
------------------------------------------------------------------------


On August 4, 2005, pursuant to the Infiniti acquisition the Company issued 1,979 warrants. These warrants are exercisable at $1.75 per common share until August 4, 2007.

9. Stock Option Plan

Under the Stock Option Plan, the Board of Directors may grant to any director, officer, employee or consultant, options to acquire common shares limited to the lesser of 5,000 common shares or 10% of the outstanding common shares of the Company. Options vest at the discretion of the Board and the term shall not exceed five years from the date of grant.

A summary of the changes and the Company's outstanding options is presented below.


Weighted
Average
Exercise
Number Price
------------------------------------------------------------------------
Outstanding, December 31, 2004 1,600 $0.54
------------------------------------------------------------------------
Granted 1,543 1.26
Exercised (169) 0.85
Cancelled (139) 1.14
------------------------------------------------------------------------
Outstanding, December 31, 2005 2,835 $0.88
------------------------------------------------------------------------
Granted 680 1.26
Exercised - -
Cancelled (65) 1.45
------------------------------------------------------------------------
Outstanding, March 31, 2006 3,450 $0.95
------------------------------------------------------------------------
------------------------------------------------------------------------

A summary of the options outstanding under the Company's Option Plan
as at March 31, 2006 is as follows:

Weighted Weighted
average average
Ranges of Options remaining exercise
exercise price outstanding term (years) Exercisable price
------------------------------------------------------------------------
$0.27 - $0.40 1,150 2.6 833 $0.35
$0.95 - $1.18 870 3.9 225 $1.00
$1.20 - $1.50 1,430 4.4 163 $1.50
------------------------------------------------------------------------
$0.27 - $1.50 3,450 3.6 1,221 $0.62
------------------------------------------------------------------------


The fair value of options granted after January 1, 2003 but before August 10, 2005 is determined on the date of the grant based on its minimum value which is computed as the current price of the stock reduced to exclude the present value of any expected dividends minus the present value of the exercise price. The minimum value was calculated using the following assumptions: current price of $0.90 (2004 - $0.90); discount rate 6% (2004 - 6%); and no dividends.

On August 10, 2005, the Company was listed on the Toronto Stock Exchange and its common shares became publicly traded. Consequently, for options granted after August 10, 2005 the Company determines the fair value of these options using the Black-Scholes option pricing model. The following weighted average assumptions were used for options granted in 2006: expected volatility of 50%, risk free interest rate of 4% and expected life of five years. The weighted average fair value of options granted during the year was $0.61 per share.

10. Related-Party Transactions

During the three month period ended March 31, 2006, Directors and officers of the Company have been granted 530 (2005 - 160) stock options under the Stock Option Plan.

Certain management functions of the Company have been provided by Brompton Limited ("BL"), the parent company of BFL. This includes the provision of certain senior management functions, certain accounting and administrative staff, office space, supplies and office equipment. Pursuant to this arrangement, BL is entitled to recover costs in providing these services. For the period ended March 31, 2006 costs of $34 (2005 - $36) were charged by BL. For the Note Payable (see Note 6) the Company has paid interest of $95 and loan and stand-by fees of $70 in 2006 to BFL. Of the above amounts, $69 (2005 - $5) was payable to BFL and BL at March 31, 2006.

All related-party transactions were recorded at the exchange amount in 2006 and 2005.



11. Interest and Financing Charges

The following table outlines the components within interest and
financing charges.


Three months ended
March 31
------------------------------------------------------------------------
Three months ended March 31 2006 2005
------------------------------------------------------------------------
Interest and loan fees on bridge loan 172 -
Interest on debentures 74 -
Amortization of debenture issue costs 9 -
Accretion of debentures 14 -
------------------------------------------------------------------------
Total interest and financing charges 269 -
------------------------------------------------------------------------


12. Commitments

The Company has an obligation to renounce remaining qualifying expenditures of $1,192 for the December 2005 flow-through share issuance during 2006. The Company has an obligation to incur qualifying expenditures totalling $7,999 during 2006 to meet its flow-through share obligations. As at March 31, 2006 the Company has satisfied $4,982 of this obligation and has until the end of 2006 to incur the remaining qualifying expenditures.

As a result of a corporate acquisition in 2005, the Company assumed a commitment of a Net Profits Interest Agreement ("NPI"). The principal amounts of the NPI Debentures accrue interest from October 1, 2001, at the simple rate of the Royal Bank of Canada prime rate plus 2%. The principal and interest are to be repaid if, and when, there is a net profit of the Company's production from the Brazeau River Nisku "I" Pool, without recourse against any of the Company's other petroleum and natural gas assets. These net profits are contingent upon the development of this property. Any payments are to be made from 50% of net profits, until the NPI has been fully repaid. Thereafter, the Company will pay 10% of net profits. The Company's costs to be deducted from revenues in calculating Net Profits include the Company's share of capital and operating costs and overhead expenses. Costs not recovered in a period are carried forward to subsequent periods until recovered, and bear interest at the same rate as noted above. As at March 31, 2006 the total commitment including interest is $3,903.

The NPI is reflected in the Company's independent engineers reserve report for the calculation of future cash-flows.

13. Reclassification

Certain information provided for prior periods has been reclassified to conform to the presentation adopted in 2006.




Corporate Information

DIRECTORS & OFFICERS: AUDITORS
Aubrey W. Baillie(1) PricewaterhouseCoopers LLP
Director Calgary, Alberta

Robert A. Befus TRANSFER AGENT
Vice President Exploration CIBC Mellon Trust Company
Toronto, Ontario
Peter A. Braaten
Chairman SUBSCRIPTION AGENT
Valiant Trust Company
Donald A. Engle
Director and President BANKER
National Bank of Canada
Moyra E. MacKay
Corporate Secretary WEBSITE
www.weltonenergy.com
Robert L. McLeish(1)
Director MAILING ADDRESS
Suite 2180, Sun Life Plaza,
David S. Oginski North Tower
Chief Operating Officer 140 - 4th Avenue SW
Calgary, Alberta
Raymond R. Pether T2P 3N3
Director and Chief Executive Officer
Phone: 403-233-2393
Mark R. Smith Fax: 403-264-6219
Director
CONTINUOUS DISCLOSURE MANAGER
Shyla M. Stinson Contact: Donald A. Engle
Controller Phone: 403-215-4747
Email: engle@weltonenergy.com
David E. Thring(1)
Director

Peter L. Wallace
Lead Director

David C. Whiteley
Chief Financial Officer


(1) Member of Audit and Corporate Governance Committees

ABBREVIATIONS

bbl barrel
bbls barrels
bcf billion cubic feet
bbls/d barrels per day
boe barrels of oil equivalent
boe conversion 6 mcf to 1 bbl
ratio
boe/d barrels of oil equivalent per day
mbbls thousand barrels


mboe thousand barrels of oil equivalent
mcf thousand cubic feet
mcf/d thousand cubic feet per day
mcfe/d thousand cubic feed equivalent per day
mmbtu million British thermal units
mmcf million cubic feet
mmcf/d million cubic feet per day
mmcfe/d million cubic feed equivalent per day
NGL natural gas liquids
WTI West Texas Intermediate at Cushing, Oklahoma


Contact Information