Accrete Energy Inc.
TSX : GZ

Accrete Energy Inc.

August 10, 2006 21:59 ET

Accrete Energy Inc. Announces Second Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 10, 2006) - Accrete Energy Inc. (TSX:GZ) is pleased to announce the operational and financial results for the six month period ended June 30, 2006.

Second quarter activities were focused on production acceleration in the Harmattan area and land acquisition for the development of new opportunities.

Harmattan continued to dominate the capital expenditure program. Drilling and completion activities in this area increased significantly with eleven zones completed from either four new wells drilled in the quarter or dually completed in preexisting wells. This new production is processed through a new compressor facility installed in May of this year bringing total production capacity to 13mmcf/d. This new compressor facility has allowed additional higher working interest production into the system resulting in a net 50% increase in volumes from approximately 1600 boe/d to 2400 boe/d.

Wet surface conditions, late in the second quarter, delayed operations in the Claresholm area. Since that period, the Company has recompleted a new target on 100% working interest lands which are currently being evaluated. This opportunity, if successful, could lead to significant development on Accrete's extensive land holdings in this area and utilize spare capacity in Company owned facilities.

Land acquisition has been the priority in the Edson area. The Company, through farmin and crown sales, now holds 14 sections of land at 100% working interest. The first well in the area spud in July and is currently being completed and evaluated. The second well in this area spud in early August.

The Company had a small land position in the Pouce Coupe area near Grand Prairie, Alberta and has since acquired an additional two sections of 100% working interest lands at the July land sale. The Company now has four firm drilling locations, two of which are low risk development wells and two locations which are moderate risk but high reward opportunities. These locations are scheduled to be drilled before year end.

Accrete's management believes that although the Company is nearing the end of its exploitation efforts on its current land holdings in it's core area of Harmattan, the Company's exceptional inventory of undeveloped and under exploited properties will provide the Company with the opportunity for growth through 2007.

Management Discussion and Analysis

The following discussion and analysis was prepared on August 9, 2006 and is management's assessment of Accrete's historical financial and operating results and should be read in conjunction with the unaudited interim financial statements and related notes for the six months ended June 30, 2006 and the audited financial statements, related notes and MD&A for the year ended December 31, 2005.

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

Additional information may be found on the Company's web site at www.accrete-energy.com and on the SEDAR web site at www.sedar.ca.

Accrete was established on June 1, 2004 and is a Calgary based, natural gas focused exploitation and development company that operates exclusively in Alberta.

It has production in the Harmattan and Claresholm areas and has drilling prospects at Pouce Coupe and Ansell.

On April 19, 2006, Accrete closed the sale of all of its interests in the Boltan area for gross proceeds of $9.55 million. The effective date of the sale was January 1, 2006. Revenues received and expenditures incurred in 2006 in respect to that area are included in Accrete's results until the closing date and are accounted for as adjustments to the sale price in accordance with generally accepted accounting principles.

Accrete's shares trade on the Toronto Stock Exchange ("TSX") under the symbol GZ.

Business Environment

The price of natural gas continued to decline during 2006 from the record pricing of the 4th quarter of 2005 as moderate temperatures prevailed and it was feared that supply would significantly outstrip demand. The sales price of oil, on the other hand, increased slightly during the current period quarter in the face of supply concerns brought about by geopolitical conditions overseas.

AECO-C next day index prices for natural gas decreased from an average of $11.88/Gj in December 2005 to $5.56/Gj for June 2006. Edmonton par prices for oil, on the other hand, increased to an average of $74.62/Bbl for the first half of 2006 from $72.50/Bbl for the last quarter of 2005.

The cost of goods and services used in the industry continued to creep upwards in the face of increased demand.



Financial Information

Total Revenue Net Income Net Income Net Income
($) ($) (Loss) Basic Diluted
$/Share $/Share
------------------------------------------------------------------------
2006
First Quarter 9,820,781 1,583,824 0.10 0.10
Second Quarter 9,183,064 1,389,676 0.09 0.08
Total 19,003,845 2,973,500 0.19 0.18
2005
First Quarter 3,633,360 707,153 0.05 0.05
Second Quarter 2,953,784 (818,297) (0.06) -
Third Quarter 6,057,942 850,334 0.06 0.05
Fourth Quarter 13,199,898 2,546,281 0.17 0.16
Total 25,844,984 3,285,471 0.23 0.21
2004
Second Quarter 197,505 (209,321) (0.03) -
Third Quarter 490,332 (155,719) (0.02) -
Fourth Quarter 872,979 (407,991) (0.02) -
Total 1,560,816 (773,031) (0.07) -


The Company commenced operations on June 1, 2004 when it acquired assets under a plan of arrangement entered into by Provident Energy Trust, Provident Energy Ltd., Olympia Energy Inc. and Accrete Energy Inc. Accordingly, the first reporting period included only one month of production. Second quarter 2004 production comprised just over 150 BOE/Day, split approximately one quarter from Atlee Buffalo and three quarters from Boltan.

By the fourth quarter of 2005, production increased to an average of 2,216 BOE/Day. This reflected the effect of production from wells drilled at Claresholm, continued drilling successes at Harmattan and the effect of infrastructure improvements at Boltan. Record prices for natural gas were recorded in December and oil prices remained strong during the period. All of this resulted in a very large increase in revenues. This was offset in part by increasing operating costs and increases in royalties because of both the price sensitive nature of Crown royalties and a larger proportion of freehold and gross overriding royalty bearing wells.

Production for the first quarter of 2006 remained flat at 2,224 BOE/Day. The Company drilled 7 (5.2) net wells during the period vs. 12 (7.4 net) in the previous period. Of the 7 wells drilled, only 2 were tied in by the end of the quarter due to delays in the field. Production for the second quarter averaged 2,437 BOE/Day. This increase was attributable to the tie in of wells drilled in 2006 and was offset in part by normal production declines.

During the second quarter, 4 (3.6 net) wells were drilled resulting in 3 (2.7 net) oil wells and 1 (.9 net) gas wells.

At the end of the second quarter, 5 (4.05 net) wells remained to be tied in. Two of these (1.8 net) will be tied in in due course, 2 (1.25 net) will be evaluated for up hole potential and the remaining well has been assigned marginal economics in the light of current commodity pricing.

Oil prices remained strong due to political instability in major overseas producing areas while natural gas prices declined from the previous periods due to mild weather and the resultant high storage levels. Since almost two thirds of the Company's production volumes relate to natural gas production, the reduction in the price of natural gas had a significant impact on revenue.

Accrete experienced increases in costs at all levels consistent with those incurred by other operators the industry. Costs were driven upward by a combination of increased demand and scarcity of supply of goods and services necessary to drill and to operate oil and gas wells in Alberta.




Operational Activities

Production
3 Months 3 Months 6 Months 6 Months
Ended June Ended June Ended June Ended June
30, 2006 30, 2005 30, 2006 30, 2005
------------------------------------------------------------------------
Oil (bbl/d) 183 72 176 71
NGL (bbl/d) 665 217 663 221
------------------------------------------------------------------------
Total Oil/NGL (bbl/d) 848 289 839 292
Gas (mcf/d) 9,532 2,267 8,945 3,269
------------------------------------------------------------------------
Total (boe/d) 2,437 668 2,330 838
------------------------------------------------------------------------

Natural Gas Production (mcf/d)
3 Months 3 Months 6 Months 6 Months
Ended June Ended June Ended June Ended June
30, 2006 30, 2005 30, 2006 30, 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo 33 93 32 108
Boltan 97 399 308 396
Claresholm 3,967 382 3,573 766
Harmattan 5,435 1,393 5,032 1,999
------------------------------------------------------------------------
Total 9,532 2,267 8,945 3,269
------------------------------------------------------------------------

Crude Oil Sales (bbl/d)
3 Months 3 Months 6 Months 6 Months
Ended June Ended June Ended June Ended June
30, 2006 30, 2005 30, 2006 30, 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm - - - -
Harmattan 183 72 176 71
------------------------------------------------------------------------
Total 183 72 176 71
------------------------------------------------------------------------

Natural Gas Liquids Sales (bbl/d)
3 Months 3 Months 6 Months 6 Months
Ended June Ended June Ended June Ended June
30, 2006 30, 2005 30, 2006 30, 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan 2 4 3 3
Claresholm 57 2 52 5
Harmattan 606 211 608 213
------------------------------------------------------------------------
Total 665 217 663 221
------------------------------------------------------------------------



The increase in production levels are a result of the Company's drilling activity offset in part by natural declines and the loss of production resulting from the sale of the Boltan property.




Product Prices

Natural Gas Prices ($/mcf)
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo 6.02 7.56 7.09 6.85
Boltan 6.46 7.29 7.82 6.72
Claresholm 6.67 8.05 7.62 9.87
Harmattan 5.94 8.44 6.80 7.26
------------------------------------------------------------------------
Average Price 6.25 8.44 7.16 7.36
------------------------------------------------------------------------

Crude Oil Sales Prices ($/bbl)
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - - -
Boltan - - -
Claresholm - - -
Harmattan 79.47 82.32 73.34 67.60
------------------------------------------------------------------------
Average Price 79.47 82.32 73.34 67.60
------------------------------------------------------------------------

Natural Gas Liquids (NGL) Sales Prices ($/bbl)
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - - -
Boltan 56.31 67.11 57.66 63.31
Claresholm 74.19 79.60 70.55 76.05
Harmattan 34.42 32.90 37.64 32.52
------------------------------------------------------------------------
Average Price 37.71 34.06 40.31 33.95
------------------------------------------------------------------------



The Company has not entered into any hedging arrangements with respect to the sale of its production

Natural gas prices rose during 2005 reaching peak levels by the end of the year. The decline in prices that commenced in the first quarter continued through the second quarter 2006.

An adjustment was booked in June 2005 in respect to sales from the Harmattan area that resulted in higher apparent oil and natural gas prices for the period ended June 30, 2005. Normally Claresholm gas commands a higher price because it includes ethanes that give it a higher heating content. The Boltan property was sold early in the second quarter when pricing was higher than it was for the remainder of the period.

Continued strength in world oil prices is reflected in the increased crude oil price realized by Accrete.

At Harmattan, NGLs comprise a considerable portion of ethanes which are relatively low priced. Claresholm NGL's are higher in pentanes, which command higher prices. NGL's at Boltan comprised a blended product stream.

The Company gleans processing revenue from its facilities at Harmattan that did not exist in 2005.



Revenue

Total Sales
($) 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Oil 1,325,521 539,906 2,340,774 871,644
NGL 2,288,316 671,461 4,839,156 1,358,949
Gas 5,422,351 1,742,417 11,599,289 4,356,551
Processing 146,876 - 224,626 -
------------------------------------------------------------------------
Total 9,183,064 2,953,784 19,003,845 6,587,144
------------------------------------------------------------------------

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

Natural Gas Sales Revenue
($) 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo 17,866 64,547 41,499 132,484
Boltan 57,115 264,386 435,533 481,822
Claresholm 2,409,281 342,955 4,926,015 1,116,437
Harmattan 2,938,089 1,070,529 6,196,242 2,625,808
------------------------------------------------------------------------
Total 5,422,351 1,742,417 11,599,289 4,356,551
------------------------------------------------------------------------

Crude Oil Sales Revenue
($) 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm - - - -
Harmattan 1,325,521 539,906 2,340,774 871,644
------------------------------------------------------------------------
Total 1,325,521 539,906 2,340,774 871,644
------------------------------------------------------------------------

Natural Gas Liquids (NGL) Sales Revenue
($) 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan 10,740 24,956 31,109 34,813
Claresholm 380,198 16,711 664,260 69,523
Harmattan 1,897,378 629,794 4,143,787 1,254,613
------------------------------------------------------------------------
2,288,316 671,461 4,839,156 1,358,949
------------------------------------------------------------------------

Processing Revenue
($) 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm (32,750) - - -
Harmattan 179,626 - 224,626 -
------------------------------------------------------------------------
Total 146,876 - 224,626 -
------------------------------------------------------------------------



The increase in revenue occurred primarily because of the addition of production from new wells and to a small extent, an increase in the price received for oil. These gains were offset in part by natural declines, the decline in the price of natural gas and the loss of production from the Boltan area.




Royalties
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
Area Total $ Rate Total $ Rate Total $ Rate Total $ Rate
Atlee-Buffalo 1,630 9% 7,968 12% 7,565 18% 24,962 19%
Boltan 4,253 6% 15,668 5% 42,326 9% 33,319 6%
Claresholm 804,924 29% 69,519 19% 1,556,820 28% 229,304 19%
Harmattan 1,565,861 25% 419,344 19% 3,336,954 29% 1,008,765 21%
------------------------------------------------------------------------
Total 2,376,668 26% 512,499 17% 4,943,665 29% 1,296,350 20%
------------------------------------------------------------------------


Crown royalties, net of Alberta Royalty Tax Credit, were $1,941,432 for the second quarter and $3,971,940 for the year to date. Total gross overriding royalties were $324,743 and $740,624 respectively, and freehold royalties totaled $110,493 and $231,101 respectively. The Company had reached the maximum allowable ARTC early in the second quarter 2006. From that point onward in 2006 no further credits are available. The apparent reduction in rate at Harmattan in 2006, occurs because a greater proportion of freehold wells bearing a relatively lower royalty rate were put on stream.

Atlee Buffalo production is subject to low rates for shallow low productivity wells. Boltan production enjoyed a deep gas crown royalty holiday and was subject only to gross overriding royalties on production.



Production and Transportation Expenses

($) 3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
Area $ $/boe $ $/boe $ $/boe $ $/boe
Atlee-Buffalo 8,894 17.97 20,841 14.65 13,643 13.98 47,758 14.82
Boltan 53,842 32.37 39,060 6.09 177,850 18.12 79,334 6.34
Claresholm 385,931 5.91 55,669 8.77 654,785 5.59 108,095 4.37
Harmattan 743,722 4.82 300,138 6.29 1,271,754 4.33 599,730 5.31
Minor
Properties 5,291 n/a - - 2,216 n/a - -
------------------------------------------------------------------------
Total 1,197,680 5.40 415,708 6.85 2,120,248 5.03 834,917 5.51
------------------------------------------------------------------------


Atlee Buffalo is a very small part of the overall operation and although operating costs are high, the effect on total expenses is minimal.

Boltan costs reflect ongoing start up costs incurred in connection with the compression facility. Costs for the second quarter at Boltan include normal seasonal bulk purchases of supplies that could not be postponed even though the property was sold early in the quarter.

Claresholm costs in 2005 reflect start up costs on new wells and the processing plant.

The industry as a whole was challenged by a scarcity of supply of services and increasing prices that result. Costs in general increased in spite of the Company's best efforts to manage them.



Field and Corporate Netbacks

Field Netback
($/boe) 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
Area June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------

Atlee-Buffalo 14.84 25.17 20.79 18.55
Boltan 5.87 36.31 25.11 32.35
Claresholm 23.98 39.04 28.82 35.25
Harmattan 26.14 32.38 28.24 28.10
------------------------------------------------------------------------
Field
Netback 25.30 33.27 28.31 29.38
------------------------------------------------------------------------



Field net backs basically reflect the effect of lower product prices for natural gas, rising royalty rates and increasing pressure on operating costs.



Corporate Netback
($) 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
Area June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Field Netback 5,608,716 2,025,577 11,939,932 4,455,877
General and
Administrative 667,848 625,780 1,384,424 1,214,571
------------------------------------------------------------------------
Corporate
Netback 4,940,868 1,399,797 10,555,508 3,241,306
------------------------------------------------------------------------



Corporate netback increased with volumes, while administrative expenses remained relatively constant.



General and Administrative Expense
($) 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Salary & Benefits 567,247 438,514 1,088,581 913,405
General Office Expenses 356,619 382,656 720,116 613,539
------------------------------------------------------------------------
923,866 821,170 1,808,697 1,526,944
Recoveries (256,018) (195,390) (424,273) (312,373)
------------------------------------------------------------------------
Total 667,848 625,780 1,384,424 1,214,571
------------------------------------------------------------------------



The Company has increased staffing levels over the past year and now employs 16 people.

General and administrative expenses are recovered through billings to participants in company operated projects in accordance with standard industry practice. The increase in recoveries relates to the increase in capital expended on capital projects.

Interest Expense

At June 30, 2006, Accrete's bank indebtedness was $22.3 million. Accrete utilized its operating line of credit and cash flow to fund its 2006 capital program. As a result, interest expense of $308,000 was incurred in the second quarter of 2006 and $540,000 was incurred for the six months ended June 30, 2006.

Stock-Based Compensation

Stock-based compensation is accounted for using the fair value method. Under the fair value method of accounting, this compensation expense is recorded in the earnings statement over the vesting period. In the second quarter of 2005, Accrete recognized options previously disclosed but deemed to be not granted until the Annual General Meeting was held on May 5, 2005. This retroactive granting led to an abnormal period cost, with a large retroactive component to it.

Depletion Depreciation & Accretion

Depletion, depreciation and accretion of the asset retirement obligation for the three and six month period ended June 30, 2006 totaled $3,179,000 or $14.22/Boe, and 5,799,000 or $13.63 /Boe respectively. The charge for the first quarter 2006 amounted to $2,597,000 or $12.97/Boe. The rate increase is mainly attributable to increasing field costs. Costs of $2,685,000 relating to unproved properties have been excluded from costs subject to depletion for the 3 month period ended June 30, 2006. This included the costs of undeveloped land such as that at Ansell and Pouce Coupe that has been purchased at land sales for future exploitation.

Income Taxes

The Company is not liable for any cash taxes.

Cash Flow

Cash flow from operations for the three months ended June 30, 2006 was $4,632,622 ($0.30 per share) and $10,015,966 ($0.66 per share) for the six months ended June 30, 2006.



Capital Expenditures

Capital expenditures for the six months ending June 30, 2006:

6 Months 3 Months 3 Months
Ended Ended Ended
June 30, June 30, March 31,
2006 2006 2006
----------------------------------------
$ $ $
----------------------------------------
Drilling and Completions 18,562,217 10,108,953 8,453,264
Equipping and Tie-Ins 2,159,396 1,268,835 890,561
Land 1,434,399 2,833 1,431,566
Disposition (9,342,639) (9,342,639) -
Office Equipment 2,865 - 2,865
------------------------------------------------------------------------
Total Cash Expenditures 12,816,238 2,037,982 10,778,256
Allowance for future
restoration expenditures 208,149 71,907 136,242
------------------------------------------------------------------------
Total 13,024,387 2,109,889 10,914,498
------------------------------------------------------------------------



During the second quarter the Company drilled 4 wells (3.6 net) comprising 3 (2.7 net) oil wells and 1 (0.9 net) gas wells. A success rate of 100% was achieved. For the year, the Company has drilled 11 wells (8.8 net), comprising 7 (6.0 net) oil wells and 4 (2.8 net) gas wells. In addition, the Company conducted completion operations on new zones in existing wells in the Harmattan area. The Company also completed the expansion of its compression facilities at Harmattan.




Liquidity and Capital Resources
$
------------
Exploration and development program funding

Cash, Beginning of Year -
Cash flow from operations 10,015,966
Change in non-cash working capital (4,892,232)
Increase in Bank Debt 7,692,504
Cash, end of period -
------------
Capital expenditures during the period 12,816,238
------------



Accrete intends to fund its capital expenditure program from internally generated cash flow, debt, and new equity if available on favorable terms.

At June 30, 2006 the Company's credit facility comprises a Revolving Operating Demand Loan facility with a credit limit of $40,000,000.

The underlying borrowing base for this facility was determined by the Bank after the consideration of the sale of the Boltan property.

The credit facility bears interest at bank prime plus one eighth percent and has no specific terms of repayment aside from the bank's right of demand and periodic review.

The capital intensive nature of the Company's activities may create a negative working capital position from time to time.

The Company's drilling program is very flexible and can be tailored to available funds. Success in its focus areas means that additional funds will be raised through bank debt or additional share issuances or both to expedite the drilling program. Commodity prices and production volumes have a large impact on the ability of the Company to generate adequate cash flow to meet its obligations. A prolonged decrease in commodity prices would negatively affect cash flow from operations and would also likely result in a reduction in the amount of bank loan available. If the capital expenditure program does not result in sufficient additional reserves and/or production it would likely have a negative impact on the Company's liquidity. A lack of or restricted access to natural gas processing facilities would have a similar effect. A prolonged decrease in commodity prices would also likely affect the availability of funds through the public equity market. See the caption entitled "Risks" for further items that could affect liquidity.

Management expects that the public capital market will remain buoyant and that funds will be readily available. Management also believes that adequate bank financing is and will be available to supplement cash flow to fund its exploitation program. New equity will be used in such funding if available on favourable terms.

Outlook

The Company will continue to focus its development efforts on its acreage at Harmattan and Claresholm with a view to increasing reserves and production.

The Company will continue to seek opportunities in new areas while aggressively developing the core areas discussed in this report.

Critical Accounting Estimates

Oil and Gas Accounting

The Company follows the full-cost method of accounting whereby all costs related to the acquisition, exploration and development of petroleum and natural gas properties, net of government incentives, are capitalized. Such costs include lease acquisition costs, geological and geophysical expenditures, costs of drilling both productive and non-productive wells and related plant and production equipment costs.

Proceeds on disposition of petroleum and natural gas properties are accounted for as a reduction of capitalized costs with no gains or losses recognized unless such disposition results in a change of 20% or more in the depletion rate.

Capitalized costs, together with estimated future capital costs associated with proved reserves are depleted and depreciated using the unit-of-production method based on estimated gross proved reserves of petroleum and natural gas as determined by independent engineers. For purposes of this calculation, reserves and production are converted to equivalent units of oil based on the relative energy content of six thousand cubic feet of natural gas to one barrel of oil. Unproved properties are excluded from the depletion base until it is determined whether proved reserves are attributable to the properties or impairment occurs.

The net amount at which petroleum and natural gas properties are carried is subject to a cost recovery test (the "ceiling test").

Oil and gas assets are evaluated at least annually to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and gas assets. If the carrying value of the oil and gas assets is not assessed to be recoverable, an impairment loss will be recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost or market value unproved properties. The cash flows are estimated using future product prices and costs and are discounted using the risk free rate.

The Company records a liability for the fair value of legal obligations associated with the retirement of long-lived assets in the period in which they are incurred, normally when the asset is purchased or developed. On recognition of the liability, there is a corresponding increase in the carrying amount of the related asset known as the asset retirement cost which is depleted using the unit-of- production method. The liability is adjusted in each reporting period to reflect the passage of time, with the accretion charged to earnings, and for revisions to the estimated future cash flows.

Income Taxes

The determination of the Company's income and other tax liabilities requires interpretation of complex laws and regulations often involving multiple jurisdictions. All tax filings are subject to audit and potential reassessment after a considerable lapse of time. Accordingly, the actual income tax liability may differ significantly from the liability estimated or recorded.

Other Estimates

The accrual method of accounting requires management to incorporate certain estimates, including estimates of revenues, royalties and production costs at a specific reporting date but for which actual revenues and costs have not yet been received; and estimates on capital projects which are in progress or recently completed where actual costs have not been received at a specific reporting date.

The Company ensures that the individuals with the most knowledge of the activity are responsible for the estimate. These estimates are then reviewed for reasonableness and past estimates are compared to actual results in order to make informed decisions on future estimates.

Stock Based Compensation

The Company has not incorporated an estimated forfeiture rate for stock options that will not vest and will account for actual forfeitures as they occur. The fair value of each stock option is determined at each grant date using the Black-Scholes model.

Risks

Accrete, in common with other companies participating in the oil and gas business in Canada, is exposed to a number of business risks. These risks can be categorized as operational, financial and regulatory, with some beyond the Company's control.

Operational risks include finding and developing oil and natural gas reserves on an economic basis, reservoir production performance, commodity marketing risk and the risk that employees and contract services can be hired and retained on a cost effective basis.

Accrete has mitigated these risks to the extent possible by employing a team of highly qualified professionals, providing a compensation scheme that will reward above average performance and by maintaining long term relationships with its suppliers.

Accrete also maintains an insurance program that is consistent with industry practice that should protect against the loss of assets through fire, blowout, pollution and other untoward events and the resultant business interruption.

Accrete maintains an inventory of prospects that are within the scope of the Company's key areas and are strategically diverse so as to minimize the Company's exposure to drilling risk. Furthermore, Accrete employs the latest technological methods in that quest.

Commodity prices and production volumes have a large impact on the ability for the Company to generate adequate cash flow to meet its obligations. A prolonged decrease in commodity prices would negatively affect cash flow from operations and would also likely result in a reduction in the amount of bank loan available. If the capital expenditure program does not result in sufficient additional reserves and/or production it would likely have a negative impact on the Company's liquidity. A lack of, or restricted access to natural gas processing facilities would have a similar effect. A prolonged decrease in commodity prices would also likely affect the availability of funds through the public equity market.

Financial risks include commodity prices, and to some extent, interest rates and the Canadian/US exchange rate. The Company may employ financial instruments, when prudent, to lessen the effects of such risks, but it has no such contracts in place at this time.

Exploration, Development and Production Risks

Oil and natural gas exploration involves a high degree of risk, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. There is no assurance that expenditures made on future exploration by Accrete will result in new discoveries of oil or natural gas in commercial quantities. It is difficult to project the costs of implementing an exploratory drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering varrious drilling conditions suc as over pressured zones and tools lost in the hole, and changes in drilling plans and locations as a result of prior exploratory wells or additional seismic data and interpretations thereof.

The long-term commercial success of Accrete depends on its ability to find, acquire, develop and commercially produce oil and natural gas reserves. No assurance can be given that Accrete will be able to continue to locate satisfactory properties for acquisition or participation. Moreover, if such acquisitions or participations are identified, Accrete may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations uneconomic.

Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions. While diligent well supervision and effective maintenance operations can contribute to maximizing production rates over time, production delays and declines from normal field operating conditions cannot be eliminated, and can be expected to adversely affect revenue and cash flow levels to varying degrees.

In addition, oil and gas operations are subject to the risks of exploration, development and production of oil and natural gas properties, including encountering unexpected formations or pressures, premature declines of reservoirs, blow-outs, cratering, sour gas releases, fires and spills. Losses resulting from the occurrence of any of these risks could have a materially adverse effect on Accrete and its future results of operations, liquidity and financial condition.

Disclosure Controls and Procedures

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure. The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the annual filings, that the Company's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the Company is made known to them by others within those entities. It should be noted that while the Company's Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Non GAAP Measures

The forgoing contains the term "cash flow from operations" and "netbacks" which should not be considered an alternative to, or more meaningful than cash flow from operating activities as determined in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") as an indicator of the Company's performance. Accrete's definition of cash flow from operations and/or netbacks may not be comparable to that reported by other companies. The reconciliation between income and funds flow may be found in the statement of cash flows in the financial statements. The Company evaluates its performance based on net earnings and cash flow. The Company considers cash flow a key measure as it illustrates the Company's ability to meet obligations necessary to repay debt and fund future growth through capital investment. Cash flow per share is presented in this discussion using the weighted average shares outstanding in a manner consistent with that used to calculate earnings per share.

The reader is cautioned that the use of the term boe's ("barrels of oil equivalent") may be misleading particularly when used in isolation. A boe conversion of 6 mcf to 1 boe may not represent a value equivalency at the wellhead.

As the determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of these financial statements requires the use of estimates and assumptions which have been made using careful judgement. In the opinion of management, the unaudited interim financial statements have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized in the financial statements.

Disclaimers

Some of the statements contained herein including, without limitation, financial and business prospects and financial outlooks may be forward-looking statements which reflect management's expectations regarding future plans and intentions, growth, results of operations, performance and business prospects and opportunities. Words such as "may", "will", "should", "could", "anticipate", "believe", "expect", "intend", "plan", "potential", "continue" and similar expressions have been used to identify these forward-looking statements. These statements reflect management's current beliefs and are based on information currently available to management. Forward-looking statements involve significant risk and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements including, but not limited to, changes in general economic and market conditions and other risk factors. Although the forward-looking statements contained herein are based upon what management believes to be reasonable assumptions, management cannot assure that actual results will be consistent with these forward-looking statements. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances.

Forward-looking statements and other information contained herein concerning the oil and gas industry and Accrete's general expectations concerning this industry are based on estimates prepared by management using data from publicly available industry sources as well as from reserve reports, market research and industry analysis and on assumptions based on data and knowledge of this industry which Accrete believes to be reasonable. However, this data is inherently imprecise, although generally indicative of relative market positions, market shares and performance characteristics. While Accrete is not aware of any misstatements regarding any industry data presented herein, the industry involves risks and uncertainties and is subject to change based on various factors.



Financial Statements

Accrete Energy Inc.
Balance Sheets
(Unaudited)
June 30, December 31,
2006 2005
$ $
------------------------------------------------------------------------

ASSETS

Current assets
Accounts receivable 7,582,428 8,220,761
Prepaid expenses 331,231 64,192
------------------------------------------------------------------------
7,913,659 8,284,953
Property and equipment (note 2) 73,355,426 66,082,769
------------------------------------------------------------------------
81,269,085 74,367,722
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities 16,285,466 21,548,992
Bank indebtedness (note 3) 22,290,688 14,598,185
------------------------------------------------------------------------
38,576,154 36,147,177

Asset retirement obligation (note 5) 1,407,860 1,152,101
Future income tax (note 6) 3,802,966 3,090,924
------------------------------------------------------------------------
43,786,980 40,390,202
------------------------------------------------------------------------

SHAREHOLDERS' EQUITY

Share capital (note 4) 29,617,526 29,617,526
Contributed surplus 3,124,264 2,593,179
Retained Earnings 4,740,315 1,766,815
------------------------------------------------------------------------
37,482,105 33,977,520
------------------------------------------------------------------------
81,269,085 74,367,722
------------------------------------------------------------------------
------------------------------------------------------------------------


Accrete Energy Inc.
Statements of Income and Retained Earnings (Deficit)
(Unaudited)

Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Revenue $ $ $ $
Petroleum and natural
gas revenue 9,183,064 2,953,784 19,003,845 6,587,144
Royalties (net of
Alberta Royalty Tax
Credit) (2,376,668) (512,499) (4,943,665) (1,296,350)

------------------------------------------------------------------------
6,806,396 2,441,285 14,060,180 5,290,794
------------------------------------------------------------------------

Expenses

Production expenses 1,110,468 374,378 1,937,903 752,610
Transportation expenses 87,212 41,330 182,345 82,307
General and
administrative, net of
recoveries 667,848 625,780 1,384,424 1,214,571
Interest Expense 308,246 76,704 539,542 94,902
Stock based compensation
cost (note 4) 247,426 1,189,236 531,085 1,342,165
Depletion, depreciation
and accretion 3,179,351 781,425 5,799,339 1,711,163
------------------------------------------------------------------------
5,600,551 3,088,853 10,374,638 5,197,718
------------------------------------------------------------------------
Income before income
taxes 1,205,845 (647,568) 3,685,542 93,076
Future income taxes
(note 6) 183,831 (170,729) (712,042) (204,220)
------------------------------------------------------------------------
Net income for the
period 1,389,676 (818,297) 2,973,500 (111,144)
Retained Earnings
(Deficit) - beginning of
period 3,350,639 (811,503) 1,766,815 (1,518,656)
------------------------------------------------------------------------
Retained Earnings
(Deficit) - end of
period 4,740,315 (1,629,800) 4,740,315 (1,629,800)
------------------------------------------------------------------------
------------------------------------------------------------------------
Weighted average number
of shares (note 4) 15,232,936 13,606,562 15,232,936 13,419,749
Income per share:
Basic 0.09 (0.06) 0.19 (0.01)
Diluted 0.08 (0.06) 0.18 (0.01)



Accrete Energy Inc.
Statements of Cash Flows
(Unaudited)
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Cash provided by
(used in): $ $ $ $
Operating Activities
Net income for the
period 1,389,676 (818,297) 2,973,500 (111,144)
Items not affecting
cash:
Stock based
compensation cost 247,426 1,189,236 531,085 1,342,165
Future income taxes (183,831) 170,729 712,042 204,220
Depletion,
depreciation and
accretion 3,179,351 781,425 5,799,339 1,711,163
------------------------------------------------------------------------
4,632,622 1,323,093 10,015,966 3,146,404
Change in non-cash
working capital
(note 8) (1,085,459) 1,534,996 (1,517,896) (503,942)
------------------------------------------------------------------------
3,547,163 2,858,089 8,498,070 2,642,462
------------------------------------------------------------------------
Investing Activities
Property and
equipment additions (11,380,621) (10,124,455) (22,158,877) (20,949,018)
Disposition of
Boltan Property 8,384,968 - 9,342,639 -

Change in non-cash
working capital
(note 8) 982,114 (2,816,624) (3,374,336) 1,335,261
------------------------------------------------------------------------
(2,013,539) (12,941,079) (16,190,574) (19,613,757)
------------------------------------------------------------------------
Financing Activities

Bank debt (1,533,625) (3,468,002) 7,692,504 2,880,625
Issue of capital
stock - net - 13,550,992 - 13,550,992
------------------------------------------------------------------------
(1,533,625) 10,082,990 7,692,504 16,431,617

Increase (decrease)
in cash
Cash - beginning of
period - - - (539,678)
Cash - end of period - - - 539,678
------------------------------------------------------------------------

Supplemental
Information :
Interest Paid 308,246 76,704 539,542 94,902
------------------------------------------------------------------------
------------------------------------------------------------------------


Accrete Energy Inc.

Notes to the Financial Statements

For the period ended June 30, 2006

(Unaudited)

1. Significant Accounting Policies

As the determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of these financial statements requires the use of estimates and assumptions which have been made using careful judgement. In the opinion of management, these financial statements have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below.

Accrete Energy Inc. ("Accrete") commenced operations on June 1, 2004 when it acquired assets under a plan of arrangement entered into by Provident Energy Trust, Provident Energy Ltd., Olympia Energy Inc. and Accrete Energy Inc.

Oil and Gas Operations

Revenues from the sale of petroleum and natural gas are recorded when title passes to an external party.

The Company follows the full-cost method of accounting whereby all costs related to the acquisition, exploration and development of petroleum and natural gas properties, net of government incentives, are capitalized. Such costs include lease acquisition costs, geological and geophysical expenditures, costs of drilling both productive and non-productive wells and related plant and production equipment costs.

Proceeds on disposition of petroleum and natural gas properties are accounted for as a reduction of capitalized costs with no gains or losses recognized unless such disposition results in a change of 20% or more in the depletion rate.

Capitalized costs, together with estimated future capital costs associated with proved reserves are depleted and depreciated using the unit-of-production method based on estimated gross proved reserves of petroleum and natural gas as determined by independent engineers. For purposes of this calculation, reserves and production are converted to equivalent units of oil based on the relative energy content of six thousand cubic feet of natural gas to one barrel of oil. Unproved properties are excluded from the depletion base until it is determined whether proved reserves are attributable to the properties or impairment occurs.

Office furniture and fixtures are recorded at cost and are depreciated over their useful lives on a declining balance basis at 20% per annum.

The net amount at which petroleum and natural gas properties are carried is subject to a cost recovery test (the "ceiling test").

Oil and gas assets are evaluated at least annually to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and gas assets. If the carrying value of the oil and gas assets is not assessed to be recoverable, an impairment loss will be recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost or market value of unproved properties. The cash flows are estimated using expected future product prices and costs and are discounted using a risk-free rate of interest.

The Company records a liability for the fair value of legal obligations associated with the retirement of long-lived assets in the period in which they are incurred, normally when the asset is purchased or developed. On recognition of the liability, there is a corresponding increase in the carrying amount of the related asset, known as the asset retirement cost, which is depleted using the unit-of- production method. The liability is adjusted in each reporting period to reflect the passage of time, with the accretion charged to earnings, and for revisions to the estimated future cash flows.

Joint Ventures

A significant portion of the Company's exploration and production activities are conducted jointly with others and the financial statements reflect only the Company's proportionate interest in such activities.

Stock Based Compensation

The Company has an employee stock option plan. The compensation cost in respect of this plan is recognized in the financial statements using the fair market value method and the cost is recognized over the vesting period of the underlying security. The Company has not incorporated an estimated forfeiture rate for stock options that will not vest and will account for actual forfeitures as they occur.

Financial Instruments

The Company may enter into financial instruments and physical delivery commodity contracts from time to time to protect future earnings and cash flows from the potential impact of fluctuating commodity prices and not for speculative purposes. Gains or losses on these contracts will be included in revenues at the time the underlying commodity is sold or when the positions are settled.

To date the Company has not entered into any such agreements.

The carrying values of the Company's monetary assets and liabilities approximate their fair values.

Measurement Uncertainty

Amounts recorded for depreciation and depletion, the provision for asset retirement and abandonment costs and amounts used for ceiling test calculations are based on estimates of oil and natural gas reserves. The Company's reserve estimates are reviewed annually by an independent engineering firm. By their nature, these estimates of reserves and future cash flows are subject to measurement uncertainty, and the impact on the financial statements of future periods could be material.

Per Share Amounts

The Company uses the treasury stock method to determine the dilutive effect of stock options and other dilutive instruments. This method assumes that proceeds received from the exercise of in-the-money stock options and other dilutive instruments are used to purchase common shares at the average market price during the year.

Flow through Shares

The resource expenditure deductions for income tax purposes related to exploratory and development activities funded by flow through share arrangements are renounced to investors in accordance with income tax legislation. Future income tax liabilities and share capital are adjusted by the estimated cost of the renounced income tax deductions when the related flow through expenditures are renounced to investors.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes. Temporary differences arising from the differences between the tax basis of an asset or liability on the balance sheet are used to calculate future income tax assets or liabilities. Future income tax assets or liabilities are calculated using the rates that are anticipated to be in effect in the periods that the temporary differences are expected to reverse.



2. Property and Equipment
As at
As At June December
30, 2006 31, 2005
------------------------
$ $
------------------------
Petroleum and natural gas properties and
equipment 84,930,303 71,908,781
Furniture, fixtures and other 113,341 110,476
------------------------
85,043,644 72,019,257
Less: Accumulated depletion and depreciation 11,688,218 5,936,488
------------------------
73,355,426 66,082,769
------------------------


At June 30, 2006 costs of $2,685,000 ($ 1,440,000 at December 31, 2005) with respect to unproved properties have been excluded from costs subject to depletion. Direct salary costs related to geological and geophysical personnel in the amount of $115,000 have been charged to petroleum and gas properties during the year ($361,000 in 2005). No other salary or overhead charges have been capitalized.

3. Bank Indebtedness

At June 30, 2006 the Company's credit facility comprises a revolving Operating Demand Loan facility with a credit limit of $40,000,000 that bears interest at bank prime plus one eighth percent.

This facility has no specific terms of repayment aside from the bank's right of demand and periodic review and is secured by a general assignment of book debts, a $50,000,000 debenture with a first floating charge over all assets with a negative pledge and an undertaking to provide fixed charges on the Company's major producing reserves at the request of the bank.

4. Share Capital

Authorized:

An unlimited number of common voting shares and an unlimited number of preferred shares issuable in series for which the directors may fix, among other things, the rights, privileges, restrictions, conditions, voting rights, rates, method of calculation and dates of payment of dividends and terms of redemption, purchase and conversion if any, and any other provisions.



Issued and outstanding:

Common Voting Shares Number of Amounts
Shares $

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

Balance, January 1, 2005 13,232,936 16,594,505
Tax effect of flow through shares (858,487)
Issued on private placement 2,000,000 14,500,000
Share issuance costs (net of tax) (618,492)
------------------------------------------------------------------------
Balance, December 31, 2005 15,232,936 29,617,526
------------------------------------------------------------------------

Balance, June 30, 2006 15,232,936 29,617,526
------------------------------------------------------------------------
- basic weighted average 15,232,936

- diluted 16,355,370


The following table reconciles the common shares used in calculating net
earnings per common share:


June 30,
2006 2005
------------------------
Weighted average common voting shares 15,232,936 13,419,749
outstanding - basic
Effect of dilutive stock options 1,122,434 1,134,410
------------------------
Weighted average common shares outstanding -
diluted 16,355,370 14,554,159
------------------------


Stock Options

Under the terms of the Accrete Energy Inc. 2004 Incentive Stock Option Plan, as amended, (the "plan"), directors, officers, employees and consultants (the "Participant(s)") are eligible to be granted options to purchase common shares. The plan provides for granting up to 1,926,394 common shares.

The maximum number of option shares that may be reserved for issuance to any one Participant under the plan cannot exceed 5% of the issued and outstanding common shares.

The exercise price under the plan is defined by the plan to be the closing price on the principal stock exchange on which the common shares are traded on the last business date preceding the date of grant or if the common shares did not trade on that date, the weighted average price for the five trading days preceding the date of grant.

The vesting of stock options is determined by the board of directors and the term, as also determined by the board of directors cannot exceed five years from the date of grant of such options.

A Participant's entitlement under the plan ceases upon ceasing to be a Participant. If such cessation is involuntary, then the vested and unvested options can be exercised for a period of ninety days after such date. Where a Participant is terminated for cause, the Participant may only exercise those options that have become vested. Where a Participant is terminated by the company without cause, the Participant is entitled to exercise stock options that have vested during the notice period or in the event of compensation being paid in lieu of notice, for 21 days after ceasing to be a Participant.

Options granted under the plan are not assignable and no financial assistance is extended to optionees.

The board of directors is empowered to amend the plan. Any amendment to the plan is subject to the receipt of necessary regulatory approvals and any amendment required by applicable law or regulatory policy to be approved by shareholders does not become effective until so approved.

The following table summarizes information about stock options outstanding at June 30, 2006:



Weighted Average Number Weighted Average
Grant Options Remaining Exercisable Exercise Price
Price Outstanding Contractual Life (Vested) ($/Share)

$ 1.00 926,845 2.9 Years 926,845 $ 1.00
$ 2.30 40,000 3.3 Years 13,333 $ 2.30
$ 2.60 395,000 3.4 Years 131,667 $ 2.60
$ 2.89 5,000 3.4 Years 1,667 $ 2.89
$ 312 40,000 3.4 Years 13,333 $ 3.12
$ 4.45 50,000 3.7 Years 16,667 $ 4.45
$ 7.01 9,000 3.9 Years 3,000 $ 7.01

------------------------------------------------------------------------
1,465,845 3.4 Years 1,106,512 $ 3.36

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



The options granted have a term of five years to expiry. All but the $1.00 stock options vest equally over a three year period commencing on the first anniversary of the date of grant. The $1.00 stock options vest equally over a three year term commencing with the date of grant.



The following assumptions were used in calculating the fair value:

$1 All
Options Others
------------------------
Volatility factor of expected market price 45% 48%
Weighted average risk-free interest rate (%) 4.5 3.7
Dividend yield (%) - -
Weighted average expected life of options 4 5
(years)

5. Asset Retirement Obligation

Asset retirement obligation comprises:

For the
Period
Ending
June 30,
2006
-----------
$
Balance, at January 1, 2006 1,152,101
Liabilities incurred 299,717
Liabilities settled (44,388)
Dispositions (47,179)
Accretion expense 47,609
-----------
Balance, end of period 1,407,860
-----------


The total future asset retirement obligation was estimated based on the Company's net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows to settle the asset retirement obligation is approximately $3,881,558 which will be incurred over the next twenty five years. A credit adjusted risk-free rate of 7% was used to calculate the fair value of the obligations.

6. Income Taxes

At June 30, 2006, the Company's exploration and development expenditures and undepreciated capital costs total $56,988,000. These costs may be carried forward indefinitely to reduce future taxable income.

The following reconciles the difference between income tax recorded and the expected income tax expense obtained by applying the expected income tax rate to earnings before taxes:



For the 3 For the 3 For the 6 For the 6
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
----------------------------------------------
$ $ $ $
----------------------------------------------
Income/(Loss) before
income taxes 1,205,846 (647,568) 3,685,542 93,076
----------------------------------------------
Statutory Rate 34.12% 37.62% 34.12% 37.62%
----------------------------------------------
Expected income tax
recovery at the
combined federal and
provincial statutory
rate 411,435 (243,615) 1,257,508 35,015
Crown royalties 231,988 118,973 535,320 333,229
Resource allowance (186,805) (78,956) (395,512) (212,665)
Alberta Royalty Tax
Credits - (37,641) (59,710) (105,250)
Stock based
compensation cost 84,422 447,391 181,206 504,923
Attributed crown
royalty income 5,761 (18,819) (73,475) (56,699)
Tax-rate adjustments (734,654) (18,087) (738,481) (25,958)
Other 4,022 1,483 5,186 3,818
Valuation allowance -
reversed - - - (272,193)
----------------------------------------------
Future income tax
expense (183,831) 170,729 712,042 204,220
----------------------------------------------

The following table summarizes the tax effect of temporary differences.

June 30, December 31,
2006 2005
------------------------
$ $
------------------------
Future income tax assets (liabilities):
Carrying value of capital assets in excess
of tax basis (4,746,636) (3,976,144)
Asset retirement obligation 473,323 387,336
Share issue costs 285,771 370,118
Attributed crown royalty income 184,576 127,766
------------------------
(3,802,966) (3,090,924)
------------------------


7. Financial Instruments

The Company's financial instruments recognized on the balance sheets consist of accounts receivable, bank indebtedness, and accounts payable and accrued expenses. The fair value of all financial instruments classified as current assets or current liabilities approximate their carrying amounts due to the short-term maturity of these instruments.

A portion of the Company's accounts receivable are from joint venture partners in the oil and gas business and are subject to normal industry credit risk. Purchasers of the Company's petroleum and natural gas products are subject to an internal credit review designed to mitigate the risk of non-payment and the carrying value reflects management's assessment of the associated credit risks.

The Company is exposed to fluctuations in commodity prices that are based in foreign currency.

The Company has not entered into any contracts during the year that would have reduced its exposure to fluctuations in commodity prices or exchange rates.



8. Supplemental Cash Flow Information

Change in non-cash working capital comprises:

Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
$ $ $ $
Accounts receivable (512,065) 1,741,028 638,333 876,496
Prepaid expenses (288,759) (179,512) (267,039) (194,557)
Accounts payable and
accrued liabilities 697,479 (2,843,144) (5,263,526) 149,380
----------------------------------------------
Change in non-cash
working capital (103,345) (1,281,628) (4,892,232) 831,319
----------------------------------------------

Relating to:
Investing activities 982,114 (2,816,624) (3,374,336) 1,335,261
Operating activities (1,085,459) 1,534,996 (1,517,896) (503,942)
----------------------------------------------
(103,345) (1,281,628) (4,892,232) 831,319
----------------------------------------------

9. Commitments

The Company has entered into various commitments related to the leasing
of office premises and office equipment. The payments due under such
leases are as follows:

Contractual
Obligations
2006 2007 2008 2009 2010 Thereafter
$ $ $ $ $ $
Office Premises 188,966 188,966 47,241 - - -
Office equipment 18,236 8,897 2,162 901 - -
------------------------------------------------------
207,202 197,863 49,403 901 - -
------------------------------------------------------


Contact Information

  • Accrete Energy Inc.
    Mr. Peter Salamon
    President and CEO
    (403) 269-8846
    or
    Accrete Energy Inc.
    Mr. Tom Dalton
    Vice President Finance
    (403) 269-8846
    or
    Accrete Energy Inc.
    2100, 500 - 4th Avenue SW
    Calgary, Alberta T2P 2V6
    Email: investor@accrete-energy.com
    Website: www.accrete-energy.com