Accrete Energy Inc.
TSX : GZ

Accrete Energy Inc.

November 14, 2006 16:00 ET

Accrete Energy Inc. Announces Third Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 14, 2006) - Accrete Energy Inc. (TSX:GZ) is pleased to announce the operational and financial results for the nine month period ended Sepember 30, 2006.




High Lights
---------------------------------------------------------------------------
$ Thousands except for 3 Months 3 Months % Change
production/day, $/unit and Ending Ending
number of wells drilled September September
information 30, 2006 30, 2005
---------------------------------------------------------------------------

Total revenue 9,584 6,058 58%
Cash flow from operations (1)
Total 4,895 3,400 44%
Per share basic 0.32 0.22 45%
Net income
Total 744 850 (12%)
Per share basic 0.05 0.06 (17%)
Per share diluted 0.05 0.05 -
Common shares outstanding 15,250 15,233 -
Net debt including working capital ($) 47,366 21,474 121%

Operational :
Sales 9,584 6,058 58%
Royalties 2,390 1,553 54%
Operating costs 1,417 523 171%
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Net Back (2) 5,777 3,982 45%
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Net Back/ bbl (2) 24.13 35.55 (32%)
General and administrative 440 501 (12%)
General and administrative $/bbl 1.84 4.53 (59%)
Volumes :
Natural gas (mcf/d) 9,073 4,462 103%
Oil (bbl/d) 196 125 57%
NGL's (bbl/d) 894 333 168%
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Total Boe/d 2,602 1,201 117%
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Wells Drilled (Gross) :
Oil 4 8
Gas 3 -
D&A 1 -
---------------------------------------------------------------
Total 8 8
---------------------------------------------------------------
Capital Expenditures ($) 21,775 15,206 43%


(1)(2) The terms "Cash Flow" and "Netback" are not recognized measures
under Canadian Generally Accepted Accounting Principals. See the Management
Discussion and Analysis for further detail in respect to non GAAP
definitions.


President's Message

To our Shareholders,

We are extremely pleased to provide Accrete's Q3 results. Efforts made in the second quarter to increase production and the facility working interest throughput are now realizing excellent returns. Production from our Harmattan field increased to 2070 boe/d up nearly 22% from the second quarter, despite an unexpected 8 day gas plant closure at the Taylor Processing Facility. In addition, the Company has approximately 400 boe/d behind pipe to offset future declines. The field as a whole has matured into a solid, highly predictable production platform and will serve as the cash flow generator for new exploration and exploitation efforts.

The Company's Claresholm property is also producing in a proven and predictable manner. Future plans in this area include drilling one well on a well defined 3D seismic anomaly in early 2007.

With the maturing of these two properties, the Company is able to focus on new projects.

In Pouce Coupe, the Company has acquired an attractive land base and shot or acquired 3-D seismic on this prospective multi-zone property. In the third quarter, the Company participated in one gas well (net 40%) is currently drilling another, with three additional wells planned for early 2007. Net production from these wells is expected to be 800 - 1000 boe/d.

The Company's longer term focus will be on its 16 section land base at Edson (Ansell). To date the Company has drilled two 100% multi-zone gas wells and has committed to drill two wells in Q1/07 to earn additional lands on this project. Given management's past experience with the nearby Minehead property, we are confident in our operating expertise in this area. The Company will, however, proceed cautiously as this area can be capital intensive and poses several logistical challenges. Initial production from the Edson area is due to commence before year-end and full scale exploitation will evolve throughout 2007.

In addition to Pouce Coupe and Edson the Company has also acquired lands on a new, exciting project. Additional lands have been posted for near term land sales and the first well is slated for early 2007.

Concern has been raised in our industry in connection with recently announced changes to the taxation of royalty trusts. We are not entirely sure of what the consequences of these proposed changes might be in the long run. However, notwithstanding any of these changes, our mandate continues to be focused on adding quality reserves and production at the lowest possible finding and operating costs.

Peter M. Salamon

President and Chief Executive Officer

Management Discussion and Analysis

The following discussion and analysis was prepared on November 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 nine months ended September 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 of Alberta. It has developed a focused inventory of drilling prospects at Ansell and Pouce Coupe.

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

Business Environment

Apart from a spike in pricing during a short lived summer heat wave, moderate temperatures prevailed during 2006. The hurricane season was mostly a non event in North America in this year. Consequently, fears that supply would significantly outstrip demand caused the weighted average AECO NGX next day index prices to decline from a high of $8.10/Gj in January to a low of $4.66/Gj in September.

On the oil front, supply concerns brought about by geopolitical conditions overseas dogged the first seven months of 2006 and forced the Edmonton Par price for oil to increase to a peak of $85.47/Bbl in July before retreating to $71.18/Bbl in September as those concerns eased.

Operating and finding and on-stream costs relentlessly crept upwards as the market prices of goods and services used in the industry increased.



Financial Information Net Income Net Income
Total (Loss) Basic Diluted
Revenue ($) Net Income ($) $/Share $/Share
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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
Third Quarter 9,583,864 743,553 0.05 0.05
Total 28,587,709 3,717,053 0.24 0.23
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 of production, 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. The loss that was recorded in the second quarter of 2005 relates to the booking of stock option benefits that had been granted in 2004 but which were approved at the annual meeting of shareholders.

Production for the first quarter of 2006 remained flat at 2,224 BOE/Day. Prices for natural gas began to slide while oil prices increased somewhat. Production and royalty expenses continued to increase. The Company drilled 7 (5.2) net wells during the period vs. 12 (7.4 net) in the previous period.

Production for the second quarter averaged 2,437 BOE/Day. This increase was attributable to the tie in of wells drilled in the first quarter through Accrete's expanded compression facility but was offset in part by normal production declines. Prices for natural gas continued their downward slide while oil prices increased somewhat. Production and royalty expenses continued to creep upward.

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. Weather conditions delayed the tie in of several wells drilled earlier in the year.

Production for the third quarter 2006 averaged 2,602 BOE/Day. This increase was attributable to drilling in the period and the tie in of wells drilled earlier in the year. The Company sold its interests in the Boltan area offsetting some of those gains. More significantly, the Taylor Harmattan gas plant was shut in for eight days during September further cutting into production gains. Prices for natural gas continued their downward slide while oil prices peaked in August before retracting somewhat. All the while, production and royalty expenses continued to increase in spite of the Company's best efforts to control them.

During the third quarter 2006 the Company drilled 8 wells (5.3 net) comprising 4 (2.9 net) oil wells, 3 (2.4 net) gas wells and 1 dry hole (0.01 net). A success rate of 88% was achieved.

The Company has drilled a total of 19 wells (14.1 net), comprising 11 (8.9 net) oil wells, 7 (5.2 net) gas wells and 1 (0.01 net) dry hole during the nine months ended September 30, 2006.

At the end of the third quarter, 5 (3.78 net) wells together with 4 (2.98 net) zones in existing wells remained behind pipe because the compression facility was at capacity. At the same time, 2 (2 net) wells at Ansell and 1 (.4 net ) well at Pouce Coupe that were drilled near the end of the quarter were also behind pipe awaiting tie in.

The Company estimates that at September 30, 2006 that behind pipe are 318 net barrels of oil equivalent per day at Harmattan from wells, 283 net barrels of oil equivalent per day from additional zones, 238 net barrels of oil equivalent per day at Ansell and 50 barrels of oil equivalent per day at Pouce Coupe.



Operational Activities

Production
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
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Oil (bbl/d) 196 125 183 89
NGL (bbl/d) 894 333 741 259
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Total Oil/NGL 1,090 458 924 348
(bbl/d)
Gas (mcf/d) 9,073 4,462 8,988 3,671
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Total (boe/d) 2,602 1,201 2,422 960
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Natural Gas Production (mcf/d)

3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Area
Atlee-Buffalo 14 62 26 92
Boltan 0 670 204 489
Claresholm 2,958 517 3,366 682
Harmattan 6,101 3,213 5,392 2,408
---------------------------------------------------------------------------
Total 9,073 4,462 8,988 3,671
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Crude Oil Sales (bbl/d)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm - 5 - 2
Harmattan 196 120 183 87
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Total 196 125 183 89
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Natural Gas Liquids Sales (bbl/d)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - 3 2 3
Claresholm 37 - 47 3
Harmattan 857 330 692 253
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Total 894 333 741 259
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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 and the shut in of the Harmattan processing facility for eight days during September 2006.



Product Prices

Natural Gas Prices ($/mcf)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Area
Atlee-Buffalo 7.44 9.01 7.15 7.34
Boltan - 8.90 7.89 7.72
Claresholm 6.62 12.24 7.32 9.12
Harmattan 5.65 9.74 6.36 8.37
---------------------------------------------------------------------------
Average 5.97 9.89 6.76 8.40
Price
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Crude Oil Sales Prices ($/bbl)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm - 78.90 78.90
Harmattan 80.17 75.03 75.81 71.02
---------------------------------------------------------------------------
Average 80.17 75.18 75.81 71.17
Price
---------------------------------------------------------------------------

Natural Gas Liquids (NGL) Sales Prices ($/bbl)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - 63.67 57.59 63.44
Claresholm 77.22 69.75 72.33 76.53
Harmattan 35.81 35.03 36.88 33.63
---------------------------------------------------------------------------
Average 37.54 35.34 39.19 34.55
Price
---------------------------------------------------------------------------


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 third quarter 2006.

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.

The trend set by world oil prices is reflected in the 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.



Revenue
Total Sales
($ thousands)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Oil 1,448 862 3,789 1,733
NGL 3,087 1,082 7,926 2,441
Gas 4,986 4,060 16,585 8,417
Processing 63 54 288 54
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Total 9,584 6,058 28,588 12,645
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Natural Gas Sales Revenue
($ thousands)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Area
Atlee-Buffalo 9 51 51 184
Boltan 4 548 439 1,030
Claresholm 1,802 581 6,728 1,698
Harmattan 3,171 2,880 9,367 5,505
---------------------------------------------------------------------------
Total 4,986 4,060 16,585 8,417
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Crude Oil Sales Revenue
($ thousands)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm - 36 - 36
Harmattan 1,448 826 3,789 1,697
---------------------------------------------------------------------------
Total 1,448 862 3,789 1,733
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Natural Gas Liquids (NGL) Sales Revenue
($ thousands)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - 20 31 55
Claresholm 266 - 930 70
Harmattan 2,821 1,062 6,965 2,316
---------------------------------------------------------------------------
Total 3,087 1,082 7,926 2,441
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Processing Revenue
($ thousands) 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm - 4 - 4
Harmattan 63 50 288 50
---------------------------------------------------------------------------
Total 63 54 288 54
---------------------------------------------------------------------------


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, the loss of production from the Boltan area and the shut in of the Harmattan processing facility in September.

Processing fees are charged to third parties utilizing Accrete facilities.



Royalties
($ thousands)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
---------------------------------------------------------------------------
Area Total $ Rate Total $ Rate Total $ Rate Total $ Rate
Atlee-Buffalo 1 11% 6 13% 9 17% 32 17%
Boltan - - 59 10% 42 9% 92 6%
Claresholm 455 22% 158 25% 2,012 26% 387 21%
Harmattan 1,934 26% 1,330 28% 5,271 28% 2,338 25%
---------------------------------------------------------------------------
Total 2,390 25% 1,553 26% 7,334 28% 2,849 23%
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Crown royalties, net of Alberta Royalty Tax Credit, were $1,792,036 for the third quarter and $5,763,975 for the year to date. Total gross overriding royalties were $543,389 and $1,284,014 respectively, and freehold royalties totaled $54,912 and $286,014 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

($ thousands except per boe information)


3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
---------------------------------------------------------------------------

Area $ $/boe $ $/boe $ $/boe $ $/boe
Atlee-Buffalo 3 16.19 5 5.39 17 14.37 53 12.67
Boltan 11 n/a 60 5.64 189 19.23 139 6.02
Claresholm 327 6.71 32 3.92 982 5.92 141 4.35
Harmattan 1,076 5.65 426 4.70 2,347 4.85 1,025 5.07
Minor
Properties - n/a - - 2 n/a - -
---------------------------------------------------------------------------
Total 1,417 5.92 523 4.74 3,537 5.35 1,358 5.35
---------------------------------------------------------------------------


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 and normal seasonal bulk purchases of supplies that could not be postponed even though the property was sold early in the second 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 9 Months 9 Months
Ended Ended Ended Ended
Area September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------

Atlee- 21.26 23.84
Buffalo 23.46 41.78
Boltan n/a 42.48 24.37 36.97
Claresholm 26.33 51.00 28.09 39.68
Harmattan 23.60 33.24 26.42 30.42
---------------------------------------------------------------------------
Field
Netback 24.13 35.55 26.79 32.00
---------------------------------------------------------------------------


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
($ thousands) 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Area September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Field Netback 5,777 3,982 17,716 8,438
General and
Administrative 440 501 1,825 1,715
---------------------------------------------------------------------------
Corporate
Netback 5,337 3,481 15,891 6,723
---------------------------------------------------------------------------


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

General and Administrative Expense

($ thousands) 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Salary & Benefits 436 470 1,524 1,383,351
General Office Expenses 322 267 1,043 880,077
---------------------------------------------------------------------------
758 737 2,567 2,263,428
Recoveries (318) (236) (742) (548,308)
---------------------------------------------------------------------------
Total 440 501 1,825 1,715,120
---------------------------------------------------------------------------


The Company has increased staffing levels over the past year and now employs 16 people. Office expenses increased with inflationary pressure.
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 September 30, 2006, Accrete's bank indebtedness was $36.0 million. Accrete utilized its operating line of credit and cash flow to fund its 2006 capital program. As a result, interest expense of $442,000 was incurred in the second quarter of 2006 and $982,000 was incurred for the nine months ended September 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 nine month period ended September 30, 2006 totaled $3,527,000 or $14.72/Boe, and $9,326,000 or $14.11 /Boe respectively. Costs of $2,890,000 relating to unproved properties have been excluded from costs subject to depletion for the 3 month period ended September 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 September 30, 2006 was $4,895,000 ($0.32 per share) and $14,910,000 ($0.98 per share) for the nine months ended September 30, 2006.



Capital Expenditures

Capital expenditures for the nine months ending September 30, 2006:

($ thousands) 9 Months 3 Months 3 Months 3 Months
Ended Ended Ended Ended
September September June March
30, 2006 30, 2006 30, 2006 31, 2006
---------------------------------------------------------------------------
$ $ $ $
---------------------------------------------------------------------------
Drilling and Completions 32,001 13,439 10,109 8,453
Equipping and Tie-Ins 2,893 733 1,269 891
Land 2,891 1,457 3 1,431
Property Acquisitions and
Dispositions (net) (3,300) 6,043 (9,343) -
Office Equipment 3 - - 3
---------------------------------------------------------------------------
Total Cash Expenditures 34,488 21,672 2,038 10,778
Allowance for future
restoration expenditures 311 103 72 136
---------------------------------------------------------------------------
Total 34,799 21,775 2,110 10,914
---------------------------------------------------------------------------


During the third quarter the Company drilled 8 wells (5.3 net) comprising 4 (2.9 net) oil wells, 3 (2.4 net) gas wells and 1 dry hole (0.01 net). A success rate of 88% was achieved. For the year, the Company has drilled 19 wells (14.1 net), comprising 11 (8.9 net) oil wells, 7 (5.2 net) gas wells and 1 (0.01 net) dry hole.

The Company completed the expansion of its compression facilities at Harmattan.

The Company's interests in the Boltan area were disposed early in the second quarter 2006 because it no longer met the Company's long term objectives.

The Company redeployed the funds that were generated from the Boltan sale in higher growth prospects. It purchased additional interests in 2 sections of land containing 4 wells in the Harmattan area thereby increasing its ownership from 25.11% to 54% in the lands and wells purchased. It also purchased a total of 11 (10 net) sections of land at Harmattan, Claresholm, Bonanza, Ansell and Pouce Coupe at land sales in support of the Company's ongoing exploration efforts.



Liquidity and Capital Resources
$ (thousands)
---------------------------------------------------------------------------
2006 Exploration and development program funding

Cash, Beginning of Year -
Cash flow from operations 14,910
Change in non-cash working capital (1,871)
Increase in Bank Debt 21,375
Funds from Stock Option Exercise 74
Cash, end of period -
---------------------------------------------------------------------------
Net capital expenditures 34,488
---------------------------------------------------------------------------


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

At September 30, 2006 the Company's credit facility comprises a Revolving Operating Demand Loan facility with a credit limit of $45,000,000.

This 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 and, in fact, at September 30, 2006, negative working capital, including bank debt was $47,366,000. Accrete was technically in default of its banking agreement that stipulated that it must maintain a working capital ratio of 1:1.

The Company's Bank has waived the working capital requirement and has proposed a new banking facility that would include a Revolving Operating Demand Loan facility with a credit limit of $50,000,000.

The new banking facility will replace the facility that was in place at September 30, and that will alleviate any event of default that existed at that time and that together with projected cash flow will provide adequate funding for the remainder of the Company's 2006 drilling program.

Success in its focus areas means that additional funds will be raised through additional bank debt or additional share issuances or both to expedite or expand the drilling program.

Commodity prices and production volumes have a large impact on the ability of the Company to generate adequate cash flow. 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 cash flow and bank loan available for investment. This condition may also affect the availability of funds through the public equity market which may be accessed if funds are available on favourable terms.

See the caption entitled "Risks" for further items that could affect liquidity.

Outlook

The Company will maintain sufficient activity to stabilize production at Harmattan and Claresholm and will utilize the cash flow generated to develop its inventory of prospects at Ansell, Pouce Coupe and West Central Alberta.

The Company will continue to seek opportunities in new areas so as to provide future development opportunities.

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 various drilling conditions such 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 the Company. 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.



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

ASSETS

Current assets
Accounts receivable 6,547 8,221
Prepaid expenses 207 64
---------------------------------------------------------------------------
6,754 8,285
Property and equipment (note 2) 91,602 66,083
---------------------------------------------------------------------------
98,356 74,368
---------------------------------------------------------------------------
---------------------------------------------------------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities 18,147 21,549
Bank indebtedness (note 3) 35,973 14,598
---------------------------------------------------------------------------
54,120 36,147

Asset retirement obligation (note 5) 1,540 1,152
Future income tax (note 6) 4,265 3,091
---------------------------------------------------------------------------
59,925 40,390
---------------------------------------------------------------------------

SHAREHOLDERS' EQUITY

Share capital (note 4) 29,692 29,618
Contributed surplus 3,255 2,593
Retained Earnings 5,484 1,767
---------------------------------------------------------------------------
38,431 33,978
---------------------------------------------------------------------------
98,356 74,368
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes to financial statements


Accrete Energy Inc.
Statements of Income and Retained Earnings (Deficit)
(thousands, except per share amounts)

Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
(Unaudited) 30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Revenue $ $ $ $
Petroleum and natural gas
revenue 9,584 6,058 28,588 12,645
Royalties (net of Alberta
Royalty Tax Credit) (2,390) (1,553) (7,334) (2,849)
---------------------------------------------------------------------------
7,194 4,505 21,254 9,796
---------------------------------------------------------------------------

Expenses

Production expenses 1,302 502 3,239 1,254
Transportation expenses 115 21 298 104
General and administrative,
net of recoveries 440 500 1,825 1,715
Interest Expense 442 82 982 177
Stock based compensation cost
(note 4) 132 499 663 1,841
Depletion, depreciation and
accretion 3,557 1,406 9,356 3,117
---------------------------------------------------------------------------
5,988 3,010 16,363 8,208
---------------------------------------------------------------------------
Income before income taxes 1,206 1,495 4,891 1,588
Future income taxes (note 6) (462) (645) (1,174) (849)
---------------------------------------------------------------------------
Net income for the period 744 850 3,717 739
Retained Earnings (Deficit)
- beginning of period 4,740 (1,630) 1,767 (1,519)
---------------------------------------------------------------------------
Retained Earnings (Deficit)
- end of period 5,484 (780) 5,484 (780)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Weighted average number of
shares (note 4) 15,247 15,233 15,238 15,233

Income per share:
Basic 0.05 0.06 0.24 0.05
Diluted 0.05 0.05 0.23 0.05


See accompanying notes to financial statements


Accrete Energy Inc. Statements of Cash Flows
(thousands)

Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
(Unaudited) 30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
Cash provided by (used in): $ $ $ $
Operating Activities
Net income for the period 744 850 3,717 739
Items not affecting cash:
Stock based compensation cost 132 499 663 1,841
Future income taxes 462 645 1,174 849
Depletion, depreciation and
accretion 3,557 1,406 9,356 3,117
---------------------------------------------------------------------------
4,895 3,400 14,910 6,546

Change in non-cash working
capital (note 8) 1,412 42 (106) (462)
---------------------------------------------------------------------------
6,307 3,442 14,804 6,084
---------------------------------------------------------------------------
Investing Activities
Property and equipment
additions (15,629) (14,980) (37,788) (35,929)
Property A&D (6,043) - 3,300 -

Change in non-cash working
capital (note 8) 1,609 2,253 (1,765) 3,589
---------------------------------------------------------------------------
(20,063) (12,727) (36,253) (32,340)
---------------------------------------------------------------------------
Financing Activities

Bank debt 13,682 9,285 21,375 12,165
Proceeds on Exercise of Stock
Options 74 74
Issue of capital stock - net - - - 13,551
---------------------------------------------------------------------------
13,756 9,285 21,449 25,716
Cash - beginning of period - - - 540
Cash - end of period - - - -
---------------------------------------------------------------------------

Supplemental Information :
Interest Paid 442 77 982 95
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes to financial statements

Accrete Energy Inc.

Notes to the Financial Statements
For the period ended September 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

($ thousands)
As At As at
September December
30, 2006 31, 2005
---------------------------------------------------------------------------
$ $
---------------------------------------------------------------------------
Petroleum and natural gas properties and equipment 106,705 71,909
Furniture, fixtures and other 113 110
---------------------------------------------------------------------------
106,818 72,019
Less: Accumulated depletion and depreciation 15,216 5,936
---------------------------------------------------------------------------
91,602 66,083
---------------------------------------------------------------------------


At September 30, 2006 costs of $2,888,672 ($ 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 $138,000 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 September 30, 2006 the Company's credit facility comprises a revolving Operating Demand Loan facility with a credit limit of $45,000,000 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.

Subsequent to quarter-end, the Company's bank proposed a new banking facility that would include a Revolving Operating Demand Loan facility with a credit limit of $50,000,000.

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 $
---------------------------------------------------------------------------
(thousands)
Balance, January 1, 2005 13,233 16,595
Tax effect of flow through shares (858)
Issued on private placement 2,000 14,500
Share issuance costs (net of tax) (619)
---------------------------------------------------------------------------
Balance, December 31, 2005 15,233 29,618
---------------------------------------------------------------------------

Exercise of Stock Options 17 74
---------------------------------------------------------------------------
Balance, September 30, 2006 15,250 29,692
---------------------------------------------------------------------------
- basic weighted average 15,238
- diluted 16,362


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

September 30,
2006 2005
---------------------------------------------------------------------------
Weighted average common voting shares outstanding
- basic 15,238 15,233
Effect of dilutive stock options 1,124 1,181
---------------------------------------------------------------------------
Weighted average common shares outstanding - diluted 16,362 16,414
---------------------------------------------------------------------------


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 September 30, 2006:



Weighted
Average Weighted
Remaining Number Average
Options Contractual Execisable Exercise
Grant Price Outstanding Life (Vested) Price
---------------------------------------------------------------------------
$1.00 926,845 2.7 Years 926,845 $0.65
$2.30 40,000 3.1 Years 13,333 $0.06
$2.60 395,000 3.2 Years 131,667 $0.72
$2.89 5,000 3.2 Years 1,667 $0.01
$3.12 40,000 3.2 Years 13,333 $0.09
$7.01 9,000 3.7 Years 3,000 $0.04
$6.91 10,000 5.0 Years 0 $0.05
---------------------------------------------------------------------------
1,425,845 3.4 Years 1,089,845 $1.62

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



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.

For the nine months ended September 30, 2006, there were 10,000 options granted with an exercise price of $6.91/share and an estimated fair value of $3.46/share.

The following assumptions were used in calculating the fair value:




September
$1 All 2006
Options Others $6.91Options
---------------------------------------------------------------------------
Volatility factor of expected market price 45% 48% 52%
Weighted average risk-free interest rate (%) 4.5 3.7 4.25%
Dividend yield (%) - - -
Weighted average expected life of options
(years) 4 5 5



5. Asset Retirement Obligation

Asset retirement obligation comprises:

($ thousands)

For the
Period Ending
September 30,
2006
---------------------------------------------------------------------------
$
Balance, at January 1, 2006 1,152
Liabilities incurred 402
Liabilities settled (44)
Dispositions (47)
Accretion expense 77
---------------------------------------------------------------------------
Balance, end of period 1,540
---------------------------------------------------------------------------



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 $4,128,855 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 September 30, 2006, the Company's exploration and development expenditures and undepreciated capital costs total $73,797,000. 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 9 For the 9
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
($ thousands) $ $ $ $
---------------------------------------------------------------------------
Income/(Loss) before
income taxes 1,206 1,495 4,891 1,588
---------------------------------------------------------------------------
Statutory Rate 34.12% 37.62% 34.12% 37.62%
---------------------------------------------------------------------------
Expected income tax
recovery at the combined
federal and provincial
statutory rate 411 562 1,669 597
Crown royalties 214 310 749 643
Resource allowance (201) (253) (596) (466)
Alberta Royalty Tax
Credits - (50) (60) (155)
Stock based compensation
cost 45 188 226 692
Attributed crown royalty
income (10) (27) (77) (84)
Tax-rate adjustments 1 (86) (744) (112)
Other 2 1 7 6
Valuation allowance -
reversed - - - (272)
---------------------------------------------------------------------------
Future income tax
expense 462 645 1,174 849
---------------------------------------------------------------------------

The following table summarizes the tax effect of temporary differences.

September 30, December 31,
2006 2005
---------------------------------------------------------------------------
($ thousands) $ $
---------------------------------------------------------------------------
Future income tax assets (liabilities):
Carrying value of capital assets in excess of
tax basis (5,164) (3,976)
Asset retirement obligation 446 387
Share issue costs 264 370
---------------------------------------------------------------------------
Attributed crown royalty 189 128
income
---------------------------------------------------------------------------
(4,265) (3,091)
---------------------------------------------------------------------------


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 Nine Nine
Months Months Months Months
Ended Ended Ended Ended
($ thousands) September September September September
30, 2006 30, 2005 30, 2006 30, 2005
---------------------------------------------------------------------------
$ $ $ $
Accounts receivable (1,035) 4,226 (1,674) 3,350
Prepaid expenses (124) (104) 143 90
Accounts payable and accrued
liabilities (1,862) (6,417) 3,402 (6,567)
---------------------------------------------------------------------------
Change in non-cash working
capital (3,021) (2,295) 1,871 (3,127)
---------------------------------------------------------------------------

Relating to:
Investing activities (1,609) (2,253) 1,765 (3,589)
Operating activities (1,412) (42) 106 462
---------------------------------------------------------------------------
(3,021) (2,295) 1,871 (3,127)
---------------------------------------------------------------------------


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
($ thousands) $ $ $ $ $ $
---------------------------------------------------------------------------
Office Premises 189 189 47 - - -
Office equipment 18 9 2 1 - -
---------------------------------------------------------------------------
207 198 49 1 - -
---------------------------------------------------------------------------


Contact Information

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