Accrete Energy Inc.
TSX : GZ

Accrete Energy Inc.

March 20, 2006 17:38 ET

Accrete Energy Inc. Announces Year-End Results

CALGARY, ALBERTA--(CCNMatthews - March 20, 2006) - Accrete Energy Inc. (TSX:GZ) is pleased to announce the operational and financial results for the year ended December 31, 2005.

Accrete Energy Inc. is an independent oil and gas exploitation and production company with a solid base of production, balanced drilling portfolio and an extensive development program in core company operated properties.

Accrete shares trade under the symbol "GZ" on the Toronto Stock Exchange.

Summary of Activities

Notwithstanding poor weather conditions, Accrete was able to undertake all of its capital program with very few delays.

The Company drilled a total of 32 wells (21.4 net) during the year. Of these, 22 (14.8 net) were classified as oil wells, 5 (3.2 net) were classified as gas wells and 5 (3.4 net) were dry holes. A success rate of 84% was achieved.

During the year the Company constructed an extensive network of gathering lines, satellites and batteries together with compression facilities at Harmattan.

In September 2005, Accrete commissioned a gas plant and completed the tie ins at its Claresholm prospect.

In November 2005, Accrete completed the installation of a compression facility and modifications to its sales pipeline at Boltan.

In all, over $49 million was spent during 2005 on capital projects. Of this, $34 million was spent on drilling and completions seismic programs and general geological expenditures, $13 million was spent on processing, compression and gathering facilities and $2 million was spent on land acquisitions.

A reserve report prepared for the Company by its independent reserve evaluators, GLJ Petroleum Consultants "GLJ", as at December 31, 2005, indicates that 4.4 million barrels equivalent of proved reserves were added in 2005 resulting in a 200% increase in proven reserves since the end of last year. In addition, the report indicates that 5.9 million barrels equivalent were added to proven plus probable reserves, resulting in an increase of 162% over last years figures.

Production for the twelve month period ended December 31, 2005 averaged 5.0 mmcf/d of natural gas, 123 bbls/d of oil, and 325 bbls/d of natural gas liquids.

Over the nineteen months that Accrete has been in existence its production has increased from an initial rate of just over 150 to about 2,300 barrels of oil equivalent after consideration of the sale of the Boltan property. In addition to this, the Company has approximately 325 barrels of oil equivalent behind pipe that should be tied in late in the first quarter or early in the second quarter of 2006.



2005 Highlights

------------------------------------------------------------------------
Production 200% growth in comparative year ends
------------------------------------------------------------------------
Reserves 162% growth on a proven + probable
nature
------------------------------------------------------------------------
Land 175% year over year growth in land
holdings

515% year over year growth in option
lands
------------------------------------------------------------------------
Financial Cash flow growth from 0.3 cents/share
in 2004 (seven months) to
.89 cents/share in 2005

Earnings growth from a loss in 2004
to .21 cents/share in 2005

Equity financing - Raised
$14,500,000.00 by issuing 2mm common
shares at $7.25/share
------------------------------------------------------------------------


Management Discussion and Analysis

The following discussion and analysis was prepared on March 16, 2006 and is management's assessment of Accrete's historical financial and operating results. The financial data presented has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). Additional information may be found on the Company's web site at www.accrete-energy.com as well as the 2005 management's discussion and analysis, the 2005 audited financial statements and the 2005 annual information form which will be filed on or before March 31, 2005 and available on the SEDAR web site at www.sedar.ca subsequent to the actual filing.

Certain oil and gas properties of Olympia Energy Inc. ("Olympia") were transferred to Accrete pursuant to a Plan of Arrangement involving it, Olympia and Provident Energy Trust Ltd. on June 1, 2004. Accordingly, the financial statements include comparative financial results for only the one month period ended June 30, 2004.

Accrete's operations are concentrated in the Harmattan, Claresholm and Boltan areas of Alberta.

Business Environment

Exploration and production companies found that the weather during 2005 severely impacted their ability to operate in the field in Alberta during most of the year. A longer than normal break up period, coupled with continued rainfall and flooding in many areas during the summer months and an unusually mild winter curtailed field operations. During the short periods of favorable weather, service providers faced unprecedented demand as they cleared backlogs that had built up during the periods of inclement weather. Competition for suitable equipment during these periods was fierce and prices for field services escalated in response. World wide demand for such items as steel and cement further exacerbated the trend toward rising costs.

Notwithstanding poor weather conditions, Accrete was able to undertake all of its capital programs with few delays.

Record commodity pricing prevailed throughout 2005. This was attributable to increasing demand in flourishing new markets, production instability in significant producing areas and the weather.

Financial Information



Annual Financial Information

Twelve months Seven months
as at and as at and
Three months as at for the for the
And for the period ended period ended
period ended December 31, December 31,
(a)
------------------------------------------------------------------------
$ Except for
production/day,
common shares &
stock options 2005 2004 2005 2004
------------------------------------------------------------------------
Total revenue 13,199,898 872,979 25,844,984 1,560,816
------------------------------------------------------------------------
Production
per day
- Natural gas 8,810 1,262 4,966 1,057
------------------------------------------------------------------------
- Oil 224 18 123 8
------------------------------------------------------------------------
- NGL's 523 18 325 8
------------------------------------------------------------------------
Cash flow from
operations 7,215,705 170,925 13,969,577 281,525
------------------------------------------------------------------------
- basic 0.47 0.01 0.92 0.03
------------------------------------------------------------------------
- diluted 0.44 0.01 0.85 0.03
------------------------------------------------------------------------
Earnings (loss)
per share
- basic 0.17 (0.03) 0.23 (0.07)
------------------------------------------------------------------------
- diluted 0.16 (0.03) 0.21 (0.07)
------------------------------------------------------------------------
Capital
expenditures 13,616,647 11,396,386 49,962,452 22,056,804
------------------------------------------------------------------------
Total assets 74,367,722 25,350,827 74,367,722 25,350,827
------------------------------------------------------------------------
Net debt
including
working
capital 27,862,226 - 27,862,226 -
------------------------------------------------------------------------
Common shares
outstanding 15,232,936 12,966,632 15,232,936 12,966.632
------------------------------------------------------------------------
Stock options
outstanding 1,465,845 926,845 1,465,845 926,845
------------------------------------------------------------------------
------------------------------------------------------------------------

(a) 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.


Quarterly Financial Information

2005 Quarter Ended Year Ended
------------------------------------------------------------------------
$ except for
bbl/d & shares March June September December December
outstanding 31, 30, 30, 31, 31,
------------------------------------------------------------------------
Financial:
Petroleum and
Natural Gas
Revenues 3,633,360 2,953,784 6,057,942 13,199,898 25,844,984
Cash Flow from
Operations 1,905,265 1,405,753 3,442,855 7,215,705 13,969,579
Per Share
Basic 0.14 0.09 0.22 0.47 0.92
Income/(Loss)
Per Share
Basic 0.05 (0.06) 0.06 0.17 0.23
Capital
Expenditures 10,952,037 10,187,719 15,206,051 13,616,645 49,962,452
Wells Drilled
- Gross 7 5 8 10 30
Wells Drilled
- Net 5.4 3.6 6.1 6.3 21.4
Total Assets 35,719,800 43,576,587 61,524,657 74,367,722 74,367,722
Working
Capital (14,642,481)(9,892,853)(21,473,528)(27,862,226)(27,862,226)
Weighted
Average
Common
Shares
Outstanding
Basic 13,232,936 13,606,562 15,232,936 15,232,936 15,232,936
Diluted 14,014,629 14,740,972 16,413,609 16,377,010 16,377,010
Employee
Stock
Options
Outstanding 926,845 1,465,845 1,465,845 1,465,845 1,465,845
Operations:
Natural Gas
Production
- mcf/d 4,281 2,267 4,462 8,810 4,966
Average Selling
Price
- Natural Gas
- $/mcf 6.78 8.44 9.89 11.70 9.87
Oil Production
- bbl/d 70 72 125 224 123
Average Selling
Price
- Crude Oil
- $/bbl 52.36 82.32 75.18 69.13 70.23
NGL Production
- bbl/d 226 217 333 523 325
Average Selling
Price - NGL
- $/bbl 33.84 34.06 35.34 46.75 39.50
Royalties
at 6:1 - $/boe 8.63 8.45 14.05 18.89 14.38
Operating Expenses
at 6:1 - $/boe 4.61 6.85 4.74 4.88 5.05
Field netback
at 6:1 - $/boe 26.75 33.29 35.55 40.76 35.83
General and
administrative
expenses 588,791 625,780 500,548 1,163,495 2,878,614
------------------------------------------------------------------------
------------------------------------------------------------------------


Seven
Months Ended
2004 Quarter Ended (a)
------------------------------------------------------------------------
$ except for
bbl/d & shares
outstanding June 30,(a) September 30, December 31, December 31,
------------------------------------------------------------------------
Financial:
Petroleum and
Natural Gas
Revenues 197,505 490,332 872,979 1,560,816
Cash Flow
from Operations (76,866) 187,466 170,925 281,525
Per Share Basic $(0.01) $0.02 $0.01 0.03
Income/(Loss)
Per Share Basic (0.02) (0.02) (0.03) (0.07)
Capital
Expenditures 6,059,187 4,601,231 11,396,386 22,056,804
Wells Drilled
- Gross 2 4 6 12
Wells Drilled
- Net 1.80 3.16 5.5 10.5
Total Assets 11,851,229 12,996,324 25,350,827 25,350,827
Working Capital 2,926,143 (1,498,222) (5,641,230) (5,641,230)
Weighted Average
Common Shares
Outstanding
Basic 9,732,936 9,732,936 12,966,632 11,123,123
Diluted 10,659,392 10,659,392 13,514,398 11,670,889
Employee Stock
Options
Outstanding 926,845 926,845 926,845 926,845
Operations:
Natural Gas
Production
- mcf/d 913 896 1,262 1,057
Average Selling
Price
- Natural Gas
- $/mcf 7.21 5.94 6.11 6.18
Oil Production
- bbl/d - - 18 8
Average Selling
Price
- Crude Oil
- $/bbl - - 49.93 49.93
NGL Production
- bbl/d - - 18 8
Average Selling
Price
- NGL
- $/bbl - - 46.79 46.79
Royalties
at 6:1
- $/boe 4.54 4.56 7.46 6.17
Operating Expenses
at 6:1 - $/boe 5.87 3.89 4.85 4.64
Field netback
at 6:1 - $/boe 30.88 27.80 26.07 27.21
General and
administrative
expenses 227,237 186,233 422,092 835,562
------------------------------------------------------------------------
------------------------------------------------------------------------

(a) 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.


Operational Activities

Production

3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
December December December December
31, 2005 31, 2004 31, 2005 31, 2004
------------------------------------------------------------------------
Oil (bbl/d) 224 18 123 8
NGL (bbl/d) 523 18 325 8
------------------------------------------------------------------------
Total Oil/NGL (bbl/d) 747 36 448 16
Gas (mcf/d) 8,810 1,262 4,966 1,057
------------------------------------------------------------------------
Total (boe/d) 2,216 246 1,276 192
------------------------------------------------------------------------
------------------------------------------------------------------------


Natural Gas Production (mcf/d)

3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
December December December December
31, 2005 31, 2004 31, 2005 31, 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo 43 106 79 177
Boltan 644 654 528 664
Claresholm 3,486 251 1,389 109
Harmattan 4,637 251 2,970 107
------------------------------------------------------------------------
Total 8,810 1,262 4,966 1,057
------------------------------------------------------------------------
------------------------------------------------------------------------


Crude Oil Sales (bbl/d)

3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
December December December December
31, 2005 31, 2004 31, 2005 31, 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm 33 - 10 -
Harmattan 191 18 113 8
------------------------------------------------------------------------
Total 224 18 123 8
------------------------------------------------------------------------
------------------------------------------------------------------------


Natural Gas Liquids Sales (bbl/d)

3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
December December December December
31, 2005 31, 2004 31, 2005 31, 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan 2 7 3 3
Claresholm 23 1 8 1
Harmattan 498 10 314 4
------------------------------------------------------------------------
Total 523 18 325 8
------------------------------------------------------------------------


The first phase of a major infrastructure project at Harmattan was completed late in December 2004. The 9 wells (8.1 net) drilled in the 2004 drilling program were placed on stream at that time. 23 (15.6 net) wells drilled in the 2005 drilling program were placed on stream at various times during 2005. Harmattan wells are oil wells that produce significant amounts of associated solution gas. Flush volumes from the initial production of the wells tend to give way to a more sustainable level after a few months. Production from the area can vary significantly day to day as wells are tested, brought on steam and overcome initial teething problems related to their individual characteristics. The company is expending considerable effort optimizing production from this area. A large increase in production at Harmattan reflects the success that resulted from intense drilling activity in the third quarter that saw eight high working interest wells drilled.

Production volumes at Boltan were less than anticipated during the first half of the year because testing of several successful wells drilled in the area by others caused erratic production from Accrete's wells. Accrete constructed a compression facility, leased a compressor and installed infrastructure improvements during the third quarter allowing Accrete's wells to access a gas plant that had the capacity to process its natural gas and achieve stable production levels for the fourth quarter 2005.

At Claresholm, the Company's wells were shut in in May when the operator of the processing facility to which company gas is shipped, limited the processing throughput available to Accrete. Gas began to flow again after a company owned gas plant was constructed and commissioned at the beginning of September.



Revenue

Total Sales

($) 3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
December December December December
31, 2005 31, 2004 31, 2005 31, 2004
------------------------------------------------------------------------
Oil 1,426,572 82,165 3,159,801 82,165
NGL 2,258,794 79,670 4,700,025 79,670
Gas 9,481,051 711,144 17,898,073 1,398,981
Processing 50,480 - 87,085 -
------------------------------------------------------------------------
Total 13,199,898 872,979 25,844,984 1,560,816
------------------------------------------------------------------------


Natural Gas Sales Revenue

($) 3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
December December December December
31, 2005 31, 2004 31, 2005 31, 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo 42,955 83,465 226,862 238,471
Boltan 667,420 319,374 1,697,325 852,205
Claresholm 3,968,747 165,729 5,666,577 165,729
Harmattan 4,801,929 142,576 10,307,309 142,576
------------------------------------------------------------------------
Total 9,481,051 811,144 17,898,073 1,398,981
------------------------------------------------------------------------


Crude Oil Sales Revenue

($) 3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
December December December December
31, 2005 31, 2004 31, 2005 31, 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm 212,887 - 249,277 -
Harmattan 1,213,685 82,165 2,910,524 82,165
------------------------------------------------------------------------
Total 1,426,572 82,165 3,159,801 82,165
------------------------------------------------------------------------


Natural Gas Liquids (NGL) Sales Revenue

($) 3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
December December December December
31, 2005 31, 2004 31, 2005 31, 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan 25,329 35,044 80,374 35,044
Claresholm 141,258 9,188 211,131 9,188
Harmattan 2,092,207 35,478 4,408,520 35,478
------------------------------------------------------------------------
2,258,794 79,670 4,700,025 79,670
------------------------------------------------------------------------

Processing Revenue

($) 3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
December December December December
31, 2005 31, 2004 31, 2005 31, 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm 12,750 - 17,000 -
Harmattan 37,730 - 70,085 -
------------------------------------------------------------------------
Total 50,480 - 87,085 -
------------------------------------------------------------------------


The resolution of regulatory issues together with increased volumes from new wells that were put on stream, coupled with record high prices, caused sales to increase.

Natural gas sales from the Claresholm and Boltan areas increased commensurate with the increase in volumes and natural gas prices.

Oil sales increased because of increased volumes and record high prices.



Product Prices

Natural Gas Prices ($/mcf)

3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
December December December December
31, 2005 31, 2004 31, 2005 31, 2004

Area
Atlee-Buffalo 10.82 8.56 7.82 6.30
Boltan 11.26 5.31 8.81 6.00
Claresholm 12.37 7.10 11.18 7.10
Harmattan 11.26 6.23 9.51 6.23
------------------------------------------------------------------------
Average Price 11.70 6.11 9.87 6.18
------------------------------------------------------------------------


Crude Oil Sales Prices ($/bbl)

3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
December December December December
31, 2005 31, 2004 31, 2005 31, 2004

Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm 68.52 - 69.86 -
Harmattan 69.24 49.93 70.26 49.93
------------------------------------------------------------------------
Average Price 69.13 49.93 70.23 49.93
------------------------------------------------------------------------


Natural Gas Liquids (NGL) Sales Prices ($/bbl)

3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
December December December December
31, 2005 31, 2004 31, 2005 31, 2004
Area
Atlee-Buffalo - - - -
Boltan 59.46 54.42 62.13 54.52
Claresholm 69.38 42.93 71.59 42.93
Harmattan 45.63 41.45 38.42 41.45
------------------------------------------------------------------------
Average Price 46.75 46.79 39.50 46.79
------------------------------------------------------------------------


The average natural gas price realized by Accrete rose in 2005, mirroring the increases in the Nymex and AECO index prices. Claresholm area natural gas is higher in heating content because it includes ethanes and therefore it normally commands a higher price.

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 in the other areas comprise a blended product stream in which lower priced products bring down the overall price received.



Royalties

3 Months 3 Months
Ended Ended
December December
31, 2005 31, 2004

Area Total $ Rate Total $ Rate

Atlee- Buffalo 4,539 11% 14,784 18%
Boltan 57,628 8% 27,630 8%
Claresholm 1,183,705 27% 51,947 30%
Harmattan 2,607,631 32% 75,327 29%
------------------------------------------------------------------------
Total 3,853,503 29% 169,688 19%
------------------------------------------------------------------------


12 Months 7 Months
Ended Ended
December December
31, 2005 31, 2004

Area Total $ Rate Total $ Rate

Atlee- Buffalo 36,045 16% 53,417 22%
Boltan 149,819 8% 72,456 8%
Claresholm 1,570,574 26% 51,947 30%
Harmattan 4,946,047 28% 75,327 29%
------------------------------------------------------------------------
Total 6,702,485 26% 253,147 16%
------------------------------------------------------------------------


Crown royalties, net of Alberta Royalty Tax Credit, were $3,121,740. Total gross overriding royalties were $675,846 and freehold royalties totaled $55,917. Crown royalties are up generally due to an increase in price because they are price sensitive. Atlee Buffalo royalties are low because they are at a low productivity rate. Boltan production enjoys a Deep Gas Royalty Holiday. Harmattan royalties are increasing due to increasing Crown rates and increased production from freehold and farm in wells.



Production and Transportation Expenses

($) 3 Months 3 Months
Ended Ended
December December
31, 2005 31, 2004
------------------------------------------------------------------------
Area $ $/boe $ $/boe
Atlee-Buffalo 3,867 5.84 (2,471) (1.66)
Boltan 129,273 12.55 46,456 4.34
Claresholm 272,501 4.65 35,799 9.05
Harmattan 590,114 4.39 30,490 4.75
------------------------------------------------------------------------
Total 995,755 4.88 110,274 4.87
------------------------------------------------------------------------


($) 12 Months 7 Months
Ended Ended
December December
31, 2005 31, 2004
------------------------------------------------------------------------
Area $ $/boe $ $/boe
Atlee-Buffalo 56,756 11.74 9,667 1.53
Boltan 268,301 8.03 114,626 4.71
Claresholm 413,481 4.54 35,799 9.05
Harmattan 1,615,603 4.80 30,490 4.75
------------------------------------------------------------------------
Total 2,354,141 5.05 190,582 4.64
------------------------------------------------------------------------


Atlee Buffalo is a very minor part of the Company's total operation. The high annual cost relates to adjustments from prior periods processed in the first quarter 2005.

Costs in the Boltan area for the 3 months ended December 31, 2005 include one time start up costs incurred in connection with the start up of the new compressor. This also influenced the year to date costs for Boltan.

The high costs for the 3 months ended December 31, 2004 for the Claresholm area reflect start up costs for the area.

The remainder of the costs on a per barrel basis is in line with budget figures.

Transportation expense totaled $87,352 for the three month period ending December 31, 2005. The total transportation expense per period will increase as natural gas production increases in the Claresholm and Harmattan areas. Up until now, Boltan natural gas is sold at the plant gate into the Alliance gas stream and, accordingly, has no transportation costs associated with it.



Field and Corporate Netbacks

Field Netback
($/boe) 3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
Area December December December December
31, 2005 31, 2004 31, 2005 31, 2004
------------------------------------------------------------------------
Atlee-Buffalo 53.65 43.78 28.25 27.78
Boltan 49.98 22.98 40.93 28.78
Claresholm 49.13 21.25 45.77 21.25
Harmattan 36.79 24.18 33.10 24.18
------------------------------------------------------------------------
Field Netback 40.76 26.17 35.83 27.17
------------------------------------------------------------------------


Field net backs basically reflect the effect of higher product prices and the effect of lower per barrel operating costs as volumes increase offset in part by increasing royalty costs.



Corporate Netback
($) 3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
Area December December December December
31, 2005 31, 2004 31, 2005 31, 2004
------------------------------------------------------------------------
Field Netback 8,350,640 593,017 16,788,358 1,117,087
General and
Administrative 1,163,495 422,092 2,878,614 835,562
------------------------------------------------------------------------
Corporate Netback 7,187,145 170,925 13,909,744 281,525
------------------------------------------------------------------------


Corporate netback increased with volumes and prices offset in part by increases in general and administrative expenses.

General and Administrative Expense



($) 3 Months 3 Months 12 Months 7 Months
Ended Ended Ended Ended
December December December December
31, 2005 31, 2004 31, 2005 31, 2004
------------------------------------------------------------------------
Salary & Benefits 1,141,077 473,517 2,524,428 596,905
General Office Expenses 367,816 77,462 1,247,893 464,209
------------------------------------------------------------------------
1,508,894 550,979 3,772,321 1,061,114
Recoveries (345,399) (128,887) (893,707) (225,552)
------------------------------------------------------------------------
Total 1,163,495 422,092 2,878,614 835,562
------------------------------------------------------------------------


Salary and benefits increased in the fourth quarter due to the accrual of approximately $600,000 of performance bonuses that were paid to all employees of the Company in recognition of the significant increases in performance statistics. The Company currently employees 16 full time staff members.

The increase in general office expenses relates to increased costs for rent, insurance and most other general costs.

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

There was no debt outstanding at December 31, 2004. At December 31, 2005, Accrete's bank indebtedness was $14.6 million. Accrete utilized its operating line of credit and cash flow to fund its 2005 capital program. Interest expense of $323,358 was incurred in 2005 as a result.

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.

Stock-based compensation costs during the fourth quarter were $395,597, down from $498,582 in the third quarter.

Depletion Depreciation & Accretion

Depletion, depreciation and accretion of the asset retirement obligation for the three month period and twelve month periods ended December 31, 2005 totaled $2,367,000 or $11.59 per boe, and $5,936,000 or $12.74 per boe respectively. Costs of $1,440,000 relating to unproved properties have been excluded from costs subject to depletion for the 3 month period ended December 31, 2005 ($1,439,000 was excluded in period ending September 30, 2005).

Income Taxes

The Company is not liable for any cash taxes.

As at December 31, 2004, all expenditures needed to satisfy flow through share requirements had been incurred.

The tax benefits related to the $2,553,500 of flow through shares were renounced in February 2005 with an effective date of renunciation of December 31, 2004.

At December 31, 2005, the Company's exploration and development expenditures and undepreciated capital costs total $54,256,045 and comprise:



$
------------
Cumulative Canadian Oil and Gas Property Expense 4,593,000
Cumulative Canadian Development Expense 24,954,000
Cumulative Canadian Exploration Expense 8,660,000
Undepreciated Capital Cost 16,049,000
------------
54,256,000
------------
------------


Cash Flow

Cash flow for the three months ended December 31, 2005 was $6,990,998 ($0.46 per share) and $13,536,486 ($0.89 per share) for the twelve months ended December 31, 2005.



Capital expenditures for the twelve months ending December 31, 2005:


12 Months 3 Months 3 Months 3 Months 3 Months
Ended Ended Ended Ended Ended
December December September June 30, March 31,
31, 2005 31, 2005 30, 2005 2005 2005
-------------------------------------------------------
$ $ $ $ $
-------------------------------------------------------
Drilling and
Completions 36,046,410 10,154,113 10,236,811 7,108,992 8,546,494
Equipping and
Tie-Ins 13,229,521 3,236,045 4,741,750 2,991,419 2,260,306
Office
Equipment 42,171 (627) 992 24,044 17,763
------------------------------------------------------------------------
Total Cash
Expenditures 49,318,102 13,389,531 14,979,553 10,124,455 10,824,563
Allowance for
future
restoration
expenditures 644,350 277,117 226,497 63,264 127,474
------------------------------------------------------------------------
Total 49,962,452 13,616,647 15,206,050 10,187,719 10,952,037
------------------------------------------------------------------------


During the fourth quarter the Company drilled 10 wells (5.9 net) comprising 5 (2.4 net) oil wells, 2 (1.6 net) gas wells and 3 (1.9 net) dry holes. That brings the total number of wells to 32 wells (21.4 net) during the year. Of these, 23 (15.6 net) were classified as oil wells, 5 (4.2 net) were classified as gas wells and 5 (3.2 net) were dry holes. A success rate of 84% was achieved.



Liquidity and Capital Resources

$
------------
Exploration and development program funding

Cash, Beginning of Year 539,678
Cash flow 13,536,486
Change in non-cash working capital 7,083,131
Increase in Bank Debt 14,598,185
Stock Issuance, net 13,560,622
------------
Cash, end of period -
------------
Capital expenditures during the period 49,318,102
------------
------------


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

At December 31, 2005 the Company's credit facility comprises a Revolving Operating Demand Loan facility with a credit limit of $25,000,000, along with a Non-revolving Acquisition/Development Demand Loan facility with a credit limit of $5,000,000.

The Revolving Operating Demand Loan facility 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. The Non-revolving Acquisition/Development Demand Loan facility bears interest at bank prime plus one percent, is repayable in monthly installments over the half-life of the reserves being financed and is subject to 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 December 31, 2005, negative working capital, including bank debt was $27,862,224. Accrete was technically in default of its banking agreement that stipulated that it must maintain a working capital ratio of 1:1.

On March 16 2006, the Company entered into an agreement to sell its interests in the Boltan area of Alberta for a total of $9.55 million prior to purchase price adjustments. The effective date of this sale is January 1, 2006. The sale is expected to close on prior to May 1, 2006.

Subsequent to year-end, the Company's Bank proposed a new banking facility that would include 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 new banking facility will replace the facility that was in place at year-end and that, together with the proceeds derived from the sale of the Boltan property, will alleviate any event of default that existed at that time and will provide adequate funding for the Company's 2006 drilling program.

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

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 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.



Accrete Energy Inc.
Balance Sheets
(Unaudited)

December 31, December 31,
2005 2004
$ $
------------------------------------------------------------------------

ASSETS

Current assets
Cash - 539,678
Accounts receivable 8,220,761 3,180,061
Prepaid expenses 64,192 71,773
------------------------------------------------------------------------
8,284,953 3,791,512
Property and equipment (note 3) 66,082,769 21,559,315
------------------------------------------------------------------------
74,367,722 25,350,827
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued
liabilities 21,548,992 9,432,742
Bank indebtedness (note 4) 14,598,185 -
------------------------------------------------------------------------
36,147,177 9,432,742

Asset retirement obligation (note 6) 1,152,101 485,400
Future income tax (note 7) 3,090,924 -
------------------------------------------------------------------------
40,390,205 9,918,142
------------------------------------------------------------------------

SHAREHOLDERS' EQUITY

Share capital (note 5) 29,617,526 16,594,505
Contributed surplus 2,593,179 356,836
Retained Earnings (Deficit) 1,766,815 (1,518,656)
------------------------------------------------------------------------
33,977,520 15,432,685
------------------------------------------------------------------------
74,367,722 25,350,827
------------------------------------------------------------------------
------------------------------------------------------------------------


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

Year Seven Months
Ended Ended
December 31, December 31
2005 2004
------------------------------------------------------------------------
Revenue $ $
Petroleum and natural gas revenue 25,844,984 1,560,816
Royalties (net of Alberta Royalty
Tax Credit) (6,702,485) (253,147)
------------------------------------------------------------------------
19,142,499 1,307,669
------------------------------------------------------------------------
Expenses

Production expenses 2,162,594 190,582
Transportation expenses 191,547 -
General and administrative,
net of recoveries 2,878,614 835,562
Interest Expense 323,258 -
Stock based compensation cost (note 5) 2,236,344 356,836
Depletion, depreciation and accretion 5,511,348 500,511
------------------------------------------------------------------------
13,303,705 1,883,491
------------------------------------------------------------------------
Income (Loss) before income taxes 5,838,794 (575,822)
Future income taxes (note 7) (2,553,323) (197,209)
------------------------------------------------------------------------
Net income (loss) for the period 3,285,471 (773,031)
Deficit arising on transfer of
assets (note 2) - (745,625)
Deficit - beginning of period (1,518,656) -
------------------------------------------------------------------------
Retained Earnings (Deficit)
- end of period 1,766,815 (1,518,656)
------------------------------------------------------------------------
------------------------------------------------------------------------
Weighted average number of shares
(note 5) 14,328,826 11,123,123
Income (Loss) per share:
Basic 0.23 (0.07)
Diluted 0.21 (0.07)


Accrete Energy Inc.
Statements of Cash Flows
(Unaudited)


Year Seven Months
Ended Ended
December 31, December 31
2005 2004
------------------------------------------------------------------------
Cash provided by (used in): $ $
Operating Activities
Net income (loss) for the period 3,285,471 (773,031)
Items not affecting cash:
Stock based compensation cost 2,236,344 356,836
Future income taxes 2,553,323 197,209
Depletion, depreciation and accretion 5,461,348 500,511
------------------------------------------------------------------------
13,536,486 281,525
Change in non-cash working capital
(note 9) (865,203) 168,224
------------------------------------------------------------------------
12,671,283 449,749
------------------------------------------------------------------------
Investing Activities
Property and equipment additions (49,318,103) (17,587,115)
Change in non-cash working capital
(note 9) 7,948,335 6,012,684
------------------------------------------------------------------------
(41,369,768) (11,574,431)
------------------------------------------------------------------------
Financing Activities
Bank Debt 14,598,185 -
Issue of capital stock 13,560,622 11,664,360
------------------------------------------------------------------------
28,158,807 11,664,360
Increase (decrease) in cash (539,678) 539,678
Cash - beginning of period 539,678 -
------------------------------------------------------------------------
Cash - end of period - 539,678
------------------------------------------------------------------------
------------------------------------------------------------------------
Supplemental Information : Interest Paid 323,258 -
------------------------------------------------------------------------
------------------------------------------------------------------------


Accrete Energy Inc.
Notes to the Unaudited Financial Statements
For the year ended December 31, 2005 and
for the period ended December 31, 2004


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. Transfer of Assets and Commencement of Operations

Under the Plan of Arrangement, Olympia Energy Inc. transferred certain producing and exploratory oil and natural gas properties to the Company and each former shareholder of Olympia received one tenth of a common share of the Company for each Olympia share owned.

A total of 4,263,936 common shares of the Company were issued pursuant to the plan.

As this was a related party transaction, assets were transferred at a book value of $1,125,284 for unproved exploratory properties and $2,393,027 for developed but non- producing properties.

A private placement of 5,000,000 common shares at an issuance price of $1.00 per share was made concurrently with the plan.

An amount of $745,625 was booked to share capital and to deficit to increase the stated value of the shares issued to $1.00 per share, being the fair value of the shares issued.



3. Property and Equipment
2005 2004
-------------------------
$ $
-------------------------
Petroleum and natural gas
properties and equipment 71,908,781 21,988,499
Furniture, fixtures and other 110,476 68,305
-------------------------
72,019,257 22,056,804
Less: Accumulated depletion and depreciation 5,936,488 497,489
-------------------------
66,082,769 21,559,315
-------------------------


At December 31, 2005 costs of $1,440,000 ($100,000 at December 31, 2004) 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 $361,000 have been charged to petroleum and gas properties during the year ($116,000 in 2004). No other salary or overhead charges have been capitalized.

4. Bank Indebtedness

At December 31, 2005 the Company's credit facility comprises:

- A Revolving Operating Demand Loan facility with a credit limit of $25,000,000

- A Non-revolving Acquisition/Development Demand Loan facility with a credit limit of $5,000,000

The Revolving Operating Demand Loan facility 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.

The Non-revolving Acquisition/Development Demand Loan facility bears interest at bank prime plus one percent is repayable in monthly instalments over the half-life of the reserves being financed and is subject to the bank's right of demand and periodic review.

Both credit facilities are 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.

At December 31, 2004 the Company's credit facility comprised a Non-revolving Acquisition/Development Demand Loan facility with a total available credit amount of $2,500,000 which bore interest at bank prime plus one percent, was repayable in monthly instalments over the half-life of the reserves being financed and was subject to the bank's right of demand and periodic review.

Subsequent to year-end, the Company's Bank proposed a new banking facility that would include 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 referred to in Note 11 to these financial statements.

5. 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 $
------------------------------------------------------------------------

Issued upon transfer from Olympia Energy Inc. 4,263,936 4,263,936
Issued for oil and gas properties 469,000 469,000
Issued on private placement - flow
through shares 2,553,500 2,553,500
Issued on private placement 2,446,500 2,446,500
Issued on private placement 3,500,000 7,175,000
Share issuance costs (net of tax) (313,431)
------------------------------------------------------------------------
Balance, December 31, 2004 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
------------------------------------------------------------------------
- basic weighted average 14,328,826
- diluted 15,472,900


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



------------------------------------------------------------------------
December 31,
2005 2004
------------------------------------------------------------------------
Weighted average common voting
shares outstanding - basic 14,328,826 11,123,123
Effect of dilutive stock options 1,144,074 547,766
-------------------------
Weighted average common shares
outstanding - diluted 15,472,900 11,670,889
-------------------------


The Company incurred losses for the period ended December 31, 2004. The use of the diluted number of shares outstanding in the calculation of diluted earnings per share is considered antidilutive. Accordingly, the basic weighted average number of common shares outstanding was used in the calculation of diluted loss per share the period then ended.

Tax benefits related to the $2,553,500 of flow through shares were renounced to flow through shareholders in February 2005.

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 "Participants") 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 December 31, 2005:



Weighted Weighted
Average Average
Remaining Number Exercise
Options Contractual Exercisable Price
Grant Price Outstanding Life (Vested) ($/Share)
------------------------------------------------------------------------
$1.00 926,845 3.4 Years 617,896 $1.00
$2.30 40,000 3.8 Years 13,333 $2.30
$2.60 395,000 3.9 Years 131,667 $2.60
$2.89 5,000 3.9 Years 1,667 $2.89
$3.12 40,000 3.9 Years 13,333 $3.12
$4.45 50,000 4.2 years - $4.45
$7.01 9,000 4.4 years - $7.01
------------------------------------------------------------------------
1,465,845 3.9 Years 777,896 $3.61
------------------------------------------------------------------------


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 Company has accounted for its employee stock options granted using the fair value method. The fair value for such options was estimated at the date of grant using a Black-Scholes Option Pricing Model to be $3,873,193 ($2.64 per option granted) This value is charged to stock based compensation cost over the vesting period. A total of $395,597 was charged in the fourth quarter of 2005, and $2,236,344 was charged for 2005. A total of $356,836 was charged in 2004.

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 (years) 4 5



6. Asset Retirement Obligation

Asset retirement obligation comprises:

December 31, December 31,
2005 2004
--------------------------
$ $
--------------------------
Liabilities incurred 1,076,730 482,378
Accretion expense 72,349 3,022
Accumulated Accretion Expense
to December 31, 2004 3,022 -
--------------------------
Balance, end of period 1,152,101 485,400
--------------------------


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 $3,089,071 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.

7. Income Taxes

As at December 31, 2004 all expenditures that were required to satisfy requirements of the flow through shares had been incurred.

The tax benefits related to the $2,553,500 of flow through shares were renounced in February 2005 with an effective date of renunciation of December 31, 2004. Accordingly, a tax liability of $858,487 was recorded in the first quarter of 2005 to reflect the tax effect of the renunciation.

At December 31, 2005, the Company's exploration and development expenditures and undepreciated capital costs total $54,256,000. 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 12 For the 7
Months Ended Months Ended
December 31, December 31,
2005 2004
-----------------------------
$ $
-----------------------------
Income/(Loss) before income taxes 5,838,794 (575,822)
-----------------------------
Expected income tax recovery at the
combined federal and provincial
statutory rate of 37.62% 2,196,553 (222,382)
Crown royalties 1,406,293 51,241
Resource allowance (1,069,887) (39,134)
Alberta Royalty Tax Credits (122,261) -
Stock based compensation cost 841,314 137,810
Attributed crown royalty income (122,958) (4,806)
Tax-rate adjustments (312,866) -
Other 9,328 2,287
Valuation allowance - reversed (272,193) 272,193
-----------------------------
Future income tax expense 2,553,323 197,209
-----------------------------


The following table summarizes the tax effect of temporary differences:

December 31, December 31,
2005 2004
-----------------------------
$ $
-----------------------------
Future income tax assets (liabilities):
Carrying value of capital assets in
excess of tax basis (3,976,144) (781,576)
Asset retirement obligation 387,336 187,461
Share issue costs 370,118 167,925
Losses carried forward - 693,577
Attributed crown royalty income 127,766 4,806
-----------------------------
(3,090,924) 272,193
-----------------------------
Less : Valuation Allowance (272,193)
-----------------------------
(3,090,924) -
-----------------------------


8. Financial Instruments

The Company's financial instruments recognized on the balance sheets consist of cash, accounts receivable, prepaid expenses, 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.

9. Supplemental Cash Flow Information

Change in non-cash working capital comprises:



Twelve Months Seven Months
Ended Ended
December 31, December 31,
2005 2004
-----------------------------
$ $
-----------------------------
Accounts receivable (5,040,700) (3,180,061)
Prepaid expenses 7,581 (71,773)
Accounts payable and accrued liabilities 12,116,251 9,432,742
-----------------------------
Change in non-cash working capital 7,083,132 6,180,908
-----------------------------
Relating to:
Investing activities 7,948,335 6,012,684
Operating activities (865,203) 168,224
-----------------------------
7,083,132 6,180,908
-----------------------------


10. Commitments

The Company has entered into various commitments related to the leasing of office premises, office equipment and a compressor used in the Boltan area. The payments due under such leases are as follows:



Contractual There
obligations 2006 2007 2008 2009 2010 after
$ $ $ $ $ $
------------------------------------------------------------------------
Office Premises 188,966 188,966 47,241 - - -
------------------------------------------------------------------------
Office equipment 18,236 8,897 2,162 901 - -
------------------------------------------------------------------------
Boltan compressor(i) 252,920 - - - - -
------------------------------------------------------------------------
460,122 197,863 49,403 901 - -
------------------------------------------------------------------------


(i) See Footnote 11 to these financial statements. The Company entered into an agreement to sell its Boltan property subsequent to year end. The lease relating to the Boltan compressor will be assumed by the purchaser of the property on closing of the sale.

11. Subsequent Events

On March 16 2006, the Company entered into an agreement to sell its interests in the Boltan area of Alberta for a total of $9.55 million prior to purchase price adjustments. The effective date of this sale is January 1, 2006. The sale is expected to close on or prior to May 1, 2006.

As this sale will not result in a change of 20% or more in the depletion rate, no gain will be recognized in the accounts in future periods.

Non GAAP Definitions

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.

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