Accrete Energy Inc.
TSX : GZ

Accrete Energy Inc.

August 11, 2005 22:44 ET

Accrete Energy Reports Second Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 11, 2005) - ACCRETE ENERGY INC. (TSX:GZ) ("Accrete") is pleased to provide the following operational update.



Accrete Energy Inc.
Summary of Activities
Three Months Ended June 30, 2005


Despite numerous operatonal setbacks, Accrete's performance during the second quarter continued to be on track within the mandate set by management.

Accrete's second quarter operations were curtailed by both weather and regulatory issues. Flooding in southern Alberta in June caused delays in the Company's facility expansion plans in the Harmattan area. This was compounded by a three-week shut at the Taylor Harmattan gas plant and the shut in of a significant well in the field which is awaiting an AEUB ruling. In the Claresholm area, Accrete's production was shut in during the second quarter as the Company awaited facility approval. In the Boltan area, Accrete's wells flowed sporadically as new third-party production from the winter drilling season took priority in the available gas plant capacity. As a result, Accrete's wells were only on about 44% of the time during the quarter.

By early August most of these issues have been resolved and the Company is hard at work on the construction of a gathering system in the south end of the Harmattan field, a compression facility at Boltan and a gas plant at Claresholm, not to mention the fact that it has two rigs contracted to drill throughout the summer.

This quarter the Company drilled four oil wells (2.6 net) and one gas well (1.0 net), achieving a 100% success rate. That brings the total number of wells drilled to date in fiscal 2005 to 12 (9.0 net) with an overall success rate for the year of 92% (89% net).

Accrete estimates that it has added 1.87 million barrels of proved and a total of 122 thousand barrels of probable reserves during the six months ended June 30, 2005 resulting in a 55% increase in proven plus probable reserves since year end. Close to $21 million was spent in the first six months of 2005 on capital projects. Of this, $15.7 million was spent on drilling and completions with the remainder being spent on processing, compression and gathering facilities.

At this time Accrete's productive capability is estimated to be approximately 2,700 barrels equivalent per day. The Company is producing approximately 1,000 barrels per day, has approximately 1,500 barrels equivalent behind pipe in Harmattan and Claresholm awaiting tie in and facility construction and another 200 barrels equivalent per day of production that is shut in due to regulatory reasons. This is an outstanding achievement considering that the Company was formed a little over a year ago at which time it had only about 150 barrels equivalent of production. It is also very important to note that all of this additional value which the Company has generated for its shareholders was achieved organically through the drilling bit.

It would appear that most of the operational issues that have dogged the Company during second quarter are being remedied and that Accrete is well positioned to take advantage of record prices.



Second quarter 2005 highlights include the following:

-----------------------------------------------------------------------
6 Month 3 Month 3 Month 7 Month 1 Month
Period Period Period Period Period
Ended Ended Ended Ended Ended
June 30, June 30, Mar. 31, Dec. 31, June 30,
2005 2005 2005 2004 2004
-----------------------------------------------------------------------
FINANCIAL:
-----------------------------------------------------------------------
Petroleum
and
Natural
Gas
Revenues 6,587,143 2,953,783 $3,633,360 $1,560,816 $197,505
-----------------------------------------------------------------------
Cash Flow
from
Operations 3,146,404 1,323,093 1,823,311 $ 281,525 $(76,866)
-----------------------------------------------------------------------
Per Share
Basic $0.23 $0.09 $0.14 $0.03 $(0.01)
-----------------------------------------------------------------------
Income/(Loss)
-----------------------------------------------------------------------
Per Share
Basic $(0.01) $(0.06) $0.05 $(0.07) $(0.02)
-----------------------------------------------------------------------
Capital Expend-
itures 21,139,756 10,187,719 10,952,037 22,056,804 $6,059,187
-----------------------------------------------------------------------
Wells Drilled
- Gross 12.0 5.0 7.0 12.0 2.0
-----------------------------------------------------------------------
Wells Drilled
- Net 9.0 3.6 5.4 10.5 1.80
-----------------------------------------------------------------------
Total
Assets 43,576,587 43,576,587 $35,719,800 $25,350,827 $11,851,229
-----------------------------------------------------------------------
Working
Capital (9,892,853)(9,892,853)$(14,642,481)$(5,641,230) $2,926,143
-----------------------------------------------------------------------
Weighted
Average
Common Shares
Outstanding
-----------------------------------------------------------------------
Basic 13,419,749 13,606,562 13,232,936 11,123,123 9,732,936
-----------------------------------------------------------------------
Diluted 14,554,159 14,740,972 14,014,629 11,670,889 10,659,392
-----------------------------------------------------------------------
Employee
Stock
Options
Outstanding 1,465,845 1,465,845 926,845 926,845 926,845
-----------------------------------------------------------------------
OPERATIONS:
-----------------------------------------------------------------------
Natural Gas
Production
- mcf/d 3,269 2,267 4,281 1,057 913
-----------------------------------------------------------------------
Average
Selling
Price -
Natural
Gas - $/mcf $7.36 $8.44 $6.78 $6.18 $7.21
-----------------------------------------------------------------------
Oil
Production
- bbl/d 71 72 70 8 -
-----------------------------------------------------------------------
Average
Selling
Price -
Crude Oil
- $/bbl $67.60 $82.32 $52.36 $49.93 -
-----------------------------------------------------------------------
NGL
Production
- bbl/d 221 217 226 8 -
-----------------------------------------------------------------------
Average
Selling
Price -
NGL
- $/bbl $33.84 $34.06 $33.84 $46.79 -
-----------------------------------------------------------------------
Royalties
at 6:1
- $/boe $8.56 $8.45 $8.63 $6.17 $4.54
-----------------------------------------------------------------------
Operating
Expenses
at 6:1
- $/boe $5.51 $6.85 $4.61 $4.64 $5.87
-----------------------------------------------------------------------
Field
netback
at 6:1
- $/boe $29.36 $33.29 $26.75 $27.21 $30.88
-----------------------------------------------------------------------
General
and
administrative
expenses $1,309,473 $702,484 $606,989 $835,562 $227,237
-----------------------------------------------------------------------


Management's Discussion and Analysis

The following discussion and analysis was prepared on August 11, 2005 and is management's assessment of Accrete's historical financial and operating results. It should be read in conjunction with the unaudited interim financial statements for the six month period ended June 30, 2005 and the audited financial statements for the seven month period ended December 31, 2004 together with the notes thereto. Additional information may be found on the Company's web site at www.accrete-energy.com.

Accrete is an independent public Company engaged in the acquisition, exploration, development and production of crude oil and natural gas in Alberta, Canada.

Certain oil and gas properties of Olympia Energy Inc. (Olympia) were transferred to Accrete pursuant to a plan of arrangement involving Accrete, Olympia, 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. Production for the six month period ended June 30, 2005 averaged 3.3 mmcf/d of natural gas, 71 bbls/d of oil, and 221 bbls/d of NGLs.

Business Environment

Natural gas storage volumes were above normal at the start of the quarter. Temperate weather during the first part of the quarter caused injections of natural gas to be high relative to historical volumes. However, continued upward pressure on oil prices caused by supply concerns, caused a high degree of fuel switching. This more than offset the negative effects of high injections and storage. Storage still remains high relative to historical statistics. However, the warmer weather trend that commenced in June is forecast to continue throughout the summer, particularly in the Eastern consuming regions. Higher than normal temperatures will result in increased demand for electrical generation for cooling and this should keep the growth in natural gas storage in check.

The weather was a significant factor in the operations of exploration and production companies that operate in Alberta. A longer than normal break up period, coupled with continued rainfall and flooding in many areas certainly curtailed field operations.

These conditions, coupled with regulatory issues, hampered Accrete's second quarter activities. Accrete had planned for a three week shut in at Harmattan for plant turn around but bad weather and an extended spring break up took even a greater toll on operations there. Although the Company was able to continue drilling on select locations, the ground conditions halted activity on the planned construction of the south section of the Harmattan gathering system. This system would have enabled the tie in of several wells that had been drilled in the south part of the Harmattan field. To compound the problem even further, regulatory issues resulted in the shut in and eventual curtailment of production from one of the best wells in the field.

The testing of flush gas from several successful third party wells in the Boltan area put pressure on the gas plant's capacity and caused Accrete's production to be squeezed out. Testing has been completed and Accrete gas has begun to flow again albeit on an interruptible basis.

Accrete is installing a compression facility and making modifications to its sales pipeline in order to alleviate the uncertainty of available Boltan processing capacity. This will give Accrete the flexibility to ship its gas to other processors if need be. Furthermore, it will enable the exploitation from new zones that had been opened up in existing wells as well as provide capacity for additional drilling in the area.

At Claresholm, Accrete announced that it had taken steps to begin construction of a natural gas processing facility. This construction was deemed necessary to secure adequate processing capacity at a reasonable cost from Accrete wells in the area. Unfortunately this triggered an objection to Accrete's gas plant license and a curtailment of capacity by the operator of the gas plant that had been processing its natural gas in the area. Accrete defended its position with the regulatory authorities and the objection was overruled. The actual physical construction of the facility is now well underway.



Operational Activities

Production
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Oil (bbl/d) 71 72 70 8 18 -
-----------------------------------------------------------------------
NGL (bbl/d) 221 217 226 8 18 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total Oil/NGL
(bbl/d) 292 289 296 16 36 -
-----------------------------------------------------------------------
Gas (mcf/d) 3,269 2,267 4,281 1,057 1,262 913
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total (boe/d) 838 668 1,010 192 246 152
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Natural Gas Production (mcf/d)
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Area
-----------------------------------------------------------------------
Atlee-Buffalo 108 93 120 177 106 216
-----------------------------------------------------------------------
Boltan 396 399 394 664 654 697
-----------------------------------------------------------------------
Claresholm 766 382 1,155 109 251 -
-----------------------------------------------------------------------
Harmattan 1,999 1,393 2,612 107 251 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total 3,269 2,267 4,281 1,057 1,262 913
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Crude Oil Sales (bbl/d)
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Area
-----------------------------------------------------------------------
Atlee-Buffalo - - - - - -
-----------------------------------------------------------------------
Boltan - - - - - -
-----------------------------------------------------------------------
Claresholm - - - - - -
-----------------------------------------------------------------------
Harmattan 71 72 70 8 18 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total 71 72 70 8 18 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Natural Gas Liquids Sales (bbl/d)
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Area
-----------------------------------------------------------------------
Atlee-Buffalo - - - - - -
-----------------------------------------------------------------------
Boltan 3 4 2 3 7 -
-----------------------------------------------------------------------
Claresholm 5 2 8 1 1 -
-----------------------------------------------------------------------
Harmattan 213 211 216 4 10 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total 221 217 226 8 18 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Production volumes at Boltan were less than anticipated because testing of several third party wells in the area caused erratic production from Accrete's wells.

At Claresholm, the Company's wells were shut in May when the operator limited the processing though put available to the Company.

Regulatory issues caused one of the best producers in the Harmattan field to be shut in. Production from the remaining wells decreased to sustainable levels as the effect of flush production decreased. Wet weather and an extended breakup period precluded the Company from placing additional wells in the area on steam.

Oil sales at Harmattan remained relatively constant as inventory from prior period production was sold.



Revenue

Total Sales
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
($) 2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Oil 871,644 539,906 331,738 82,165 82,165 -
-----------------------------------------------------------------------
NGL 1,358,949 671,461 687,488 79,670 79,670 -
-----------------------------------------------------------------------
Gas 4,356,550 1,742,416 2,614,134 1,398,981 711,144 197,505
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total 6,587,143 2,953,783 3,633,360 1,560,816 872,979 197,505
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Natural Gas Sales Revenue
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
($) 2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Area
-----------------------------------------------------------------------
Atlee-Buffalo 132,484 64,547 67,937 238,471 83,465 45,565
-----------------------------------------------------------------------
Boltan 481,822 264,386 217,436 852,205 319,374 151,940
-----------------------------------------------------------------------
Claresholm 1,116,436 342,954 773,482 165,729 165,729 -
-----------------------------------------------------------------------
Harmattan 2,625,808 1,070,529 1,555,279 142,576 142,576 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total 4,356,550 1,742,416 2,614,134 1,398,981 711,144 197,505
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Natural gas sales from the Boltan area increased commensurate with the increase in natural gas prices.

Natural gas sales from the Claresholm area were adversely affected by the shut in of production as previously enumerated. The full impact however, was offset in part by an increase in natural gas price and an adjustment from prior periods booked in the current period.

Natural gas sales at Harmattan increased slightly because of increased prices but the full impact of that was offset by decreased volumes.



Crude Oil Sales Revenue
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
($) 2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Area
-----------------------------------------------------------------------
Atlee-Buffalo - - - - - -
-----------------------------------------------------------------------
Boltan - - - - - -
-----------------------------------------------------------------------
Claresholm - - - - - -
-----------------------------------------------------------------------
Harmattan 871,644 539,906 331,738 82,165 82,165 -
-----------------------------------------------------------------------
Total 871,644 539,906 331,738 82,165 82,165 -
-----------------------------------------------------------------------

Oil sales increased because of an adjustment to prior sales that was
booked in the current period.


Natural Gas Liquids (NGL) Sales Revenue
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
($) 2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Area
-----------------------------------------------------------------------
Atlee-Buffalo - - - - - -
-----------------------------------------------------------------------
Boltan 34,813 24,956 9,857 35,004 35,004 -
-----------------------------------------------------------------------
Claresholm 69,523 16,711 52,812 9,188 9,188 -
-----------------------------------------------------------------------
Harmattan 1,254,613 629,794 624,819 35,478 35,478 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total 1,358,949 671,461 687,488 79,670 79,670 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Product Prices

Natural Gas Prices ($/mcf)
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Area
-----------------------------------------------------------------------
Atlee-Buffalo 6.85 7.56 6.29 6.30 8.56 7.03
-----------------------------------------------------------------------
Boltan 6.72 7.29 6.13 6.00 5.31 7.26
-----------------------------------------------------------------------
Claresholm 9.87 8.05 7.44 7.10 7.10 -
-----------------------------------------------------------------------
Harmattan 7.26 8.44 6.62 6.23 6.23 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Average Price 7.36 8.44 6.78 6.18 6.11 7.21
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Accrete's average natural gas price realized rose in the first half of 2005, mirroring the increases in the Nymex and AECO index prices. However, an adjustment was booked in June in respect to prior period sales from the Harmattan area. Claresholm area natural gas is higher in heating content because it includes ethanes and therefore it normally commands a higher price.



Crude Oil Sales Prices ($/bbl)
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Area
-----------------------------------------------------------------------
Atlee-Buffalo - - - - - -
-----------------------------------------------------------------------
Boltan - - - - - -
-----------------------------------------------------------------------
Claresholm - - - - - -
-----------------------------------------------------------------------
Harmattan 67.60 82.32 52.36 49.93 49.93 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Average Price 67.60 82.32 52.36 49.93 49.93 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Continued strength in world oil prices is reflected in the increased crude oil price realized by Accrete. As can be seen from the preceding table, an adjustment to sales related to the first quarter sales that was booked in the second quarter caused an even larger upwards variation.



Natural Gas Liquids (NGL) Sales Prices ($/bbl)
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Area
-----------------------------------------------------------------------
Atlee-Buffalo - - - - - -
-----------------------------------------------------------------------
Boltan 63.31 67.11 55.36 54.52 54.52 -
-----------------------------------------------------------------------
Claresholm 76.05 79.60 74.81 42.93 42.93 -
-----------------------------------------------------------------------
Harmattan 32.52 32.90 32.15 41.45 41.45 -
-----------------------------------------------------------------------
Average Price 33.95 34.06 33.84 46.79 46.79 -
-----------------------------------------------------------------------


At Harmattan, NGL prices decreased as prices for ethane, which makes up a considerable portion of the mix, decreased significantly from last year but remained constant in 2005. Claresholm NGL's are higher in pentanes, which command higher prices. NGLs in the other areas comprise a blended product stream in which lower priced products bring down the overall price received.



Royalties
------------------------------------------------------------------------
6 Months Ended 3 Months Ended 3 Months Ended
June 30, 2005 June 30, 2005 March 31, 2005
------------------------------------------------------------------------
Area Total $ Rate Total $ Rate Total $ Rate
------------------------------------------------------------------------
Atlee-Buffalo 24,962 19% 7,968 12% 16,994 25%
------------------------------------------------------------------------
Boltan 33,319 6% 15,668 5% 17,651 8%
------------------------------------------------------------------------
Claresholm 229,304 19% 69,519 19% 159,785 19%
------------------------------------------------------------------------
Harmattan 1,008,764 21% 419,343 19% 589,421 23%
------------------------------------------------------------------------
Total 1,296,349 20% 512,498 17% 783,851 22%
------------------------------------------------------------------------
------------------------------------------------------------------------


----------------------------------------------------
7 Months Ended 1 Month Ended
December 31, 2004 June 30, 2004
----------------------------------------------------
Area Total $ Rate Total $ Rate
----------------------------------------------------
Atlee-Buffalo 53,417 22% 9,955 22%
---------------------------------------------------
Boltan 72,456 8% 10,382 7%
----------------------------------------------------
Claresholm 51,947 30% - -
----------------------------------------------------
Harmattan 75,327 29% - -
----------------------------------------------------
Total 253,147 16% 20,337 10%
----------------------------------------------------

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


Crown royalties, net of Alberta Royalty Tax Credit, for the three months ended June 30, 2005 were $363,844 (ARTC = $121,280). Total gross overriding royalties were $148,654. Harmattan oil production was subject to a low-productivity Crown royalty rate and the gross overriding royalties were on the low end of the sliding scale.



Production Expenses
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
($) 2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Area
-----------------------------------------------------------------------
Atlee-Buffalo 47,758 20,841 26,917 9,667 (2,471) 9,138
-----------------------------------------------------------------------
Boltan 79,334 39,060 40,274 114,626 46,456 17,659
-----------------------------------------------------------------------
Claresholm 108,095 55,669 52,426 35,799 35,799 -
-----------------------------------------------------------------------
Harmattan 599,730 300,138 299,592 30,490 30,490 -
-----------------------------------------------------------------------
Total 834,917 415,708 419,209 190,582 110,274 26,797
-----------------------------------------------------------------------


-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
($) 2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Area $/boe $/boe $/boe $/boe $/boe $/boe
-----------------------------------------------------------------------
Atlee-Buffalo 14.82 14.65 14.95 1.53 (1.66) 8.48
-----------------------------------------------------------------------
Boltan 6.34 6.09 6.61 4.71 4.34 5.06
-----------------------------------------------------------------------
Claresholm 4.37 8.77 2.91 9.05 9.05 -
-----------------------------------------------------------------------
Harmattan 5.31 6.29 4.61 4.75 4.75 -
-----------------------------------------------------------------------
Average / bbl 5.51 6.85 4.61 4.64 4.87 5.87
-----------------------------------------------------------------------


Fixed costs coupled with lower volumes, resulted in per barrel increases in operating costs.

Transportation expense totaled $41,330 for the three month period ending June 30, 2005. The total transportation expense per period will increase as natural gas production increases in the Claresholm and Harmattan areas. Boltan natural gas was 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)
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 1 Month
Ended Ended Ended Ended Ended
June 30, June 30, March 31, December 31, June 30,
2005 2005 2005 2004 2004
-----------------------------------------------------------------------
Area
-----------------------------------------------------------------------
Atlee-Buffalo 18.55 25.17 13.35 27.78 24.51
-----------------------------------------------------------------------
Boltan 32.35 36.31 27.80 28.78 35.55
-----------------------------------------------------------------------
Claresholm 35.25 39.04 34.05 21.25 -
-----------------------------------------------------------------------
Harmattan 28.10 32.38 24.99 24.18 -
-----------------------------------------------------------------------
Field Netback 29.38 33.27 26.75 27.17 32.94
-----------------------------------------------------------------------

Field netbacks basically reflect the effect of higher product prices and
lower royalties during the first half.


Corporate Netback
-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 1 Month
Ended Ended Ended Ended Ended
June 30, June 30, March 31, December 31, June 30,
($) 2005 2005 2005 2004 2004
-----------------------------------------------------------------------
Field
Netback 4,455,877 2,025,577 2,430,300 1,117,087 150,371
-----------------------------------------------------------------------
General
and
Administrative 1,309,473 702,484 606,989 835,562 227,237
-----------------------------------------------------------------------
Corporate
Netback 3,146,404 1,323,093 1,823,311 281,525 (76,866)
-----------------------------------------------------------------------


Corporate netback decreased with volumes and increases in general and administrative expense offset in part by increases in prices and the effect of adjustments from prior periods.



General And Administrative Expense

-----------------------------------------------------------------------
6 Months 3 Months 3 Months 7 Months 3 Months 1 Month
Ended Ended Ended Ended Ended Ended
June 30, June 30, March 31, December December June 30,
($) 2005 2005 2005 31, 2004 31, 2004 2004
-----------------------------------------------------------------------
Salary &
Benefits 913,406 438,514 474,892 596,905 473,517 44,122
-----------------------------------------------------------------------
General Office
Expenses 479,763 320,342 159,421 161,553 67,645 20,807
-----------------------------------------------------------------------
Professional
Fees, Dues,
etc 133,392 72,050 61,342 171,082 1,988 160,187
-----------------------------------------------------------------------
Computer
Services and
Software 62,568 32,140 30,428 114,015 18,382 22,698
-----------------------------------------------------------------------
Insurance 32,717 34,828 (2,111) 17,559 (10,553) 3,052
-----------------------------------------------------------------------
1,621,846 897,874 723,972 1,061,114 550,979 250,866
-----------------------------------------------------------------------
Recoveries (312,373) (195,390) (116,983) (225,552) (128,887) (23,629)
-----------------------------------------------------------------------
Total 1,309,473 702,484 606,989 835,562 422,092 227,237
-----------------------------------------------------------------------


The Company began paying rent on its premises effective April 1, 2005. Prior to that it had enjoyed rent free status from its landlords. Accrete will strive to meet its target of $2.00 per barrel for general and administrative costs in 2005.

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 second quarter were $1,189,236, up from $152,929 in the first quarter. This reflects the $618,543 that was related to past periods, and the larger number of options in the calculation that will be incurred on an on-going basis.

Interest and Bank Charges

Interest expense and bank charges for the first six months ended June 30, 2005 were $140,807. Bank debt during the first half increased as a result of capital expenditures then was reduced in May by a private placement of stock.

Depletion Depreciation & Amortization

Depletion, depreciation and accretion of the asset retirement obligation for the three month period and six month periods ended June 30, 2005 totaled $781,425 or $12.85 per boe, and $1,711,163 or $11.28 per boe respectively. The increase on a per barrel basis reflects facility expenditures.

Income Taxes

The Company is not liable for any current 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 June 30, 2005, the Company's exploration and development expenditures and undepreciated capital costs total $34,942,597 and comprise:



------------------------------------------------------------------------
$
------------------------------------------------------------------------
Cumulative Canadian Oil and Gas Property Expense 4,688,708
------------------------------------------------------------------------
Cumulative Canadian Development Expense 13,838,342
------------------------------------------------------------------------
Cumulative Canadian Exploration Expense 6,672,240
------------------------------------------------------------------------
Undepreciated Capital Cost 9,743,307
------------------------------------------------------------------------
34,942,597
------------------------------------------------------------------------
------------------------------------------------------------------------


These costs may be carried forward indefinitely to reduce future taxable income. There are also $1,561,414 of non-capital losses which may be carried forward for seven years to reduce future taxable income.

Cash Flow

Cash flow for the three months ended June 30, 2005 was $1,323,093 ($0.09 per share) and $3,146,404 ($0.23 per share) for the six months ended June 30, 2005.



Capital Expenditures

Capital expenditures for the six months ending June 30, 2005:
------------------------------------------------------------------------
6 Months Ended 3 Months Ended 3 Months Ended
June 30, 2005 June 30, 2005 March 31, 2005
------------------------------------------------------------------------
$ $ $
------------------------------------------------------------------------
Drilling and Completions 15,655,486 7,108,992 8,546,494
------------------------------------------------------------------------
Equipping and Tie-Ins 5,251,725 2,991,419 2,260,306
------------------------------------------------------------------------
Office Equipment 41,807 24,044 17,763
------------------------------------------------------------------------
Total Cash Expenditures 20,949,018 10,124,455 10,824,563
------------------------------------------------------------------------
Allowance for future
restoration expenditures 190,738 63,264 127,474
------------------------------------------------------------------------
Total 21,139,756 10,187,719 10,952,037
------------------------------------------------------------------------
------------------------------------------------------------------------


This quarter the Company drilled four oil wells (2.6 net) and one gas well (1.0 net), achieving a 100% success rate. That brings the total number of wells drilled to date in fiscal 2005 to 12 (9.0 net) with an overall success rate for the year of 92% (89% net).

Equipping costs include gathering, battery and compression facility costs at Harmattan as well as the initial costs incurred on the Claresholm gas plant.



Liquidity and Capital Resources

------------------------------------------------------------------------
$
------------------------------------------------------------------------

------------------------------------------------------------------------
Exploration and development program funding
------------------------------------------------------------------------
Cash, Beginning of Year 539,678
------------------------------------------------------------------------
Cash flow 3,146,404
------------------------------------------------------------------------
Change in non-cash working capital 831,319
------------------------------------------------------------------------
Increase in Bank Debt 2,880,625
------------------------------------------------------------------------
Stock Issuance, net 13,550,992
------------------------------------------------------------------------
Cash, end of period -
------------------------------------------------------------------------
Capital expenditures during the period 20,949,018
------------------------------------------------------------------------
------------------------------------------------------------------------


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

At June 30, 2005 the Company's credit facility comprises a Revolving Operating Demand Loan facility with a credit limit of $15,000,000, 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 quarter 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.

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

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 though 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 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.

Management expects that continued high commodity prices will contribute to healthy cash flow and a buoyant public capital market, 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. Continued drilling in the Boltan area will be dependent upon stable production from the successful gas well drilled in 2005.

The Company will continue to seek opportunities in new areas while aggressively developing the core areas discussed in this report. It is expected that up to 30 wells will be drilled in 2005, with total capital expenditures totaling $40 million This total includes land purchases, tie-ins and infrastructure. This program is highly adaptable to changing information and conditions.

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.

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 unproved properties. The cash flows are estimated using the 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, blow-out, 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.

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.

Disclaimers

This discussion contains the term "cash flow from operations" 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 may not be comparable to that reported by other companies. The reconciliation between net loss 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.

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
(Unaudited)

June 30, 2005 December 31, 2004
------------------------------------------------------------------------
$ $
------------------------------------------------------------------------
ASSETS
------------------------------------------------------------------------
Current assets
------------------------------------------------------------------------
Cash - 539,678
------------------------------------------------------------------------
Accounts receivable 2,303,565 3,180,061
------------------------------------------------------------------------
Prepaid expenses 266,329 71,773
------------------------------------------------------------------------
------------------------------------------------------------------------
2,569,894 3,791,512
------------------------------------------------------------------------

Property and
equipment (note 3) 41,006,693 21,559,315
------------------------------------------------------------------------
------------------------------------------------------------------------
43,576,587 25,350,827
------------------------------------------------------------------------
------------------------------------------------------------------------
LIABILITIES
------------------------------------------------------------------------
Current liabilities
------------------------------------------------------------------------
Accounts payable and
accrued liabilities 9,582,122 9,432,742
------------------------------------------------------------------------
Bank indebtedness
(note 4) 2,880,625 -
------------------------------------------------------------------------
------------------------------------------------------------------------
12,462,747 9,432,742
------------------------------------------------------------------------

Asset retirement
obligation (note 6) 694,923 485,400
------------------------------------------------------------------------
Future Income Tax (note 7) 705,689 -
------------------------------------------------------------------------
------------------------------------------------------------------------
13,863,359 9,918,142
------------------------------------------------------------------------
------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
------------------------------------------------------------------------
Share capital (note 5) 29,644,028 16,594,505
------------------------------------------------------------------------
Contributed surplus 1,699,000 356,836
------------------------------------------------------------------------
Deficit (1,629,800) (1,518,656)
------------------------------------------------------------------------
------------------------------------------------------------------------
29,713,228 15,432,685
------------------------------------------------------------------------
------------------------------------------------------------------------
43,576,587 25,350,827
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements

Approved by the Board of Directors:

P.Salamon

B.Mellum


Accrete Energy Inc.

Statements of Income (Loss) and Deficit
(Unaudited)

Three Months Three Months Six Months One Month
Ended Ended Ended Ended
March 31, June 30, June 30, June 30,
2005 2005 2005 2004
------------------------------------------------------------------------
$ $ $ $
------------------------------------------------------------------------
Revenue
------------------------------------------------------------------------
Petroleum and
natural gas revenue 3,633,360 2,953,784 6,587,144 197,505
------------------------------------------------------------------------
Royalties (783,851) (512,499) (1,296,350) (20,337)
------------------------------------------------------------------------

------------------------------------------------------------------------
------------------------------------------------------------------------
2,849,509 2,441,285 5,290,794 177,168
------------------------------------------------------------------------
------------------------------------------------------------------------
Expenses
------------------------------------------------------------------------
Production expenses 378,232 374,378 752,610 26,797
------------------------------------------------------------------------
Transportation
expenses 40,977 41,330 82,307 -
------------------------------------------------------------------------
General and
administrative, net
of recoveries 606,989 702,484 1,309,473 227,237
------------------------------------------------------------------------
Stock based
compensation cost
(note 5) 152,929 1,189,236 1,342,165 50,955
------------------------------------------------------------------------
Depletion,
depreciation and
accretion 929,738 781,425 1,711,163 81,500
------------------------------------------------------------------------
------------------------------------------------------------------------
2,108,865 3,088,853 5,197,718 386,489
------------------------------------------------------------------------
------------------------------------------------------------------------
Income (loss) before
income taxes 740,644 (647,568) 93,076 (209,321)
------------------------------------------------------------------------
Future income taxes
(note 7) (33,491) (170,729) (204,220) -
------------------------------------------------------------------------
Net income (loss)
for the period 707,153 (818,297) (111,144) (209,321)
------------------------------------------------------------------------
Deficit arising on
transfer of assets
(note 2) - - - (745,625)
------------------------------------------------------------------------
Deficit - beginning
of period (1,518,656) (811,503) (1,518,656) -
------------------------------------------------------------------------
------------------------------------------------------------------------
Deficit - end of
period (811,503) (1,629,800) (1,629,800) (954,946)
------------------------------------------------------------------------
------------------------------------------------------------------------
Weighted average
number of shares
(note 5) 13,232,936 13,606,562 13,419,749 9,732,936
------------------------------------------------------------------------
Income (loss) per share:
------------------------------------------------------------------------
Basic 0.05 (0.06) (0.01) (0.02)
------------------------------------------------------------------------
Diluted 0.05 (0.06) (0.01) (0.02)

See accompanying notes to financial statements


Accrete Energy Inc.

Statements of Cash Flows (Unaudited)

Three Months Three Months Six Months One Month
Ended Ended Ended Ended
March 31, June 30, June 30, June 30,
2005 2005 2005 2004
------------------------------------------------------------------------
$ $ $ $
------------------------------------------------------------------------
Cash provided by
(used in):
------------------------------------------------------------------------
Operating Activities
------------------------------------------------------------------------
Net income (loss)
for the period 707,153 (818,297) (111,144) (209,321)
------------------------------------------------------------------------
Items not affecting
cash:
------------------------------------------------------------------------
Stock based
compensation cost 152,929 1,189,236 1,342,165 50,955
------------------------------------------------------------------------
Future income taxes 33,491 170,729 204,220 -
------------------------------------------------------------------------
Depletion,
depreciation and
accretion 929,738 781,425 1,711,163 81,500
------------------------------------------------------------------------
------------------------------------------------------------------------
Funds flow 1,823,311 1,323,093 3,146,404 (76,866)
Change in non-cash
working capital
(note 9) (2,038,938) 1,534,996 (503,942) (168,312)
------------------------------------------------------------------------
(215,627) 2,858,089 2,642,462 (245,178)
------------------------------------------------------------------------
------------------------------------------------------------------------
Investing Activities
------------------------------------------------------------------------
Property and
equipment additions (10,824,563) (10,124,455) (20,949,018) (1,996,876)
------------------------------------------------------------------------
Change in non-cash
working capital
(note 9) 4,151,885 (2,816,624) 1,335,261 1,935,405
------------------------------------------------------------------------
------------------------------------------------------------------------
(6,672,678) (12,941,079) (19,613,757) (61,471)
------------------------------------------------------------------------
------------------------------------------------------------------------
Financing activities
------------------------------------------------------------------------
Bank debt 6,348,627 (3,468,002) 2,880,625 -
------------------------------------------------------------------------
Issue of capital
stock - net - 13,550,992 13,550,992 4,999,885
------------------------------------------------------------------------
------------------------------------------------------------------------
6,348,627 10,082,990 16,431,617 4,999,885
------------------------------------------------------------------------
------------------------------------------------------------------------

Decrease in cash (539,678) - (539,678) 4,693,236
------------------------------------------------------------------------
Cash - beginning of
period 539,678 - 539,678 -
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash - end of period - - - 4,693,236
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements


Accrete Energy Inc.
Notes to the Financial Statements
For the period ended June 30, 2005


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 in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") 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. (the "Plan of Arrangement"). Accordingly, the financial statements do not include comparative financial results for the equivalent period in 2004.

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 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 (the "Plan"), 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



---------------------------------------------------------------------
As at June 30, As at December 31,
2005 2004
---------------------------------------------------------------------
$ $
---------------------------------------------------------------------
Petroleum and natural gas properties
and equipment 43,086,448 21,988,499
---------------------------------------------------------------------
Furniture, fixtures and other 110,111 68,305
---------------------------------------------------------------------
43,196,559 22,056,804
---------------------------------------------------------------------
Less: Accumulated depletion
and depreciation (2,189,866) (497,489)
---------------------------------------------------------------------
41,006,693 21,559,315
---------------------------------------------------------------------


At June 30, 2005 costs of $ 2,007,501 ($1,225,384 at March 31, 2005, $100,000 at December 31, 2004, $ 7,723,391 at September 30, 2004, and $1,125,284 at June 30, 2004) with respect to unproved properties have been excluded from costs subject to depletion. No overhead charges have been capitalized to petroleum and natural gas properties.

4. Credit Facility



At June 30, 2005 the Company's credit facility comprises:

A Revolving Operating Demand Loan facility with a credit limit of
$15,000,000
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 quarter 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 $25,000,000 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.

5. Share Capital

Authorized:

An unlimited number of common shares and an unlimited number of preferred shares.



Issued and outstanding:

---------------------------------------------------------------------
Common Shares Number of Shares Amounts
---------------------------------------------------------------------
$
---------------------------------------------------------------------
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
---------------------------------------------------------------------
Share issuance costs (115)
---------------------------------------------------------------------
Balance, June 30, 2004 9,732,936 9,732,821
---------------------------------------------------------------------
Share issuance costs - (10,600)
---------------------------------------------------------------------
Balance, September 30, 2004 9,732,936 9,722,221
---------------------------------------------------------------------
Issued on private placement 3,500,000 7,175,000
---------------------------------------------------------------------
Share issuance costs (net of tax) - (302,716)
---------------------------------------------------------------------
Balance, December 31, 2004 13,232,936 16,594,505
---------------------------------------------------------------------
Tax Effect of Flow Through - (858,487)
---------------------------------------------------------------------
Balance, March 31, 2005 13,232,936 15,736,018
---------------------------------------------------------------------
Issued on private placement 2,000,000 14,500,000
---------------------------------------------------------------------
Share issuance costs (net of tax) - (591,990)
---------------------------------------------------------------------
Balance, June 30, 2005 15,232,936 29,644,028
---------------------------------------------------------------------
- basic weighted average 13,419,749
---------------------------------------------------------------------
- diluted 14,554,159
---------------------------------------------------------------------

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

---------------------------------------------------------------------
June 30, December 31,
2005 2004
---------------------------------------------------------------------
Weighted average common shares
outstanding - basic 13,419,749 11,123,123
---------------------------------------------------------------------
Effect of dilutive stock options 1,134,410 547,766
---------------------------------------------------------------------
Weighted average common shares
outstanding - diluted 14,554,159 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 was considered antidilutive. Accordingly, the basic weighted average number of common shares outstanding was used in the calculation of diluted loss per share for that period.

Tax benefits related to the $2,553,500 of flow-through shares were renounced to flow-through shareholders in February 2005. Future tax liabilities and share capital were adjusted in the amount of $858,487, being the estimated cost of the renounced tax benefits.

Stock Options

Under the terms of the Accrete Energy Inc. 2004 Incentive Stock Option Plan (the "plan"), directors, officers and employees are eligible to be granted options to purchase common shares. The plan provides for granting up to 10% of the number of issued and outstanding common shares that were outstanding immediately after the completion of the plan of arrangement and the June private placement of common shares. The Company granted all stock options that were available to officers, employees and directors at that time.

Subsequently, it was necessary to grant additional stock options as inducement to secure the employment of officers and employees. A total of 530,000 stock options were granted prior to the revision to the stock option plan.

The Company's shareholders, at their annual general meeting held on May 5, 2005, approved an amendment to the Plan that increased the number of common shares reserved for issuance pursuant to the Plan from 926,394 to 1,926,394. In addition, at that meeting, the shareholders approved all previously unapproved grants.



The following table summarizes information about stock options
outstanding at June 30, 2005:
---------------------------------------------------------------------
Weighted Weighted
Average Average
Remaining Number Exercise
Grant Options Contractual Exercisable Price
Price Outstanding Life (Vested) ($/Share)
---------------------------------------------------------------------
$1.00 926,845 3.9 years 617,897 $1.00
---------------------------------------------------------------------
$2.30 40,000 4.3 years - $2.30
---------------------------------------------------------------------
$2.60 395,000 4.4 years - $2.60
---------------------------------------------------------------------
$2.89 5,000 4.4 years - $2.89
---------------------------------------------------------------------
$3.12 40,000 4.4 years - $3.12
---------------------------------------------------------------------
$4.45 50,000 4.7 years - $4.45
---------------------------------------------------------------------
$7.01 9,000 4.9 years - $7.01
---------------------------------------------------------------------
1,465,845 4.4 years 617,897 $1.69
---------------------------------------------------------------------


The exercise price of each of the options granted equals the market price of the Company's common shares on the date of grant.

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 using the fair value method. The fair value for such options was estimated to be $3,873,193 (An average of $2.64 per option granted) at the date of grant or at the date of approval of the amendment to the Plan for those options that were granted subject to shareholder approval, using a Black-Scholes option pricing model. This value is charged to stock based compensation cost over the expected holding period.

A total of $1,189,235 was charged in the second quarter of 2005. This amount included $1,052,882 relative to stock based compensation for the options that were subject to the amendment of the Plan. Of this amount, $618,543 relates to prior period compensation costs booked in the second quarter of 2005.

The following assumptions were used in calculating the fair value for options valued in the second quarter of 2005:



---------------------------------------------------------------------
Volatility factor of expected market price 48%
---------------------------------------------------------------------
Weighted average risk-free interest rate (%) 3.7
---------------------------------------------------------------------
Dividend yield (%) -
---------------------------------------------------------------------
Weighted average expected life of options (years) 5
---------------------------------------------------------------------


The reconciling item between basic and diluted earnings per share is outstanding stock options that have been approved by the shareholders.



6. Asset Retirement Obligation

Asset retirement obligation comprises:

---------------------------------------------------------------------
June 30, 2005 December 31, 2004
---------------------------------------------------------------------
$ $
---------------------------------------------------------------------
Liabilities incurred 673,115 482,378
---------------------------------------------------------------------
Accretion expense 18,786 3,022
---------------------------------------------------------------------
Accumulated Accretion Expense
to December 31, 2004 3,022 -
---------------------------------------------------------------------
Balance, end of period 694,923 485,400
---------------------------------------------------------------------


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 $1,928,000(1,417,000 at December 31, 2004), 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 June 30, 2005, the Company's exploration and development expenditures and undepreciated capital costs total $34,942,597 and comprise:



---------------------------------------------------------------------
June 30, 2005 December 31, 2004
---------------------------------------------------------------------
$ $
---------------------------------------------------------------------
Cumulative Canadian Oil and
Gas Property Expense 4,688,708 3,312,242
---------------------------------------------------------------------
Cumulative Canadian
Development Expense 13,838,342 6,186,956
---------------------------------------------------------------------
Cumulative Canadian
Exploration Expense 6,672,240 4,625,599
---------------------------------------------------------------------
Undepreciated capital cost 9,743,307 5,410,759
---------------------------------------------------------------------
34,942,597 19,535,556
---------------------------------------------------------------------
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 For the For the For the
6 Months 3 Months 3 Months 7 Months
Ended Ended Ended Ended
June 30, June 30, March 31, December 31,
2005 2005 2005 2004
---------------------------------------------------------------------
$ $ $ $
---------------------------------------------------------------------
Income/(Loss) before
income taxes 93,076 (647,568) 740,644 (575,822)
---------------------------------------------------------------------
Expected income tax
recovery at the
combined federal and
provincial statutory
rate of 37.62% 35,015 (243,615) 278,630 (222,382)
---------------------------------------------------------------------
Crown royalties 333,229 118,973 214,256 51,241
---------------------------------------------------------------------
Resource allowance (212,665) (78,956) (133,709) (39,134)
---------------------------------------------------------------------
Alberta Royalty
Tax Credits (105,250) (37,641) (67,609) -
---------------------------------------------------------------------
Stock based
compensation cost 504,923 447,391 57,532 137,810
---------------------------------------------------------------------
Attributed crown
royalty income (56,699) (18,819) (37,880) (4,806)
---------------------------------------------------------------------
Tax-rate adjustments (25,958) (18,087) (7,871) -
---------------------------------------------------------------------
Other 3,818 1,483 2,335 2,287
---------------------------------------------------------------------
Valuation allowance
- reversed (272,193) - (272,193) 272,193
---------------------------------------------------------------------
Future income tax
expense 204,220 170,729 33,491 197,209
---------------------------------------------------------------------


The following table summarizes the tax effect of temporary
differences.
---------------------------------------------------------------------
June 30, March 31, December 31,
2005 2005 2004
---------------------------------------------------------------------
$ $ $
---------------------------------------------------------------------
Future income tax assets
(liabilities):
Carrying value of capital
assets in excess of tax
basis (2,106,152) (1,720,161) (781,576)
---------------------------------------------------------------------
Asset retirement
obligation 233,634 208,326 187,461
---------------------------------------------------------------------
Share issue costs 471,395 142,838 167,925
---------------------------------------------------------------------
Losses carried forward 633,928 434,332 693,577
---------------------------------------------------------------------
Attributed crown
royalty income 61,506 42,687 4,806
---------------------------------------------------------------------
(705,689) (891,978) 272,193
---------------------------------------------------------------------
Less: Valuation Allowance - - (272,193)
---------------------------------------------------------------------
(705,689) (891,978) -
---------------------------------------------------------------------


The following table summarizes the entries to future tax liability
account for the six month period ended June 30, 2005:

---------------------------------------------------------------------
Future Tax Liability
---------------------------------------------------------------------
As at December 31, 2004 - -
---------------------------------------------------------------------

---------------------------------------------------------------------
As at March 31, 2005
Add Tax Effect of Flow-through shares (960,627)
---------------------------------------------------------------------
Provision for three month period
ended March 31, 2005 (203,544)
---------------------------------------------------------------------
Reverse Valuation Allowance 272,193
---------------------------------------------------------------------
(891,978) (891,978)
---------------------------------------------------------------------

---------------------------------------------------------------------
As at June 30, 2005
---------------------------------------------------------------------
Provision for three month period
ended June 30, 2005 186,289
---------------------------------------------------------------------
186,289 705,689
---------------------------------------------------------------------


8. Financial Instruments

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

---------------------------------------------------------------------
6 Months 3 Months 3 Months 3 Months
Ended Ended Ended Ended
June 30, June 30, March 31, December 31,
2005 2005 2005 2004
---------------------------------------------------------------------
$ $ $ $
---------------------------------------------------------------------
Accounts receivable 876,496 1,741,028 (864,532) (2,024,400)
---------------------------------------------------------------------
Prepaid expenses (194,557) (179,512) (15,045) (11,728)
---------------------------------------------------------------------
Accounts payable
and accrued
liabilities 149,380 (2,843,144) 2,992,524 5,328,614
---------------------------------------------------------------------
Change in non-cash
working capital 831,319 (1,281,628) 2,112,947 3,292,486
---------------------------------------------------------------------

Relating to:
Investing activities 1,335,261 (2,816,624) 4,151,885 3,177,398
---------------------------------------------------------------------
Operating activities (503,942) 1,534,996 (2,038,938) 115,088
---------------------------------------------------------------------
831,319 (1,281,628) 2,112,947 3,292,486
---------------------------------------------------------------------


Additional information concerning Accrete Energy Inc. may be found on its website at accrete-energy.com.


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