Accrete Energy Inc.
TSX : GZ

Accrete Energy Inc.

November 08, 2005 21:19 ET

Accrete Energy Reports Third Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 8, 2005) - ACCRETE ENERGY INC. (TSX:GZ) ("Accrete") is pleased to provide the unaudited results of its operations for the nine month period ended September 30, 2005.

Summary of Activities

Accrete, in common with other industry operators, continued to experience the aftermath of the second quarter which saw wet weather impair field operations. Regulatory issues at Harmattan and Claresholm also impinged on operations during that period. By early August most of the regulatory issues had been resolved and the Company was hard at work drilling, constructing a gathering system in the south end of the Harmattan field, a compression facility at Boltan and a gas plant at Claresholm.

Notwithstanding the aforementioned operating challenges, the Company drilled 8 oil wells (6.1 net) during the third quarter, achieving a 100% success rate. That brings the total number of wells drilled to date in fiscal 2005 to 20 (15.1 net) with an overall success rate for the year of 95% (93% net).

Accrete estimates that it has added 3.2 million barrels of proved reserves during the nine months ended September 30, 2005 resulting in a 228% increase in proven reserves since year end. It also estimates that recent drilling has added approximately 2.02 million barrels of new proven undeveloped reserves that have not been verified by its independent engineering evaluators but that are believed to fall within the assignment criteria.

Close to $36 million was spent in the first nine months of 2005 on capital projects. Of this, $26 million was spent on drilling and completions with the remainder being spent on processing, compression and gathering facilities.

Activity reached near normal levels at Harmattan by August and Claresholm production came back on stream with the commissioning of a company owned gas plant at the beginning of September.

Accrete has almost completed the installation of a compression facility and 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 and alleviate the risk of sporadic production that had plagued previous months.

At this time Accrete's productive capability is estimated to be approximately 3,200 barrels equivalent per day. The Company is producing approximately 3,000 barrels per day and has approximately 200 barrels equivalent behind pipe in Harmattan. 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 through the drilling bit on internally generated projects.



------------------------------------------------------------------------
Three Month Three Month Three Month
Period Ended Period Ended Period Ended
September 30, June 30, March 31,
2005 2005 2005

------------------------------------------------------------------------
Financial:

------------------------------------------------------------------------
Petroleum and Natural
Gas Revenues 6,057,942 2,953,783 $ 3,633,360
------------------------------------------------------------------------
Cash Flow from Operations $ 3,399,082 $ 1,323,093 $ 1,823,311
Per Share Basic $ 0.22 $ 0.09 $ 0.14
------------------------------------------------------------------------
Income/(Loss)
Per Share Basic $ 0.06 $ (0.06) $ 0.05
------------------------------------------------------------------------
Capital Expenditures 15,206,051 10,187,719 10,952,037
------------------------------------------------------------------------
Wells Drilled - Gross 8 5 7
------------------------------------------------------------------------
Wells Drilled - Net 6.1 3.6 5.4
------------------------------------------------------------------------
Total Assets $ 61,524,657 $ 43,576,587 $ 35,719,800
------------------------------------------------------------------------
Working Capital $(21,473,528) $ (9,892,853) $(14,642,481)
------------------------------------------------------------------------
Weighted Average Common
Shares Outstanding
Basic 15,232,936 13,606,562 13,232,936
Diluted 16,413,609 14,740,972 14,014,629
------------------------------------------------------------------------
Employee Stock Options
Outstanding 1,465,845 1,465,845 926,845
------------------------------------------------------------------------
Operations:
------------------------------------------------------------------------
Natural Gas Production
- mcf/d 4,462 2,267 4,281
------------------------------------------------------------------------
Average Selling Price
- Natural Gas - $/mcf $ 9.89 $ 8.44 $ 6.78
------------------------------------------------------------------------
Oil Production - bbl/d 125 72 70
------------------------------------------------------------------------
Average Selling Price
- Crude Oil - $/bbl $ 75.18 $ 82.32 $ 52.36
------------------------------------------------------------------------
NGL Production - bbl/d 333 217 226
------------------------------------------------------------------------
Average Selling Price
- NGL - $/bbl $ 35.34 $ 34.06 $ 33.84
------------------------------------------------------------------------
Royalties at 6:1 - $/boe $ 14.05 $ 8.45 $ 8.63
------------------------------------------------------------------------
Operating Expenses at 6:1
- $/boe $ 4.74 $ 6.85 $ 4.61
------------------------------------------------------------------------
Field netback at 6:1
- $/boe $ 35.55 $ 33.29 $ 26.75
------------------------------------------------------------------------
General and administrative
expenses $ 582,759 $ 702,484 $ 606,989
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Three Month Three Month One Month
Period Ended Period Ended Period Ended
December 31, September 30, June 30,
2004 2004 2004

------------------------------------------------------------------------
Financial:

------------------------------------------------------------------------
Petroleum and Natural
Gas Revenues $ 872,979 $ 490,332 $ 197,505
------------------------------------------------------------------------
Cash Flow from Operations $ 170,925 $ 187,466 $ (76,866)
Per Share Basic $ 0.01 $ 0.02 $ (0.01)
------------------------------------------------------------------------
Income/(Loss)
Per Share Basic $ (0.03) $ (0.02) $ (0.02)
------------------------------------------------------------------------
Capital Expenditures 11,396,386 4,601,231 6,059,187
------------------------------------------------------------------------
Wells Drilled - Gross 6 4 2
------------------------------------------------------------------------
Wells Drilled - Net 5.5 3.16 1.80
------------------------------------------------------------------------
Total Assets $ 25,350,827 $ 12,996,324 $ 11,851,229
------------------------------------------------------------------------
Working Capital $ (5,641,230) $ (1,498,222) $ 2,926,143
------------------------------------------------------------------------
Weighted Average Common
Shares Outstanding
Basic 12,966,632 9,732,936 9,732,936
Diluted 13,514,398 10,659,392 10,659,392
------------------------------------------------------------------------
Employee Stock Options
Outstanding 926,845 926,845 926,845
------------------------------------------------------------------------
Operations:
------------------------------------------------------------------------
Natural Gas Production
- mcf/d 1,262 896 913
------------------------------------------------------------------------
Average Selling Price
- Natural Gas - $/mcf $ 6.11 $ 5.94 $ 7.21
------------------------------------------------------------------------
Oil Production - bbl/d 18 - -
------------------------------------------------------------------------
Average Selling Price
- Crude Oil - $/bbl $ 49.93 - -
------------------------------------------------------------------------
NGL Production - bbl/d 18 - -
------------------------------------------------------------------------
Average Selling Price
- NGL - $/bbl $ 46.79 - -
------------------------------------------------------------------------
Royalties at 6:1 - $/boe $ 7.46 $ 4.56 $ 4.54
------------------------------------------------------------------------
Operating Expenses at 6:1
- $/boe $ 4.85 $ 3.89 $ 5.87
------------------------------------------------------------------------
Field netback at 6:1
- $/boe $ 26.07 $ 27.80 $ 30.88
------------------------------------------------------------------------
General and administrative
expenses $ 422,092 $ 186,233 $ 227,237
------------------------------------------------------------------------
------------------------------------------------------------------------


Management's Discussion and Analysis

The following discussion and analysis was prepared on November 8, 2005 and is management's assessment of Accrete's historical financial and operating results and should be read in conjunction with the unaudited interim financial statements for the nine month period ended September 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 Corporation's web site at www.accrete-energy.com.

Accrete is an independent public corporation 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 it, 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 nine month period ended September 30, 2005 averaged 3.7mmcf/d of natural gas, 89 bbls/d of oil, and 259 bbls/d of NGLs.

Business Environment

Hot weather and hurricanes were the order of the day for the third quarter. Extremely high temperatures in July and August in the consuming regions caused a tremendous demand for electrical power for cooling. Demand for natural gas for electrical generation surged during this period. The early onslaught of the hurricane season led to curtailment of production and the damage to productive facilities in the US Gulf Coast. This more than offset the negative effect of high injections and storage that had accrued during the first half of the year. Storage still remains high relative to historical statistics so that milder fall and winter weather could cause further price volatility in the natural gas market.

The increased demand for crude oil, inventory uncertainties and hurricanes Rita and Katrina resulted in continued high and volatile oil prices.

Exploration and production companies found that the weather also severely impacted their ability to operate in the field in Alberta during the first half of the year. A longer than normal break up period, coupled with continued rainfall and flooding in many areas certainly curtailed field operations. These conditions continued but appeared to be moderating by the end of the third quarter. Prices for field services continued to climb as service providers experienced unprecedented demand as they attempted to clear backlogs that had built up from earlier periods.



Operational Activities

Production

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Oil (bbl/d) 125 - 89 -
NGL (bbl/d) 333 - 259 -
------------------------------------------------------------------------
Total Oil/NGL (bbl/d) 458 - 348 -
Gas (mcf/d) 4,462 896 3,671 901
------------------------------------------------------------------------
Total (boe/d) 1,201 149 960 150
------------------------------------------------------------------------
------------------------------------------------------------------------


Natural Gas Production(mcf/d)

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo 62 235 92 231
Boltan 670 661 489 670
Claresholm 517 - 682 -
Harmattan 3,213 - 2,408 -
------------------------------------------------------------------------
Total 4,462 896 3,671 901
------------------------------------------------------------------------
------------------------------------------------------------------------


Crude Oil Sales(bbl/d)

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm 5 - 2 -
Harmattan 120 - 87 -
------------------------------------------------------------------------
Total 125 - 89 -
------------------------------------------------------------------------
------------------------------------------------------------------------


Natural Gas Liquids Sales (bbl/d)

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan 3 - 3 -
Claresholm - - 3 -
Harmattan 330 - 253 -
------------------------------------------------------------------------
Total 333 - 259 -
------------------------------------------------------------------------
------------------------------------------------------------------------


During the first half, regulatory issues caused one of the best wells in the Harmattan field to be shut in. In addition, production from the remaining wells decreased to sustainable levels as the effect of flush production decreased, and wet weather and an extended breakup period precluded the Company from placing additional wells in the area on steam. The regulatory problems were resolved late in the third quarter and the Company's infrastructure was extended so that more wells were tied in the third quarter as the wet conditions abated somewhat. At September 30, 2005, four wells had yet to be tied in.

Production volumes at Boltan were less than anticipated during the first half of the year because testing of several successful wells drilled in the area by others caused erratic production from Accrete's wells. The testing activity eased off during the third quarter allowing Accrete's wells to produce with more regularity.

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

Oil sales at Harmattan increased as new wells were put on stream during the period.



Revenue

Total Sales

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
($) 2005 2004 2005 2004
------------------------------------------------------------------------
Oil 861,584 - 1,733,229 -
NGL 1,082,282 - 2,441,231 -
Gas 4,060,472 490,332 8,417,022 687,837

Processing 53,604 - 53,604 -
------------------------------------------------------------------------
Total 6,057,942 490,332 12,645,086 687,837
------------------------------------------------------------------------


Natural Gas Sales Revenue

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
($) 2005 2004 2005 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo 51,423 109,441 183,906 155,006
Boltan 548,083 380,891 1,029,906 532,831
Claresholm 581,394 - 1,697,830 -
Harmattan 2,879,572 - 5,505,380 -
------------------------------------------------------------------------
Total 4,060,472 490,332 8,417,022 687,837
------------------------------------------------------------------------


Crude Oil Sales Revenue

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
($) 2005 2004 2005 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm 36,390 - 36,390 -
Harmattan 825,194 - 1,696,839 -
------------------------------------------------------------------------
Total 861,584 - 1,733,229 -
------------------------------------------------------------------------


Natural Gas Liquids(NGL) Sales Revenue

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
($) 2005 2004 2005 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan 20,232 - 55,044 -
Claresholm 351 - 69,874 -
Harmattan 1,061,699 - 2,316,313 -
------------------------------------------------------------------------
Total 1,082,282 - 2,441,231 -
------------------------------------------------------------------------


Processing Revenue

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
($) 2005 2004 2005 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm 4,250 - 4,250 -
Harmattan 49,354 - 49,354 -
------------------------------------------------------------------------
Total 53,604 - 53,604 -
------------------------------------------------------------------------


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

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

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



Product Prices

Natural Gas Prices ($/mcf)

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo 9.01 5.05 7.34 5.52
Boltan 8.90 6.26 7.72 6.51
Claresholm 12.24 - 9.12 -
Harmattan 9.74 - 8.37 -
------------------------------------------------------------------------
Average Price 9.89 5.94 8.40 6.26
------------------------------------------------------------------------


Crude Oil Sales Prices ($/bbl)

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan - - - -
Claresholm 78.90 - 78.90 -
Harmattan 75.03 - 71.02 -
------------------------------------------------------------------------
Average Price 75.18 - 71.17 -
------------------------------------------------------------------------


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

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo - - - -
Boltan 63.67 - 63.44 -
Claresholm 69.75 - 76.53 -
Harmattan 35.03 - 33.63 -
------------------------------------------------------------------------
Average Price 35.34 - 34.55 -
------------------------------------------------------------------------


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

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

At Harmattan, NGLs comprise a considerable portion ethanes which are relatively low priced. Claresholm NGL's are higher in pentanes, which command higher prices. NGL's in the other areas comprise a blended product stream in which lower priced products bring down the overall price received.



Royalties

3 Months Ended 3 Months Ended
September 30, 2005 September 30, 2004
------------------------------------------------------------------------
Area Total $ Rate Total $ Rate
Atlee-Buffalo 6,545 13% 28,678 26%
Boltan 58,870 10% 34,444 9%
Claresholm 157,566 25% -
Harmattan 1,329,651 28% -
------------------------------------------------------------------------
Total 1,552,632 26% 63,122 13%
------------------------------------------------------------------------
------------------------------------------------------------------------


9 Months Ended 4 Months Ended
September 30, 2005 September 30, 2004
------------------------------------------------------------------------
Area Total $ Rate Total $ Rate
Atlee-Buffalo 31,507 17% 38,633 25%
Boltan 92,190 6% 44,826 8%
Claresholm 386,872 21% - -
Harmattan 2,338,413 25% - -
------------------------------------------------------------------------
Total 2,848,982 23% 83,459 12%
------------------------------------------------------------------------
------------------------------------------------------------------------


Crown royalties, net of Alberta Royalty Tax Credit, for the three months ended September 30, 2005 were $1,107,455 (ARTC = $160,868). Total gross overriding royalties were $389,898 and freehold royalties totaled $55,281. Atlee Buffalo royalties are low because they are at a low productivity rate. Boltan production enjoys a Deep Gas Royalty Holiday. Harmattan royalties are increasing due to increased production from freehold and farm in wells.



Production Expenses

3 Months Ended 3 Months Ended
($) September 30, 2005 September 30, 2004
------------------------------------------------------------------------
Area $ $/boe $ $/boe
Atlee-Buffalo 5,131 5.39 3,000 0.84
Boltan 59,695 5.64 50,511 4.98
Claresholm 32,885 3.92 - -
Harmattan 425,758 4.70 - -
------------------------------------------------------------------------
Total 523,469 4.74 53,511 3.89
------------------------------------------------------------------------
------------------------------------------------------------------------


9 Months Ended 4 Months Ended
($) September 30, 2005 September 30, 2004
------------------------------------------------------------------------
Area $ $/boe $ $/boe
Atlee-Buffalo 52,888 12.67 12,138 2.59
Boltan 139,027 6.02 68,170 5.00
Claresholm 140,981 4.35 - -
Harmattan 1,025,490 5.07 - -
------------------------------------------------------------------------
Total 1,358,386 5.18 80,308 4.38
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating costs are extremely sensitive to volume changes because they have a significant proportion of fixed costs imbedded in them. That fact is illustrated in the decrease in costs on a per barrel basis at Boltan, Claresholm, and Harmattan. Atlee Buffalo is a very minor part of the total operation. The high annual cost relates to adjustments from prior periods processed in the first quarter.

Transportation expense totaled $26,322 for the three month period ending September 30, 2005. The total transportation expense per period will increase as natural gas production increases in the Claresholm and Harmattan areas. Up until now, Boltan natural gas is sold at the plant gate into the Alliance gas stream and accordingly has no transportation costs associated with it.



Field and Corporate Netbacks

Field Netback

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
($/boe) 2005 2004 2005 2004
------------------------------------------------------------------------
Area
Atlee-Buffalo 41.78 21.58 23.84 22.27
Boltan 42.48 29.20 36.97 33.24
Claresholm 51.00 - 39.38 -
Harmattan 33.24 - 30.42 -
------------------------------------------------------------------------
Field Netback 35.55 27.20 32.00 28.62
------------------------------------------------------------------------
------------------------------------------------------------------------


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

Corporate Netback

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
($) 2005 2004 2005 2004
------------------------------------------------------------------------
Area
Field Netback 3,981,841 373,699 8,437,717 524,070
General and
Administrative 582,758 186,233 1,892,232 413,470
------------------------------------------------------------------------
Corporate Netback 3,399,083 187,466 6,545,485 110,600
------------------------------------------------------------------------
------------------------------------------------------------------------


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

General and Administrative Expense

3 Months 3 Months 9 Months 4 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
($) 2005 2004 2005 2004
------------------------------------------------------------------------
Salary & Benefits 469,946 79,266 1,383,351 123,388
General Office
Expenses 273,162 73,101 752,925 93,908
Professional
Fees, Dues, etc 26,638 8,907 160,032 169,094
Computer Services
and Software 26,303 72,935 88,871 95,633
Insurance 22,644 25,060 55,361 28,112
------------------------------------------------------------------------
818,693 259,269 2,440,540 510,135
Recoveries (235,935) (73,036) (548,308) (96,665)
------------------------------------------------------------------------
Total 582,758 186,233 1,892,232 413,470
------------------------------------------------------------------------
------------------------------------------------------------------------


The Company began paying rent on its premises effective April 1, 2005. Prior to that it had enjoyed rent free status under its lease arrangements.

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 third quarter were $498,582, down from $1,189,236 in the second quarter. This decrease is due to the retroactive adjustment that was taken in the second quarter, while the third quarter reflects only the calculations from the current period.

Interest and Bank Charges

Interest expense and bank charges for the nine months ended September 30, 2005 were $83,961 and have increased with bank indebtedness.

Depletion Depreciation & Accretion

Depletion, depreciation and accretion of the asset retirement obligation for the three month period and nine month periods ended September 30, 2005 totaled $1,405,518 or $12.72 per boe, and $3,116,681 or $11.89 per boe respectively . Costs of $1,438,961 relating to unproved properties have been excluded from costs subject to depletion for the 3 month period ended September 30, 2005 ($2,117,612 was excluded in period ending June 30, 2005).

Income Taxes

The Corporation is not liable for any cash taxes.

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

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

At September 30, 2005, the Corporation's exploration and development expenditures and undepreciated capital costs total $47,277,580 and comprise:



$
-----------
Cumulative Canadian Oil and Gas Property Expense 4,643,741
Cumulative Canadian Development Expense 21,883,837
Cumulative Canadian Exploration Expense 7,017,725
Undepreciated Capital Cost 13,732,277
-----------
47,277,580
-----------
-----------


These costs may be carried forward indefinitely to reduce future taxable income. There are also $1,009,297 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 September 30, 2005 was $3,399,082 ($0.22 per share) and $6,545,486 ($0.43 per share) for the nine months ended September 30, 2005.



Capital Expenditures

Capital expenditures for the nine months ending September 30, 2005:

9 Months 3 Months 3 Months 3 Months
Ended Ended Ended Ended
September 30, September 30, June 30, March 31,
2005 2005 2005 2005
-------------------------------------------------------
$ $ $ $
-------------------------------------------------------
Drilling and
Completions 25,892,297 10,236,811 7,108,992 8,546,494
Equipping and
Tie-Ins 9,993,475 4,741,750 2,991,419 2,260,306
Office Equipment 42,799 992 24,044 17,763
------------------------------------------------------------------------
Total Cash
Expenditures 35,928,571 14,979,553 10,124,455 10,824,563
Allowance for
future
restoration
expenditures 417,235 226,497 63,264 127,474
------------------------------------------------------------------------
Total 36,345,806 15,206,050 10,187,719 10,952,037
------------------------------------------------------------------------
------------------------------------------------------------------------


This quarter the Company drilled 8 oil wells (6.1 net), achieving a 100% success rate. That brings the total number of wells drilled to date in fiscal 2005 to 20 (15.1 net) with an overall success rate for the year of 95% (93% net).



Liquidity and Capital Resources

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

Cash, Beginning of Year 539,678
Cash flow 6,545,486
Change in non-cash working capital 3,126,817
Increase in Bank Debt 12,165,803
Stock Issuance, net 13,550,787
-----------
Cash, end of period -
-----------
Capital expenditures during the period 35,928,571
-----------
-----------


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

At September 30, 2005 the Company's credit facility comprises a Revolving Operating Demand Loan facility with a credit limit of $25,000,000, along with a Non-revolving Acquisition/Development Demand Loan facility with a credit limit of $5,000,000.

The Revolving Operating Demand Loan facility bears interest at bank prime plus one eighth percent. This facility has no specific terms of repayment aside from the bank's right of demand and periodic review. The Non-revolving Acquisition/Development Demand Loan facility bears interest at bank prime plus one percent, is repayable in monthly installments over the half-life of the reserves being financed and is subject to the bank's right of demand and periodic review.

Accrete intends to fund its capital expenditure program from internally generated cash flow, debt, and periodic issuance of new equity.

The Corporation'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 Corporation 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 Corporation'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 Corporation 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 Corporation 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 $48 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 Corporation 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 Corporation 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 Corporation'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 Corporation 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 Corporation 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 Corporation's control.

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

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

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

Accrete maintains an inventory of prospects that are within the scope of the Corporation's key areas and are strategically diverse so as to minimize the Corporation'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 Corporation 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 Corporation'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 Corporation evaluates its performance based on net earnings and cash flow. The Corporation considers cash flow a key measure as it illustrates the Corporation'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)

September 30, December 31,
2005 2004
$ $
------------------------------------------------------------------------
ASSETS

Current assets
Cash - 539,678
Accounts receivable 6,529,928 3,180,061
Prepaid expenses 162,082 71,773
------------------------------------------------------------------------
6,692,010 3,791,512
Property and equipment (note 3) 54,832,647 21,559,315
------------------------------------------------------------------------
61,524,657 25,350,827
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities 15,999,735 9,432,742
Bank indebtedness (note 4) 12,165,803 -
------------------------------------------------------------------------
28,165,538 9,432,742

Asset retirement obligation (note 6) 946,843 485,400
Future Income Tax (note 7) 1,350,266 -
------------------------------------------------------------------------
30,462,647 9,918,142
------------------------------------------------------------------------

SHAREHOLDERS' EQUITY

Share capital (note 5) 29,643,894 16,594,505
Contributed surplus 2,197,582 356,836
Deficit (779,466) (1,518,656)
------------------------------------------------------------------------
31,062,010 15,432,685
------------------------------------------------------------------------
61,524,657 25,350,827
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to financial statements


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

Three Months Three Months Nine Months Four Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Revenue $ $ $ $
Petroleum and
natural gas
revenue 6,057,942 490,332 12,645,086 687,837
Royalties (1,552,632) (63,122) (2,848,982) (83,459)
------------------------------------------------------------------------
4,505,310 427,210 9,796,104 604,378
------------------------------------------------------------------------

Expenses

Production expenses 501,582 53,511 1,254,192 80,308
Transportation
expenses 21,887 - 104,194 -
General and
administrative,
net of recoveries 582,759 186,233 1,892,232 413,470
Stock based
compensation
cost (note 5) 498,582 152,865 1,840,747 203,820
Depletion,
depreciation and
accretion 1,405,518 190,320 3,116,681 271,820
------------------------------------------------------------------------
3,010,328 582,929 8,208,046 969,418
------------------------------------------------------------------------
Income (loss)
before income
taxes 1,494,982 (155,719) 1,588,058 (365,040)
Future income
taxes (note 7) (644,648) - (848,868) -
------------------------------------------------------------------------
Net income (loss)
for the period 850,334 (155,719) 739,190 (365,040)
Deficit arising on
transfer of
assets (note 2) - - - (745,625)
Deficit - beginning
of period (1,629,800) (954,946) (1,518,656) -
------------------------------------------------------------------------
Deficit - end
of period (779,466) (1,110,665) (779,466) (1,110,665)
------------------------------------------------------------------------
------------------------------------------------------------------------
Weighted average
number of shares
(note 5)
Income (loss) per
share:
Basic 0.06 (0.02) 0.05 (0.04)
Diluted 0.05 (0.02) 0.05 (0.04)

See accompanying notes to financial statements


Accrete Energy Inc.
Statements of Cash Flows
(Unaudited)
Three Months Three Months Nine Months Four Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Cash provided by $ $ $ $
(used in):
Operating Activities
Net income (loss)
for the period 850,334 (155,719) 739,190 (365,040)
Items not
affecting cash:
Stock based
compensation cost 498,582 152,865 1,840,747 203,820
Future income
taxes 644,648 - 848,868 -
Depletion,
depreciation
and accretion 1,405,518 190,320 3,116,681 271,820
------------------------------------------------------------------------
Funds flow 3,399,082 187,466 6,545,486 110,600
Change in
non-cash
working capital
(note 9) 42,367 221,448 (461,575) 53,136
------------------------------------------------------------------------
3,441,449 408,914 6,083,911 163,736
------------------------------------------------------------------------
Investing
Activities
Property and
equipment
additions (14,979,554) (4,601,231) (35,928,572) (6,598,107)
Change in
non-cash
working capital
(note 9) 2,253,131 899,881 3,588,392 2,835,286
------------------------------------------------------------------------
(12,726,423) (3,701,350) (32,340,180) (3,762,821)
------------------------------------------------------------------------
Financing
Activities
Bank debt 9,285,179 - 12,165,803 -
Issue of capital
stock - net (205) (10,600) 13,550,788 4,989,285
------------------------------------------------------------------------
9,284,974 (10,600) 25,716,591 4,989,285
------------------------------------------------------------------------

Increase (Decrease)
in cash - (3,303,036) (539,678) 1,390,200
Cash - beginning
of period - 4,693,236 539,678 -
------------------------------------------------------------------------
Cash - end
of period - 1,390,200 - 1,390,200

See accompanying notes to financial statements


Accrete Energy Inc.
Notes to the Financial Statements
For the period ended September 30, 2005
(Unaudited)


1. Significant Accounting Policies

As the determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of these financial statements requires the use of estimates and assumptions which have been made using careful judgement. In the opinion of management, these financial statements have been properly prepared 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"). 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, Olympia Energy Inc. ( "Olympia") 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 Accrete 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 As at
September 30, 2005 December 31, 2004
---------------------------------------
$ $
---------------------------------------
Petroleum and natural gas
properties and equipment 58,291,506 21,988,499
Furniture, fixtures and other 111,103 68,305
---------------------------------------
58,402,609 22,056,804
Less: Accumulated depletion
and depreciation (3,569,962) (497,489)
---------------------------------------
54,832,647 21,559,315
---------------------------------------
---------------------------------------


At September 30, 2005 costs of $1,438,961 ($7,723,391 at September 30, 2004, $100,000 at December 31, 2004) with respect to unproved properties have been excluded from costs subject to depletion. Direct salary costs related to geological and geophysical staff in the amount of $65,634 for the quarter ended September 30, 2005 ($248,016 for nine months ended September 30, 2005) have been charged to property and equipment. No other salary or overhead charges have been capitalized to petroleum and natural gas properties.

4. Bank indebtedness

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

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

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

The Revolving Operating Demand Loan facility bears interest at bank prime plus one eighth percent. This facility has no specific terms of repayment aside from the bank's right of demand and periodic review. The Non-revolving Acquisition/Development Demand Loan facility bears interest at bank prime plus one percent, is repayable in monthly instalments over the half-life of the reserves being financed and is subject to the bank's right of demand and periodic review.

Both credit facilities are secured by a general assignment of book debts, a $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. The Corporation has agreed to increase the debenture amount to $50,000,000. No amounts can be drawn under the Non-revolving Acquisition/Development Demand Loan facility until such time as this increase has been made.

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
------------------------------------------------------------------------
Share issuance costs, net of tax (134)
------------------------------------------------------------------------
Balance, September 30, 2005 15,232,936 29,643,894
-----------------------------------------------------------
- basic weighted average 15,232,936
------------
- diluted 16,413,609
------------


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

September 30, 2005
-------------------
Weighted average common shares outstanding - basic 15,232,936
Effect of dilutive stock options 1,180,673
-------------------
Weighted average common shares outstanding - diluted 16,413,609
-------------------
-------------------


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 Corporation'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 September 30, 2005:

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

------------------------------------------------------------------------
$1.00 926,845 3.7 Years 617,897 $1.00

$2.30 40,000 4.1 Years $2.30

$2.60 395,000 4.2 Years $2.60

$2.89 5,000 4.2 Years $2.89

$3.12 40,000 4.2 Years $3.12

$4.45 50,000 4.4 Years $4.45

$7.01 9,000 4.7 Years $7.01
------------------------------------------------------------------------
1,465,845 4.2 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 $498,582 was charged in the third quarter of 2005.

The reconciling item between basic and diluted earnings per share is outstanding stock options.



6. Asset Retirement Obligation

Asset retirement obligation comprises:

September 30, 2005 December 31, 2004
----------------------------------------
$ $
----------------------------------------
Liabilities incurred 899,613 482,378
Accretion expense 44,208 3,022
Accumulated Accretion Expense
to December 31, 2004 3,022 -
----------------------------------------
Balance, end of period 946,843 485,400
----------------------------------------
----------------------------------------


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 $2,640,850 (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 September 30, 2005, the Company's exploration and development expenditures and undepreciated capital costs total $47,278,364 and comprise:



September 30, 2005 December 31, 2004
----------------------------------------
$ $
----------------------------------------
Cumulative Canadian Oil
and Gas Property Expense 4,643,741 3,312,242
Cumulative Canadian
Development Expense 21,883,837 6,186,956
Cumulative Canadian
Exploration Expense 7,017,725 4,625,599
Undepreciated capital cost 13,732,277 5,410,759
----------------------------------------
47,277,580 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
9 Months 3 Months 3 Months 3 Months
Ended Ended Ended Ended
September 30, September 30, June 30, March 30,
2005 2005 2005 2005
-------------------------------------------------------
$ $ $ $
-------------------------------------------------------
Income/(Loss)
before income
taxes 1,588,058 1,494,984 (647,568) 740,644
-------------------------------------------------------
Expected income
tax recovery at
the combined
federal and
provincial
statutory
rate of 37.62% 597,428 562,413 (243,615) 278,630
Crown royalties 643,145 309,916 118,973 214,256
Resource allowance (465,585) (252,920) (78,956) (133,709)
Alberta Royalty
Tax Credits (155,178) (49,928) (37,641) (67,609)
Stock based
compensation
cost 692,490 187,567 447,391 57,532
Attributed crown
royalty income (83,503) (26,804) (18,819) (37,880)
Tax-rate
adjustments (112,280) (86,322) (18,087) (7,871)
Other 4,544 726 1,483 2,335
Valuation
allowance
- reversed (272,193) - - (272,193)
-------------------------------------------------------
Future income
tax expense 848,868 644,648 170,729 33,491
-------------------------------------------------------
-------------------------------------------------------


The following table summarizes the tax effect of temporary differences.

September 30, June 30, March 31, December 31,
2005 2005 2005 2004
-------------------------------------------------------
$ $ $ $
-------------------------------------------------------
Future income
tax assets
(liabilities):
Carrying value
of capital
assets in
excess of
tax basis (2,580,385) (2,106,152) (1,720,161) (781,576)
Asset retirement
obligation 318,329 233,634 208,326 187,461
Share issue
costs 443,781 471,395 142,838 167,925
Losses carried
forward 379,699 633,928 434,332 693,577
Attributed
crown royalty
income 88,310 61,506 42,687 4,806
-------------------------------------------------------
(1,350,266) (705,689) (891,978) 272,193
-------------------------------------------------------
Less : Valuation
Allowance - (272,193)
-------------------------------------------------------
(1,350,266) (705,689) (891,978) -
-------------------------------------------------------
-------------------------------------------------------


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

------------------------------------------------------------------------
Future Tax Liability $
------------------------------------------------------------------------

------------------------------------------------------------------------
As at December 31, 2004 -
------------------------------------------------------------------------

------------------------------------------------------------------------
As at March 31, 2005
------------------------------------------------------------------------
Add Tax Effect of Flow-through shares 858,487
------------------------------------------------------------------------
Provision for 3 month period ended March 31, 2005 33,491
------------------------------------------------------------------------
891,978
------------------------------------------------------------------------

------------------------------------------------------------------------
As at June 30, 2005
------------------------------------------------------------------------
Provision for 3 month period ended June 30, 2005 170,729
------------------------------------------------------------------------
Share issue expense (357,018)
------------------------------------------------------------------------
705,689
------------------------------------------------------------------------

------------------------------------------------------------------------
As at September 30, 2005
------------------------------------------------------------------------
Provision for 3 month period ended September 30, 2005 644,648
------------------------------------------------------------------------
Share issuance expense (71)
------------------------------------------------------------------------
1,350,266
------------------------------------------------------------------------
------------------------------------------------------------------------


8. Financial Instruments

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

The Corporation is exposed to a floating rate of interest on its bank loans. The Company has no instruments in place at September 30, 2005 to manage the interest rate exposures.



9. Supplemental Cash Flow Information

Change in non-cash working capital comprises:

Three Three Nine Four
Months Months Months Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
$ $ $ $
Accounts
receivable 4,226,363 50,826 3,349,867 1,155,661
Prepaid expenses (104,248) (14,926) 90,309 60,045
Accounts payable
and accrued
liabilities (6,417,613) (1,157,229) (6,566,993) (4,104,128)
------------------------------------------------------------------------
Change in
non-cash
working capital (2,295,498) (1,121,329) (3,126,817) (2,888,422)
------------------------------------------------------------------------

Relating to:
Investing
activities (2,253,131) (899,881) (3,588,392) (2,835,286)
Operating
activities (42,367) (221,448) 461,575 (53,136)
------------------------------------------------------------------------
(2,295,498) (1,121,328) (3,126,817) (2,888,422)
------------------------------------------------------------------------
------------------------------------------------------------------------



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