Anderson Energy Ltd.
TSX : AXL

Anderson Energy Ltd.

November 14, 2005 19:40 ET

Anderson Energy Ltd. Announces Third Quarter 2005 Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 14, 2005) - Anderson Energy Ltd. (TSX:AXL), ("Anderson Energy" or "the Company") is pleased to announce its operating and financial results for the third quarter and nine months ended September 30, 2005.



Financial Highlights

Three months ended % Nine months ended %
September 30 Change September 30 Change
------------------------------------------------------------
2005 2004 2005 2004
(thousands of dollars,
except share data)

Oil and natural
gas revenue 12,147 3,146 286% 24,059 9,595 151%
Cash flow from
operations 6,745 1,369 393% 12,268 4,085 200%
Per share - basic $0.18 $0.05 260% $0.35 $0.14 150%
- diluted $0.17 $0.05 240% $0.34 $0.14 143%
Net earnings (loss) 543 (323) 268% (1,031) (852) -21%
Per share - basic $0.01 ($0.01) 200% ($0.03) ($0.03) 0%
- diluted $0.01 ($0.01) 200% ($0.03) ($0.03) 0%
Capital
expenditures 14,960 14,035 7% 47,095 25,304 86%
Aquest acquisition 80,032 80,032
Debt, net of
working capital 13,539 (7,776) 274% 13,539 (7,776) 274%
Weighted average
shares (thousands)
Basic 38,224 29,417 30% 35,160 29,417 20%
Diluted 39,132 29,417 33% 36,073 29,417 23%
Shares outstanding
(thousands)
Basic 47,806 29,417 63%
Diluted 51,679 32,653 58%

Operating (6:1 conversion)

Average Daily Production
Natural gas
(mmcf/d) 11,991 5,450 120% 9,940 5,179 92%
Oil (bbls/d) 181 - 68 -
NGL (bbls/d) 69 21 229% 42 19 122%
Barrels of oil
equivalent (boe/d) 2,249 929 142% 1,767 882 100%

Average sales price
Natural gas ($/mcf) 9.68 6.08 59% 8.17 6.59 24%
Oil ($/bbl) 62.06 - 61.58 -
NGL ($/bbl) 62.94 50.87 24% 58.28 45.57 28%
Barrels of oil
equivalent ($/boe) 58.72 36.80 60% 49.88 39.68 26%

Royalties ($/boe) 11.73 9.33 26% 9.90 10.01 -1%
Operating costs
($/boe) 9.77 5.39 81% 9.52 8.04 18%
Operating netbacks
($/boe) 37.22 22.08 69% 30.46 21.63 41%
General and
administrative
($/boe) 4.39 7.29 -40% 5.27 6.46 -18%
------------------------------------------------------------------------
------------------------------------------------------------------------


Highlights of the third quarter follow:

- Third quarter production averaged 2,249 boe/d, an increase of 36% over the second quarter of 2005 and a 142% increase over the comparable quarter of 2004. Current production is approximately 4,000 boe/d.

- Record cash flow from operations in the third quarter of 2005 of $6.7 million or $0.18 per share, an increase of $3.8 million or $0.09 per share over the second quarter and an increase of $5.4 million or $0.13 per share over the third quarter of 2004.

- Average natural gas price for the third quarter was $9.68/mcf.

- Drilling for the three months ended September 30, 2005 resulted in 32 gross (16.0 net) wells drilled with a success rate of 94%. Drilling results for the nine months ended September 30, 2005 resulted in 69 gross (38.9 net) wells drilled with a success rate of 94%.

- Acquisition of Aquest Energy Ltd. ("Aquest Energy") through a plan of arrangement on September 1, 2005, which added 1,800 boe/d of production and 58,000 net undeveloped acres of land.

- Bought deal subscription receipts financing closed on August 4, 2005 for net proceeds of $28.3 million.

- The Company was listed on the Toronto Stock Exchange on September 7, 2005.

- The Company has re-evaluated its remaining Edmonton Sands drilling prospect inventory and has increased the inventory by 53% to 503 gross (197 net) wells as of October 1, 2005.

Corporate

On September 1, 2005, the Company acquired all of the issued and outstanding shares of Aquest Energy through a plan of arrangement approved by shareholders and the Court of Queen's Bench of Alberta. The Company issued 9.6 million shares in this transaction. Net proceeds of $28.3 million were released from escrow on September 1, 2005 pursuant to a private placement of 4.35 million shares. The acquisition of Aquest Energy added 1,800 boe/d of production and 58,000 net undeveloped acres. Anderson Energy has initially identified 45 gross (22 net) drilling locations on Aquest Energy acreage.

Operations

During the third quarter of 2005, the Company drilled 32 gross (16.0 net) wells with a success rate of 94%. Of the wells drilled in the quarter, 28 gross (14.4 net) gas wells were drilled in the Sylvan Lake area, targeting the Edmonton Sands play. Capital spending in the quarter was $15.0 million, of which $9.6 million was directed at drilling and completion expenditures and $4.1 million were directed at facility expenditures. Wet weather slowed down the Company's tie-in efforts in the third quarter. As of November 14, 2005, the Company has 45 gross (23 net) well tie-in projects underway in its year round access areas in Alberta.

The Company plans to drill 50 gross (26.8 net) wells in the fourth quarter, with 39 gross (20 net) planned for the Sylvan Lake area, 6 gross (3.2 net) planned for Provost and the balance in other areas. As at the date of this report, the Company has drilled 21 gross (11.2 net) wells in the fourth quarter at a success rate of 100%.

Outlook

The Board of Directors has approved an initial 2006 capital budget of $70 million. The breakdown of the 2006 budget is as shown below:



(millions of dollars)

Drilling and completion $ 36
Facilities 22
Geological, geophysical and land 6
Asset retirement obligation and other 6
-------
Total $ 70
-------
-------

In terms of total spending by area, the Company estimates that spending
breakdown by property will be as shown:


(millions of dollars)

Sylvan Lake $ 34
Northeast B.C. 10
North Central Alberta 7
Provost 7
Peace River Arch 3
Other 9
-------
Total $ 70
-------
-------


Projected drilling activity for 2006 is 110 gross (48 net) wells. The Company affirms its production target of 6,000 to 6,400 boe/d average production for 2006. The Company has secured sufficient drilling rigs for its fourth quarter 2005 and first quarter 2006 program.

We encourage anyone interested in further details on our Company to visit our website at www.andersonenergy.ca.



(signed)

Brian H. Dau
President and Chief Executive Officer
November 14, 2005

Anderson Energy Ltd.
Management's Discussion and Analysis
For the Nine Months Ended September 30, 2005 and 2004


The following discussion and analysis of financial results should be read in conjunction with the unaudited interim consolidated financial statements of Anderson Energy Ltd. ("Anderson Energy" or "the Company") for the nine months ended September 30, 2005 and 2004 and is based on information available as of November 14, 2005.

The following information has been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"). Production and reserve numbers are stated before deducting crown or lessor royalties. Included in the discussion and analysis are references to terms commonly used in the oil and gas industry such as cash flow from operations and barrel of oil equivalent. Cash flow from operations as used in this report represent funds from operating activities before changes in non-cash working capital and asset retirement expenditures. Anderson Energy believes that cash flow from operations represent both an indicator of the Company's performance and a funding source for on-going operations. Production volumes and reserves are commonly expressed on a barrel of oil equivalent (boe) basis whereby natural gas volumes are converted at the ratio of six thousand cubic feet to one barrel of oil. The intention is to sum oil and natural gas measurement units into one basis for improved analysis of results and comparisons with other industry participants. These terms are not defined by Canadian GAAP and therefore are referred to as non-GAAP measures.

The information contained herein contains forward looking statements and assumptions, such as those relating to results of operations and financial condition, capital spending, financial resources, commodity prices and costs of production. By their nature, forward looking statements are subject to numerous risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, actual results may differ materially from those predicted. The forward looking statements contained herein are as of November 14, 2005 and are subject to change after this date. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward looking statements.

All references to dollar values are to Canadian dollars unless otherwise stated.

The following abbreviations are used in this discussion and analysis:



bbl - barrel mcf - thousand cubic feet
boed - barrels of oil mcf/d - thousand cubic feet per day
equivalent per day mcfe - thousand cubic feet equivalent
bbls/d - barrels per day mmcf - million cubic feet
mbbls - thousand barrels mmcf/d - million cubic feet per day
mboe-thousand barrels of oil
equivalent
GJ - gigajoule


Review of Financial Results:

Acquisition of Aquest Energy Ltd.

On June 27, 2005, the Company entered into an arrangement agreement with Aquest Energy Ltd. ("Aquest Energy"), a publicly traded oil and gas company. Pursuant to the arrangement, Anderson Energy acquired all of the outstanding shares of Aquest Energy for consideration of 0.31 Anderson Energy shares for each Aquest Energy share, for total consideration of 9.6 million Anderson Energy common shares or $53.1 million before transaction costs. Transactions costs were $1.0 million and net debt assumed was $25.9 million for a total acquisition cost of $80.0 million. The acquisition was approved by the shareholders of both Anderson Energy and Aquest Energy and received regulatory approval on August 31, 2005 and the transaction closed on September 1, 2005. The acquisition has been accounted for using the purchase method of accounting.

On June 27, 2005, the Company also agreed to issue and sell, on a private placement "bought deal" basis to a syndicate of Canadian underwriters subscription receipts and flow through common shares. On August 4, 2005, a total of 3,100,000 subscription receipts priced at $6.50 each and 1,250,000 flow through common shares priced at $8.00 each were sold for aggregate gross proceeds of $30,150,000. The proceeds from the sale of the subscription receipts and flow through common shares were held in escrow pending completion of the Aquest Energy transaction and after release from escrow, were used to repay indebtedness of the combined companies and fund exploration, development and acquisition activities. Net proceeds after commissions and expenses were $28.3 million.

Effective September 1, 2005, the Company became a reporting issuer. The Company commenced trading on the Toronto Stock Exchange on September 7, 2005.

Revenue and Production:

As the Aquest Energy acquisition closed on September 1, 2005, only one month of revenue from these properties has been included in the third quarter of 2005. The Company achieved average gas sales of 12.0 mmcf/d in the third quarter. This compares to 9.6 mmcf/d in the second quarter of 2005 and 5.5 mmcf/d in the third quarter of 2004. Gas sales for the nine months ended September 30, 2005 were 9.9 mmcf/d. Excluding the impact of the Aquest Energy acquisition, sales volumes in the third quarter were similar to the second quarter of 2005. The Company experienced wet weather related ground conditions, limiting the Company's ability to tie in new wells drilled in the second and third quarter. Oil production averaged 181 bbls/d in the third quarter of 2005 as compared to 15 bbls/d in the second quarter of 2005. The increase in production is almost entirely related to the Aquest Energy acquisition. Natural gas liquids production averaged 69 bbls/d in the third quarter of 2005 as compared to 35 bbls/d in the second quarter of 2005 and 21 bbls/d in the third quarter of 2004. The increase is primarily due to the Aquest Energy acquisition and the rich gas wells recently brought on-stream in the Peace River Arch.



The following tables outline production revenue, volumes and average
sales prices for the three and nine month periods.

Three months Nine months
ended Sept 30 ended Sept 30
----------------------------------------
2005 2004 2005 2004
Oil and Natural Gas Revenue
(thousands of dollars)
Natural Gas $ 10,673 $ 3,048 $ 22,158 $ 9,354
Oil 1,034 - 1,140 -
NGL 400 99 672 241
Royalty and other 40 - 89 -
------------------------------------------------------------------------
Total $ 12,147 $ 3,147 $ 24,059 $ 9,595
------------------------------------------------------------------------
------------------------------------------------------------------------


Three months Nine months
ended Sept 30 ended Sept 30
----------------------------------------
2005 2004 2005 2004
Production
Natural gas (mcf/d) 11,991 5,450 9,940 5,179
Oil (bbls/d) 181 - 68 -
NGL (bbls/d) 69 21 42 19
------------------------------------------------------------------------
Total (boe/d) 2,249 929 1,767 882
------------------------------------------------------------------------
------------------------------------------------------------------------


Three months Nine months
ended Sept 30 ended Sept 30
----------------------------------------
2005 2004 2005 2004

Prices
Natural gas ($/mcf) $ 9.68 $ 6.08 $ 8.17 $ 6.59
Oil ($/bbl) 62.06 - 61.58 -
NGL ($/bbl) 62.94 50.87 58.28 45.57
------------------------------------------------------------------------
Total ($/boe) $ 58.72 $ 36.80 $ 49.88 $ 39.68
------------------------------------------------------------------------
------------------------------------------------------------------------


Anderson Energy's average gas sales prices was $9.68/mcf for the three months ended September 30, 2005. This compares to $7.28/mcf realized in the second quarter of 2005 and $6.08/mcf realized in the third quarter of 2004.

The physical fixed price contracts assumed in the Aquest Energy acquisition all expire in 2005 and are shown below:



Volume/day Price
Natural Gas
September to October 2005 1,000 GJ/day $7.15/GJ
Crude Oil
September to December 2005 100 bbl/day $45.40 to $51.40 US/bbl
September to December 2005 100 bbl/day $46.80 US/bbl


Anderson Energy sells most of its gas at Alberta spot market prices and has not entered into any fixed price or forward contracts for the sale of its production, other than as noted above. Anderson Energy has classified all transportation costs as an offset to gas sales revenue as title transfers prior to transport on the applicable sales pipelines and transportation is being held by and charged by the gas purchasers.

Royalties:

Royalties were 20.0% of the revenue in the third quarter of 2005 and 19.8% of revenue for the nine months ended September 30, 2005. The Company expects 2005 royalties to increase as revenue increases.



Three months Nine months
ended Sept 30 ended Sept 30
----------------------------------------
2005 2004 2005 2004

Royalties (%) 20% 25% 20% 25%

Royalties ($/boe) $ 11.73 $ 9.33 $ 9.90 $ 10.01


Operating Expenses:

Operating expenses were $9.77/boe in the third quarter and $9.52/boe for the nine months ended September 30, 2005. Operating costs were down $1.12/boe from the second quarter of 2005. They are expected to increase somewhat again in the fourth quarter as a result of start up costs on new wells being brought on production.



Three months Nine months
ended Sept 30 ended Sept 30
----------------------------------------
2005 2004 2005 2004

Operating expenses ($/boe) $ 9.77 $ 5.39 $ 9.52 $ 8.04


Operating Netback:

Three months Nine months
ended Sept 30 ended Sept 30
-------------------------------------------
2005 2004 2005 2004
(thousands of dollars)
Revenue $ 12,147 $ 3,147 $ 24,059 $ 9,595
Royalties (2,427) (798) (4,773) (2,421)
Operating expenses (2,021) (461) (4,590) (1,945)
-------------------------------------------
$ 7,699 $ 1,888 $ 14,696 $ 5,229
-------------------------------------------

Sales (mboe) 206.9 85.5 482.3 241.8

($/boe)
Revenue $ 58.72 $ 36.80 $ 49.88 $ 39.68
Royalties (11.73) (9.33) (9.90) (10.01)
Operating expenses (9.77) (5.39) (9.52) (8.04)
-------------------------------------------
$ 37.22 $ 22.08 $ 30.46 $ 21.63
-------------------------------------------
-------------------------------------------


General and Administrative Expenses:

General and administrative expenses were $4.39/boe in the third quarter of 2005 and $5.27/boe for the nine months ended September 30, 2005. It is expected that overall general and administrative expenses will increase as a result of the Aquest Energy acquisition and increased staffing levels to manage the growth in drilling activity. Furthermore, the Company expects a rise in the 4th quarter general and administrative expenses due to significantly higher rental rates and the need for more office space. General and administrative expenses consist largely of salaries, rent, computer and other office costs. As the Company increases its production in the upcoming quarters, general and administrative costs on a per boe basis are expected to continue to decline.



Three months Nine months
ended Sept 30 ended Sept 30
------------------------------------
2005 2004 2005 2004

General and administrative
(gross) $ 1,669 $ 867 $ 4,004 $ 2,136
Overhead recoveries (216) (27) (517) (70)
Capitalized (544) (217) (944) (505)
------------------------------------------------------------------------
General and administrative (net) $ 909 $ 623 $ 2,543 $ 1,561
------------------------------------------------------------------------
General and administrative
($/boe) $ 4.39 $ 7.29 $ 5.27 $ 6.46

% G&A capitalized 33% 25% 24% 24%


In light of going public, the Company has reevaluated some of its assumptions regarding capitalized general and administrative costs in order to be more in line with its peer group and to consider its anticipated capital program and additional staff. This has resulted in an increase in the percentage capitalized in the third quarter of 2005. Capitalized general and administrative costs are limited to salaries and associated office rent of staff involved in capital activities.

Interest Expense:

In connection with the Aquest Energy acquisition, the Company increased its bank line to $45 million. The fees associated with this debt facility are included in interest expense.

Depletion, Depreciation and Amortization:

Depletion and depreciation was $27.65/boe in the third quarter of 2005 and $27.91/boe for the nine months ended September 30, 2005. Depletion and depreciation expense is calculated based on proved reserves only and is significantly impacted by the fact that only 54% of the Company's total reserves as of September 30, 2005 are proven reserves. The ratio reflects the newness of the wells that make up the reserve evaluation. Given production increases for the balance of the year, the Company expects the depletion and depreciation rate to remain high in the fourth quarter.

Goodwill:

In connection with the Aquest Energy transaction, the Company recorded $12.8 million of goodwill. The goodwill largely reflects the difference between the book base and the tax base of the assets and the associated recording of future income tax liabilities.

Asset Retirement Obligation:

As a result of new drilling, the Company incurred $0.6 million in asset retirement obligations in the third quarter of 2005 and $2.2 million for the nine months ended September 30, 2005. Accretion expense was $0.2 million for the first nine months of the year and was included in depletion and depreciation expense.

Income Taxes:

The Company is not currently taxable except for large corporations tax. The Company has approximately $154 million in available tax pools as of September 30, 2005.

The subscription receipts financing completed on September 1, 2005 included $10 million of flow through shares. The flow though share renouncement will be made on February 28, 2006 for qualifying exploration expenditures that will be incurred between September 1, 2005 and December 31, 2006.

Cash Flow from Operations:

Cash flow from operations for the nine months ended September 30, 2005 were $12.3 million and for the three months ended September 30, 2005 were $6.7 million.

Earnings:

The Company reported $0.5 million in earnings in the third quarter and a loss of $1.0 million for the nine months ended September 30, 2005. The Company does not expect to be able to report significant earnings until it can get proved reserve recognition for its probable undeveloped reserves. A large portion of the Company's capital spending is directed at developing probable undeveloped reserves in 2005 and 2006.

Capital Expenditures:

The Company spent $15.0 million in capital additions for the third quarter and $47.1 million for the nine months ended September 30, 2005, not including the acquisition of Aquest Energy. The acquisition cost of Aquest Energy Ltd. was $80.0 million including assumed debt and working capital. The breakdown of expenditures, net of the Aquest acquisition, is shown below:



Three months ended Nine months ended
(thousands of dollars) September 30, 2005 September 30, 2005
--------------------------------------------
Land, geological
& geophysical costs $ 634 $ 2,415
Property acquisitions
net of dispositions - 20
Drilling, completion
and recompletion 9,618 26,540
Facilities and well equipment 4,060 15,798
Office equipment and furniture 20 87
Asset retirement costs 628 2,235
--------------------------------------------
Total $ 14,960 $ 47,095
--------------------------------------------
--------------------------------------------


Drilling statistics are shown below:

Three months ended Sept 30 Nine months ended Sept 30
-----------------------------------------------------------
2005 2004 2005 2004
Gross Net Gross Net Gross Net Gross Net

Gas 30.0 14.7 14.0 12.2 64.0 35.7 23.0 15.0
Oil - - 1.0 0.4 1.0 0.5 1.0 0.4
Dry 2.0 1.3 2.0 2.0 4.0 2.8 3.0 3.0
-----------------------------------------------------------
Total 32.0 16.0 17.0 14.6 69.0 39.0 27.0 18.4
-----------------------------------------------------------
Success
rate (%) 94 92 88 86 94 93 89 84


For the third quarter of 2005, 88% of the gross wells drilled were in Sylvan Lake and for the nine months ended September 30, 2005, 77% of the gross wells drilled were in Sylvan Lake.

Liquidity and Capital Resources:

The Company expects to spend $65 million in field capital in 2005. These expenditures will be funded from cash flow and available bank lines. The 2006 capital program is of similar size and is budgeted to be $70 million. This program is expected to be financed from cash flow and available bank lines.

As of November 14, 2005, there are 47,897,208 common shares outstanding and 3,901,855 stock options outstanding.

Business Risks:

Oil and gas exploration and production is capital intensive and involves a number of business risks including the uncertainty of finding new reserves, the instability of commodity prices and various operational risks. Commodity prices are influenced by local and worldwide supply and demand, the U.S. dollar exchange rate, transportation costs, political stability and seasonal and weather related changes to demand. The industry is subject to extensive governmental regulation with respect to the environment.

The Company manages these risks by employing competent professional staff, following sound operating practices and using capital prudently. The Company generates its exploration prospects internally and performs extensive geological, geophysical, engineering, and environmental analysis before committing to the drilling of new prospects. The Company seeks out and employs new technologies where possible.

The Company has a formal emergency plan which details the procedures employees and contractors will follow in the event of an operational emergency. The emergency response plan is designed to respond to emergencies in an organized and timely manner so that the safety of employees, contractors, residents in the vicinity of field operations, the general public and the environment are protected. A corporate safety program covers hazard identification and control on the jobsite, establishes Company policies, rules and work procedures and outlines training requirements for employees and contact personnel.

The Company currently deals with a small number of buyers and sales contracts, and ensures those buyers are an appropriate credit risk. The Company has assumed some fixed price contracts entered into by Aquest Energy which will expire at the end of 2005. The Company continuously evaluates the merits of entering into fixed price or financial hedge contracts for price management.

Business Prospects:

The Company has an excellent prospect inventory with approximately five years of drilling prospects in Sylvan Lake and Sierra. The Company is in the midst of a significant drilling program at Sylvan Lake that is designed to increase production, move probable reserves to proved reserves and add additional reserves. In the fourth quarter, the Company will be commencing drilling operations on Aquest Energy lands in Sylvan Lake, Provost and North Central Alberta. In the upcoming winter drilling program, several significant exploratory prospects will be evaluated.

Timing of AEUB regulatory applications continues to be slower than expected. The Company has incorporated these regulatory timing issues into its planning cycle. Competition for industry services is more intense than previous years and that, combined with more landholder consultation, requires more lead time and more planning. Given the Company's extensive drilling inventory, we have been able to meet this challenge through advance planning of larger scale drilling programs and securing the services of drilling rigs and sourcing people for larger projects.

The Company has confirmed its 2006 average production forecast of 6,000 to 6,400 boe/d of production for 2006. Risks associated with this forecast include gas plant capacity, regulatory issues, weather problems and access to industry services.



Quarterly Information:

(in thousands, except per share amounts)

Q3 2005 Q2 2005 Q1 2005 Q4 2004
-------------------------------------------

Oil & gas revenue
before royalties $ 12,147 $ 6,646 $ 5,266 $ 4,170
Cash flow from operations $ 6,745 $ 2,937 $ 2,580 $ 2,132
Cash flow from operations
per share
Basic $ 0.18 $ 0.09 $ 0.08 $ 0.07
Diluted $ 0.17 $ 0.09 $ 0.07 $ 0.07
Earnings $ 543 $ (801) $ (773) $ (766)
Earning per share
Basic $ 0.01 $ (0.02) $ (0.02) $ (0.03)
Diluted $ 0.01 $ (0.02) $ (0.02) $ (0.03)
Capital expenditures $ 14,960 $ 11,589 $ 20,545 $ 16,339
Daily sales
Natural gas (mcf/d) 11,991 9,623 8,165 6,799
Liquids (bbls/d) 250 50 28 25
BOE (boe/d) 2,249 1,653 1,389 1,159


Q3 2004 Q2 2004 Q1 2004 Q4 2003
-------------------------------------------

Oil & gas revenue before
royalties $ 3,147 $ 4,234 $ 2,215 $ 1,808
Cash flow from operations $ 1,369 $ 2,224 $ 491 $ 935
Cash flow from operations
per share
Basic $ 0.05 $ 0.08 $ 0.02 $ 0.03
Diluted $ 0.05 $ 0.08 $ 0.02 $ 0.03
Earnings $ (323) $ 41 $ (569) $ (264)
Earning per share
Basic $ (0.01) $ 0.00 $ (0.02) $ (0.01)
Diluted $ (0.01) $ 0.00 $ (0.02) $ (0.01)
Capital expenditures $ 14,035 $ 3,677 $ 7,592 $ 7,389
Daily sales
Natural gas (mcf/d) 5,450 6,415 3,668 3,204
Liquids (bbls/d) 21 22 15 6
BOE (boe/d) 929 1,092 626 540



Unaudited Interim Consolidated Financial Statements

ANDERSON ENERGY LTD.

For the nine month periods ended September 30, 2005 and 2004




ANDERSON ENERGY LTD.
Consolidated Balance Sheets


------------------------------------------------------------------------
------------------------------------------------------------------------
September 30, December 31,
2005 2004
------------------------------------------------------------------------
(unaudited) (audited)

Assets

Current assets:
Cash and short term investments $ 238,063 $ 29,241,896
Accounts receivable and accruals 28,992,615 7,256,152
Prepaid expenses and deposits 1,079,825 276,215
------------------------------------------------------------------------
30,310,503 36,774,263

Property, plant and equipment (note 2) 205,838,728 87,409,900

Goodwill 12,781,236 -

------------------------------------------------------------------------
$ 248,930,467 $ 124,184,163
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accruals $ 37,920,720 $ 20,035,430
Capital taxes payable 39,916 19,916
------------------------------------------------------------------------
37,960,636 20,055,346

Bank loan (note 4) 5,888,475 -

Assets retirement obligations (note 3) 8,616,193 2,093,758

Future income taxes 15,117,045 727,452
------------------------------------------------------------------------
67,582,349 22,876,556

Shareholders' equity:
Share capital (note 5) 183,426,885 102,388,612
Contributed surplus (note 5) 32,976 -
Deficit (2,111,743) (1,081,005)
------------------------------------------------------------------------
181,348,118 101,307,607

------------------------------------------------------------------------
$ 248,930,467 $ 124,184,163
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


ANDERSON ENERGY LTD.
Consolidated Statements of Earnings (Loss)
and Retained Earnings (Deficit)


------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------------ -------------------------
2005 2004 2005 2004
------------------------------------------------------------------------

Revenues
Oil and gas sales $12,146,731 $ 3,146,684 $ 24,058,535 $ 9,595,235
Royalties (net of
ARTC of $375,000
in 2005, $119,000
in 2004) (2,427,127) (797,541) (4,772,979) (2,420,744)
Interest income 47,931 119,483 275,171 467,343
------------------------------------------------------------------------
9,767,535 2,468,626 19,560,727 7,641,834

Expenses
Operating 2,021,132 460,838 4,589,664 1,944,835
General and
administrative 908,856 623,415 2,543,102 1,561,073
Interest 55,722 - 77,036 -
Depletion, depreciation
and accretion 5,801,935 1,607,600 13,658,443 5,031,798
------------------------------------------------------------------------
8,787,645 2,691,853 20,868,245 8,537,706

------------------------------------------------------------------------
Earnings (loss) before
income taxes 979,890 (223,227) (1,307,518) (895,872)

Income taxes
Capital taxes 64,766 15,000 116,401 51,149
Future income taxes
(reduction) 371,819 85,000 (393,181) (95,000)
------------------------------------------------------------------------
436,585 100,000 (276,780) (43,851)

------------------------------------------------------------------------
Earnings (loss) for
the period 543,305 (323,227) (1,030,738) (852,021)

Retained earnings
(deficit), beginning
of period (2,655,048) 8,869 (1,081,005) 537,663

------------------------------------------------------------------------
Deficit, end
of period $(2,111,743) $ (314,358)$ (2,111,743)$ (314,358)
------------------------------------------------------------------------
------------------------------------------------------------------------

Earnings (loss)
per share
Basic $ 0.01 $ (0.01)$ (0.03)$ (0.03)
Diluted $ 0.01 $ (0.01)$ (0.03)$ (0.03)

See accompanying notes to consolidated financial statements.


ANDERSON ENERGY LTD.
Consolidated Statements of Cash Flows


------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------------ -------------------------
2005 2004 2005 2004
------------------------------------------------------------------------

Cash provided by (used in):

Operations
Earnings (loss) for
the period $ 543,305 $ (323,227)$ (1,030,738)$ (852,021)
Items not involving cash
Depletion,
depreciation and
accretion 5,801,935 1,607,600 13,658,443 5,031,798
Future income taxes
(reduction) 371,819 85,000 (393,181) (95,000)
Stock based
compensation 27,715 - 32,976 -
Asset retirement
expenditures (79,626) - (267,278) -
Changes in non-cash
working capital
Accounts receivable
and accruals (1,296,817) 289,923 (1,682,468) (272,194)
Prepaid expenses
and deposits (113,853) (21,389) (157,473) (45,015)
Accounts payable and
accruals 2,052,017 23,601 3,709,222 281,078
Capital taxes payable 34,000 32,759 20,000 (181,846)
------------------------------------------------------------------------
7,340,495 1,694,267 13,889,503 3,866,800

Financing
Increase in bank loan 5,888,475 - 5,888,475 -
Issue of common
shares 29,283,350 - 29,523,350 -
------------------------------------------------------------------------
35,171,825 - 35,411,825 -

Investments
Additions to
property, plant
and equipment (14,329,527) (13,532,399) (45,857,464)(24,801,889)
Proceeds on sale
of properties - - 1,000,000 300,000
Acquisition of
Aquest (note 1) (1,041,773) - (1,041,773) -
Payment of Aquest
liabilities assumed
(note 1) (25,881,860) - (25,881,860) -
Changes in non-cash
working capital
Accounts receivable
and accruals (16,506,681) (1,440,317) (20,053,995) (965,135)
Prepaid expenses
and deposits (705,469) (290,565) (646,137) 76,129
Accounts payable
and accruals 11,997,111 5,413,008 14,176,068 8,780,012
------------------------------------------------------------------------
(46,468,199) (9,850,273) (78,305,161)(16,610,883)

------------------------------------------------------------------------
Decrease in cash
and short-term
investments (3,955,879) (8,156,006) (29,003,833)(12,744,083)

Cash and short-term
investments,
beginning of period 4,193,942 25,994,571 29,241,896 30,582,648
------------------------------------------------------------------------
Cash and short-term
investments,
end of period $ 238,063 $17,838,565 $ 238,063 $17,838,565
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


ANDERSON ENERGY LTD.
Notes to the Unaudited Interim Consolidated Financial Statements

For the nine month periods ended September 30, 2005 and 2004


Anderson Energy Ltd. ("Anderson Energy" or "the Company") is engaged in the acquisition, exploration and development of oil and gas properties in western Canada. These interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the consolidated financial statements for the year ended December 31, 2004, except for the change in the accounting for stock based compensation as described in note 5. The disclosures included below are incremental to those included with the annual consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2004.

1. Acquisition of Aquest Energy Ltd.

On June 27, 2005 the Company entered into an arrangement agreement with Aquest Energy Ltd. ("Aquest Energy"), a publicly traded oil and gas company. Pursuant to the arrangement, Anderson Energy acquired all of the outstanding shares of Aquest Energy for consideration of 0.31 Anderson Energy shares for each Aquest Energy share, for total consideration of 9.6 million Anderson Energy common shares valued at $53.1 million before transaction costs. The arrangement was approved by the shareholders and received regulatory approval on August 31, 2005 and the transaction closed on September 1, 2005. The acquisition has been accounted for using the purchase method of accounting whereby the assets and liabilities of Aquest Energy were recorded at fair market values at September 1, 2005 and the operating results were included in the consolidated financial statements from September 1, 2005. The fair value of the assets acquired and the liabilities assumed on September 1, 2005 are as follows:



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

Current assets $ 8,381,468
Bank loan (20,946,536)
Accounts payable and accruals (13,316,792)
Property, plant & equipment 84,793,295
Goodwill 12,781,236
Asset retirement obligations (4,353,201)
Future income taxes (13,188,889)
------------------------------------------------------------------------
$ 54,150,581
------------------------------------------------------------------------
------------------------------------------------------------------------

Consideration paid
9,656,147 common shares $ 53,108,808
Transaction costs 1,041,773
------------------------------------------------------------------------
$ 54,150,581
------------------------------------------------------------------------
------------------------------------------------------------------------


2. Property, plant and equipment:

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

Cost $ 229,279,587 $ 97,766,376
Less accumulated depletion and depreciation (23,815,859) (10,356,476)

------------------------------------------------------------------------
Net book value $ 205,463,728 $ 87,409,900
------------------------------------------------------------------------
------------------------------------------------------------------------



At September 30, 2005, unproved property costs of $23.3 million (December 31, 2004 - $14.7 million) have been excluded from the full cost pool for depletion and depreciation calculations. Future development costs of proven, undeveloped reserves of $13.2 million (December 31, 2004 - $5.6 million) have been included for depletion, depreciation and impairment test calculations.

For the nine months ended September 30, 2005, $943,800 (September 30, 2004 - $505,200) of general and administrative costs were capitalized.

No impairment was recognized under the ceiling test at September 30, 2005. The future commodity prices used in the ceiling test were based on commodity price forecasts adjusted for differentials specific to the reserves.

3. Asset retirement obligations:

The Company estimates the total undiscounted cash flows required to settle its asset retirement obligations is approximately $14.7 million, including expected inflation of 2% per annum. The majority of the costs will be incurred between 2006 and 2016. A credit adjusted risk-free rate of 7.5% was used to calculate the fair value of the asset retirement obligations.

A reconciliation of the asset retirement obligations is provided below:



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

Balance, beginning of period $ 2,093,758 $ 1,133,068
Liabilities incurred during period 2,237,452 876,148
Liabilities assumed on Aquest
Energy acquisition 4,353,201 -
Liabilities settled in period (267,278) -
Accretion expense 199,060 84,542

------------------------------------------------------------------------
$ 8,616,193 $ 2,093,758
------------------------------------------------------------------------
------------------------------------------------------------------------


4. Bank loan:

In June 2005, the Company renewed its revolving credit facility with a Canadian Bank, increasing the borrowing base to $45 million. The reserve-based credit facility has a 364 day revolving period, extendible at the option of the lender, followed by a 180 day term period. Advances under the facility can be drawn in either Canadian or U.S. funds. The facility bears interest at the bank's prime lending rate, bankers' acceptance or LIBOR loan rates plus applicable margins. The margins vary depending on the borrowing option used and the Company's financial ratios. Loans are secured by a floating charge debenture over all assets and guarantees by material subsidiaries.

5. Share capital and contributed surplus:

Authorized share capital

On September 1, 2005, the Company filed articles of amendments to create an unlimited number of common shares and delete the existing Class A and Class B shares from the authorized share capital.

The Company is authorized to issue an unlimited number of preferred shares. The preferred shares may be issued in one or more series.



Issued share capital
------------------------------------------------------------------------
Number
----------------------------------
Common
Class A Class B shares Amount
------------------------------------------------------------------------

Balance at
December 31, 2004 875,000 32,689,667 - $102,388,612
Stock options exercised - 60,000 - 240,000
Tax effect of
flow-through share
renouncements - - - (2,293,146)
Conversion to
common shares (875,000) (32,749,667) 33,624,667 -
------------------------------------------------------------------------
- - 33,624,667 100,335,466
---------------------
---------------------
Issued on Aquest
Energy acquisition 9,656,147 53,108,808
Issue of flow-through
common shares(1) 1,250,000 10,000,000
Issue of common shares(1) 3,100,000 20,150,000
Share issue costs - (1,830,524)
Tax effect of share issue costs - 699,261
Stock options exercised 174,769 963,874

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

Balance at September 30, 2005 47,805,583 $183,426,885
-------------------------
-------------------------

(1) includes 6,000 flow-through shares and 7,000 common shares issued to
a director


Pursuant to the plan of arangement each Class A and B shareholder received one common share for each Class A or B share held.

Flow-through shares

Under flow-through share agreements entered into in 2004, the Company committed to incur $6,003,000 of qualifying expenditures by December 31, 2005. The renouncements were made on February 28, 2005 with an effective date of December 31, 2004.

Under flow-through share agreements entered into in 2005, the Company committed to incur $10,000,000 of qualifying expenditures by December 31, 2006. The renouncements will be made before February 28, 2006 with an effective date of December 31, 2005.

The Company has an employee stock option plan under which employees, directors and consultants are eligible to receive grants. Changes in the number of options outstanding during the nine month period ended September 30, 2005 are as follows:



------------------------------------------------------------------------
Balance at December 31, 2004 3,411,700
Granted 406,400
Assumed on the acquisition of Aquest Energy 961,465
Exercised (234,769)
Expirations and cancellations (671,316)

------------------------------------------------------------------------
Balance at September 30, 2005 3,873,480
------------------------------------------------------------------------
------------------------------------------------------------------------


The outstanding options at September 30, 2005 had an average exercise price of $4.57 and a weighted average remaining contractual life of 6.7 years; 3,165,080 of the options were exercisable at that date.

On January 1, 2005, the Company adopted the fair value method of accounting for stock based compensation plan. Under this method, the Company recognizes compensation expense, with a corresponding increase to contributed surplus, based on the fair value of the options over the vesting period of the grant. The Company uses a Black-Scholes option pricing model to determine the fair value of options at the date of grant. When exercised, the consideration paid together with the amount previously recognized in contributed surplus is recorded as an increase to share capital.

The application of this method of accounting for stock-based compensation plans would have resulted in negligible compensation expense being recorded in years prior to 2005 as the exercise price of the options was higher than the fair value of the underlying stock at the date of the grant.

The fair value of the options issued in 2005 ranged between $0.55 to $3.45 per option. The weighted average assumptions used in arriving at these values were: a risk-free interest rate of 3.3%, expected option life of 4 years, expected volatility of 25% and a dividend yield of 0%.

Per share amounts

During the period ended September 30, 2005, there were 35,160,340 weighted average shares outstanding (2004 - 29,416,667). On a diluted basis, there were 36,072,865 weighted average shares outstanding (2004 - 29,416,667) after giving effect to dilutive stock options.



Contributed surplus
------------------------------------------------------------------------
Amount
------------------------------------------------------------------------
Balance at December 31, 2004 -
Stock based compensation $ 32,976
------------------------------------------------------------------------
Balance at September 30, 2005 $ 32,976
------------------------------------------------------------------------
------------------------------------------------------------------------

6. Commodity price risk management:

The physical fixed price contracts assumed in the Aquest Energy
acquisition are summarized below:

------------------------------------------------------------------------
Volume/day Price
------------------------------------------------------------------------

Natural Gas
September to October 2005 1,000 GJ/day $7.15/GJ
Crude Oil
September to December 2005 100 bbl/day $45.40 to $51.40 US/bbl
September to December 2005 100 bbl/day $46.80 US/bbl
------------------------------------------------------------------------
------------------------------------------------------------------------


Contact Information

  • Anderson Energy Ltd.
    Brian H. Dau
    President and Chief Executive Officer
    (403) 206-6000