Aquest Energy Ltd.

Aquest Energy Ltd.

March 23, 2005 08:15 ET

Aquest Announces Year-End 2004 Financial Results & Reserve Evaluation


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: AQUEST ENERGY LTD.

TSX SYMBOL: AEX

MARCH 23, 2005 - 08:15 ET

Aquest Announces Year-End 2004 Financial Results &
Reserve Evaluation

CALGARY, ALBERTA--(CCNMatthews - March 23, 2005) - Aquest Energy Ltd.
(TSX:AEX) ("Aquest" or the "Company") is pleased to announce year-end
2004 financial and operating results. During the year ended December 31,
2004 Aquest posted significant gains in production, cash flow and
reserve increases. As a result of the Eravista Energy Corp. acquisition
in January of 2004, our comparatives for financial purposes reflect the
2003 performance of Eravista, which was a private company, rather than
the performance of Aquest Explorations Ltd. for 2003.

Highlights for 2004 included:

- The acquisition of Eravista Energy Corp. a private oil and gas company,

- Increased natural gas production 64% to average 7,510 mcfpd while
liquids production increased 8% to 589 bpd,

- Gross revenues before royalties increased 54% to $29.5 million,

- Cash flow increased 62% to $14.3 million or $0.49 per share,

- Proven plus probable reserves increased 49% to 3,908,533 barrels of
oil equivalent, 73% of which was natural gas,

- Replaced production 2.5 times on a proven reserve basis and 4.0 times
on a proven plus probable basis,

- Participated in the drilling of 31 gross wells resulting in 16 gas
wells and 10 oil wells for a success rate of 84%, and



The financial and operating highlights are summarized below:

Year Ended December 31
2004 2003

FINANCIAL

Revenue ($) (before royalties) 29,462,500 19,161,982
Cash flow from operations ($) 14,265,383 8,920,138
Per share basic ($) 0.49 0.55
Per share diluted ($) 0.49 0.52

Net income ($) 964,916 3,349,944
Per share basic ($) 0.03 0.20
Per share diluted ($) 0.03 0.19

Capital expenditures ($) 24,378,890 11,414,292
Working capital deficiency ($) 3,794,721 2,498,207
Bank Debt ($) 14,779,559 7,632,283
Shares outstanding
At period end 30,892,574 7,732,468
Weighted average during year, basic 28,990,373 16,332,684
Weighted average during year, diluted 29,163,869 17,255,323

OPERATIONS

Production
Natural gas (mcf/d) 7,510 4,575
Oil and natural gas liquids (bbls/d) 589 547
Oil equivalent (boe/d) (6:1) 1,840 1,309

Wells drilled (gross/net)
Natural gas 16(6.29) 12(5.83)
Oil 10(7.56) 7(4.83)
Dry 3(2.08) 3(1.5)
Others 2(0.83)
Total 31(16.76) 22(12.16)
Net success rate 83.9% 86.4%


Financial:

Aquest's financial results reflect significant improvement from the
predecessor company Aquest Explorations Ltd. As a result of the
acquisition of Eravista Energy Corp. ("Eravista") and due to the
application of reverse take-over accounting rules, Aquest now compares
its 2004 performance with that of Eravista for 2003. Under this
comparative Aquest increased gross revenues by 54% to $29.5 million
based on average natural gas production increasing 64% to 7,510 mcfpd
and oil and natural gas liquids increasing 8% to 589 bpd. For 2004
Aquest averaged $6.94 per mcf for natural gas while oil and natural gas
liquid prices averaged $45.57 per barrel and $45.42 per barrel
respectively. Reported cash flows also increased 62% to $14.3 million or
$0.49 per share. Net income totaled $964,916 or $0.03 per share.

Reserves:

Aquest's oil and gas reserves increased a total of 49% on a proven plus
probable basis to 3,908,533 barrels of oil equivalent. This increase
replaced production 2.5 times on a proven basis and 4.0 times on a
proven plus probable basis. Aquest added 1,275,247 boe's from drilling
activities and 1,498,500 boe's from the acquisition of Eravista Energy
Corp., a private oil and gas company in January 2004. These additions
offset reserve sales of 801,740 boe's made at the time of the Eravista
acquisition and production during 2004 of 687,314 boe's. On a
geographical basis over 85% of Aquest reserves are located in central
Alberta with the remaining 15% in north east British Columbia. All
reserves were evaluated by McDaniel and Associates Consultants Ltd.
under NI 51-01 Guidelines. The statement of Oil and Gas Disclosure and
Other Information required to be filed under NI 51-101 will be
incorporated into the Corporation's AIF, which is expected to be filed
on SEDAR by March 28, 2005.

In addition to these proven plus probable reserves, McDaniel's also
estimated that Aquest's Clarke Lake gas pool in British Columbia
contained an additional 10,658 mmcf (1,776,300 boe's) of gas reserves
based upon a technical evaluation of the pool. This evaluation was made
subsequent to Aquest's first quarter 2005 drilling and re-completion
activity that was terminated pre-maturely due to an early winter breakup.



The Company's reserves are summarized in the following tables:

Company Gross Reserves

Oil NGL's Natural Gas
mbbls Mbbls mmcf
--------------------------------------
Proved Developed Producing 597.2 88.1 9,247.5

Proved Developed Non - Producing 1.9 0.8 177.0
Proved Undeveloped 39.3 0.4 25.9

Total Proved 638.4 89.4 9,450.4

Probable 264.6 55.2 7,715.8
Total Proved Plus Probable 903.0 144.6 17,166.2
Total Proved Plus Probable
Plus Possible 903.0 144.6 27,824.1



Company Net Revenue Before Tax

(thousands of dollars)
Discounted at 0% 5% 10%
--------------------------------------
Proved Developed Producing 51,006.8 45,932.9 41,945.5
Proved Developed Non - Producing (384.8) (306.7) (245.7)
Proved Undeveloped 888.6 698.7 557.6

Total Proved 51,510.6 46,324.9 42,257.4
Probable 32,822.1 25,731.4 20,870.8
Total Proved Plus Probable 84,332.7 72,056.3 63,128.3
Total Proved Plus Probable
Plus Possible 117,489.4 95,249.6 79,900.6



Future prices used in the forecast of net revenues in the above table
are based upon the estimates of McDaniel & Associates Consultants Ltd.
As summarized below:

Forecast of Future Prices

Year Natural Gas
Oil (WTI) Oil (Edm.) (AECO)
($U.S./bbl) ($Cdn./bbl) ($Cdn/mcf)
--------------------------------------
2005 42.00 49.60 6.45
2006 39.50 46.60 6.20
2007 37.00 43.50 6.05
2008 35.00 41.10 5.80
2009 34.50 40.50 5.70
2010 34.30 40.20 5.60
Thereafter annual change 2% 2% 2%


2005 Program:

Aquest will be focusing its efforts during 2005 in the central Alberta
properties, concentrating on expanding the 2004 success in the Cardiff
area and on a further it's development of the Sylvan Lake and Cooking
Lake area gas properties. At this time we anticipate participating in
the drilling of 25-35 prospects with a preliminary capital budget of
$15-20 million. With the suspension of operations in the first quarter
at Clark Lake and Muskwa due to a premature winter break-up, further
development of these properties will deferred until the 2005 - 2006
winter season.

Aquest is a Calgary, Alberta based company engaged in the exploration,
development and production of oil and natural gas. The Corporation's
common shares are listed on The Toronto Stock Exchange under the trading
symbol "AEX".


MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's discussion and analysis (MD&A) for Aquest Energy Ltd.
("Aquest" or the "Company") has been prepared to analyze for its
shareholders, 2004 operating results and to discuss our future
opportunities. The MD&A should be read in conjunction with Aquest's
audited consolidated financial statements and related notes for the
years ended December 31, 2004 and 2003 which have been prepared in
accordance with Canadian generally accepted accounting principles
("GAAP").

By its nature, MD&A requires the presentation of certain forward looking
financial and operational information that involves known and unknown
risks and uncertainties, some of which are beyond Aquest's control.
These include, but are not limited to, general economic conditions,
volatility of commodity prices, currency fluctuations, imprecision of
reserve estimates, environmental risks, government regulations, stock
market volatility, and competition from other producers. Although
assumptions used in the preparation of forward looking information are
considered reasonable by management at the time, actual results could
differ materially from those contained in such forward looking
information.

Management's discussion and analysis 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 GAAP as an indicator of the Company's performance.
Aquest's determination of "cash flow from operations" may not be
comparable to that reported by other companies. The reconciliation
between net income and "cash flow from operations" can be found in the
consolidated statements of cash flows. The Company also presents cash
flow from operations per share whereby per share amounts are calculated
using weighted average shares outstanding consistent with the
calculation of income per share.

For the purposes of calculating unit costs, natural gas has been
converted to a barrel equivalent ("boe") using a conversion rate of six
thousand cubic feet equal to one barrel ("6:1"). This conversion is
based upon energy equivalence at the burner tip and does not represent a
value equivalency at the well head.

Overview

Corporate Development

At the beginning of 2003, Aquest was a recently reorganized petroleum
and natural gas exploration company with no petroleum and natural gas
production. In January 2003, Aquest completed a $7.0 million private
placement and then closed the acquisition of the Red Leaf assets for
approximately $12.0 million. In September 2003, Aquest announced an
agreement to acquire Lexoil Incorporated for share consideration valued
at $1.5 million. On November 14, 2003, Aquest announced it had entered
into an agreement to acquire Eravista Energy Corp. ("Eravista"), a
private oil and gas company. Aquest closed the merger transaction with
Eravista on January 23, 2004 thereby acquiring all of the outstanding
shares of Eravista in exchange for 65,330,736 shares (pre-consolidation)
and $8,000,000 cash. The merger with Eravista created a company with
approximately 1,750 boepd of production (after the sale of certain
producing properties acquired in the transaction), increased acreage and
added drilling prospects geographically located in the same central
Alberta areas as Aquest properties. For accounting purposes, the
business combination was recorded as an acquisition of Aquest by
Eravista as the former Eravista shareholders, after the acquisition,
controlled over 60% of the combined Company's common shares. As Eravista
is deemed for accounting purposes to be the continuing Company, the
comparative information presented in the consolidated financial
statements and the MD&A for the year ended December 31, 2003, is that of
Eravista.

Petroleum and Natural Gas Sales

During the past year Aquest's petroleum and natural gas revenues
increased 53.8% to $29,462,500. This increase was the result of a 40.6%
increase in total reported production for the year, combined with an
increase in the overall sales price received of 11.0%.

Production grew from an average of 1,309 boepd in 2003 (Eravista) to an
average of 1,840 boepd in 2004 before exiting the year at a rate of
2,250 boepd. The increase in production during the year can be
attributed to successful drilling efforts and the business combination
of Aquest and Eravista. The acquisition of Eravista added approximately
1,150 boepd, 175 boepd of which was subsequently sold, to Aquest's
production base of 785 boepd. Drilling activities during the year offset
declines and added an additional 490 boepd to arrive at 2004's exit
rate. Production for the first quarter of 2005 is expected to remain at
levels consistent with the 2004 exit rate of 2,250 boepd.

Fourth quarter petroleum and natural gas sales were up 128.6% from the
comparable quarter of 2003. The increase was attributable to a 72.6%
increase in production and a 36.2% increase in average price received.
Production increases in the fourth quarter of 2004, compared to the rest
of 2004, were the result of wells coming on stream in the Bellshill,
Cardiff and Edberg areas.

The following tables outline our production sales and volumes for the
three-month periods and years ended December 31, 2004 and 2003.



Three-months ended Year ended
December 31 December 31
Petroleum and
Natural Gas Sales 2004 2003 2004 2003
------------------------------------------------------------------------
Natural Gas $ 4,743,238 $ 2,299,236 $ 19,083,047 $ 11,968,948
Oil 3,515,045 1,133,957 8,288,809 4,860,530
Liquids 456,388 275,677 1,527,042 1,649,164
Royalty and other 250,559 213,595 563,602 683,340
------------------------------------------------------------------------
Total $ 8,965,230 $ 3,922,465 $ 29,462,500 $ 19,161,982
------------------------------------------------------------------------
------------------------------------------------------------------------

Three months ended Year ended
December 31 December 31
Production 2004 2003 2004 2003
------------------------------------------------------------------------
Natural gas (mcf/d) 7,187 4,022 7,510 4,575
Oil (bbls/d) 762 437 497 417
Liquids (bbls/d) 106 90 92 130
------------------------------------------------------------------------
Total (boe/d) 2,066 1,197 1,840 1,309
------------------------------------------------------------------------
------------------------------------------------------------------------

Prices and Marketing

Three months ended Year ended
December 31 December 31
2004 2003 2004 2003
------------------------------------------------------------------------
Benchmark Prices
AECO gas ($/mcf) $ 6.57 $ 5.76 $ 6.55 $ 6.68
WTI oil (US $/bbl) 47.95 31.18 41.40 31.04
Edmonton par
(Cdn $/bbl) 57.71 39.55 52.54 43.14
CDN/US average
exchange rate 0.819 0.760 0.770 0.716
Aquest's Average
Selling Price
Natural gas
($/mcf) $ 7.17 $ 6.21 $ 6.94 $ 7.17
Oil ($/bbl) 50.14 28.21 45.57 31.94
Natural gas
liquids ($/bbl) 46.66 33.29 45.42 34.89
------------------------------------------------------------------------
Total ($/boe) $ 45.85 $ 33.67 $ 42.91 $ 38.68
------------------------------------------------------------------------
------------------------------------------------------------------------


Aquest's 2004 average natural gas sales price dropped 3.2% from 2003 to
$6.94 per mcf. This drop was consistent with the decrease in the Alberta
daily spot price at AECO from 2004 to 2003. Aquest's average sales price
received a premium of 6.0% over the spot price at AECO during 2004
representing favorable heat content adjustments for Aquest's gas.
Aquest's fixed price sales contracts had little impact on price during
2004, recognizing an additional $93,000 in revenue as a result of these
contracts.

Aquest's oil sales price averaged $45.57/bbl during 2004, an increase of
42.7% over the 2003 average price of $31.94/bbl. This increase is due to
the fact that Eravista had a higher proportion of Hardisty heavy oil in
2003 compared to the combined Company in 2004. During 2004 Aquest
received 86.7% of the Edmonton par price of $52.54/bbl compared with
74.0% of the Edmonton par price in 2003. The corporate average price for
2004 was reduced slightly due to the impact of fixed price sales
contracts in place during the year. Overall the Company's revenue on oil
sales was reduced by approximately $107,000, or $0.59/bbl as a result of
these contracts.

Natural gas liquids price improved by 30.2% during 2004, increasing to
$45.42/bbl, compared to $34.89/bbl in 2003 as a result of increases in
overall prices received by the Company.

Aquest's pricing for the fourth quarter of 2004 was consistent with
results for the rest of 2004 as gas prices received a premium of 9.1%
over AECO. The premium is slightly above expectations for the quarter
due to Aquest receiving additional revenue of approximately $300,000
related to its fixed price physical sales contracts. The corporate oil
price in the fourth quarter remained consistent as a percentage of
Edmonton par at 86.8% of the posted price.

Aquest currently has the following physical, fixed price forward sales
contracts in place.



Volume/day Price
------------------------------------------------------------------------
Natural Gas
November 2004 - March 2005 3,000 GJ $8.05/GJ
Crude Oil
January - December 2005 100 bbl $45.40 - $51.40 US/bbl
February - December 2005 100 bbl $46.80 US/bbl
------------------------------------------------------------------------
------------------------------------------------------------------------

Royalties

Three months ended Year ended
December 31 December 31
2004 2003 2004 2003
------------------------------------------------------------------------
Crown $ 1,160,702 $ 371,254 $ 3,263,090 $ 1,526,695
Freehold & other 1,286,668 664,204 3,080,765 3,093,513
ARTC (83,620) (93,377) (185,466) (321,000)
------------------------------------------------------------------------
Total $ 2,363,750 $ 942,081 $ 6,158,388 $ 4,299,208
------------------------------------------------------------------------
------------------------------------------------------------------------

Three months ended Year ended
Royalty Rates December 31 December 31
(as a % of revenue) 2004 2003 2004 2003
------------------------------------------------------------------------
Crown 13.3% 10.0% 11.3% 8.3%
Freehold & other 14.8% 17.9% 10.6% 16.7%
ARTC (1.0%) (2.5%) (0.6%) (1.7%)
------------------------------------------------------------------------
Total 27.1% 25.4% 21.3% 23.3%
------------------------------------------------------------------------
------------------------------------------------------------------------


Total royalties in 2004 increased by 43.2% to $6,158,388 compared to
2003, as a result of increases in petroleum and natural gas sales.
During the year, recoveries related to adjustments on the calculation of
freehold and other royalties relating to prior years, helped decrease
the overall royalty rate as a percentage of sales from 23.3% to 21.3%.

The Company's Alberta Royalty Tax Credit ("ARTC") decreased during the
year from adjustments to prior years ARTC claims related to audits of
the 2000, 2001 and 2002 taxation years.

The Company expects its overall royalty rate to increase to
approximately 23% next year as the effect of prior year's recoveries
experienced in 2004 is not expected to occur in 2005. The increase will
be partially offset by an increase in Aquest's ARTC claims as the effect
of audit adjustments during 2004 are one time items.

Royalties as a percentage of sales for the fourth quarter increased 5.8%
compared with 2004. The increase is due to recoveries experienced by
Aquest being recorded in the second and third quarter of 2004. The
fourth quarter is higher than would be expected due to a one time
royalty adjustment recorded in the fourth quarter relating to the entire
year.



Production Expense

Three months ended Year ended
December 31 December 31
2004 2003 2004 2003
------------------------------------------------------------------------
Production
expenses $ 1,401,428 $ 1,514,194 $ 5,154,955 $ 4,325,762
------------------------------------------------------------------------
Dollars Per BOE $ 7.37 $ 13.75 $ 7.65 $ 9.05
------------------------------------------------------------------------
------------------------------------------------------------------------


Aquest's 2004 operating costs of $7.65/boe represent a decrease of 15.5%
from 2003. The decrease in operating costs is attributable to new
facilities, operational efficiencies in core areas and increased
production. Aquest is subject to higher operating costs in central
Alberta due to processing and gathering charges on gas production where
the Company does not own facilities. The Company is also subject to
higher freehold mineral tax costs as a large portion of its central
Alberta land is freehold. These combined costs account for approximately
15.5% of the Company's overall operating costs per boe.

During 2005 operating expenses are expected to decrease as a result of
cost saving activities initiated late in 2004 and additional activities
planned in 2005. During the fourth quarter of 2004 Aquest purchased
compression equipment which it had been previously renting. Most of the
purchases took place in December so the effect of decreased equipment
rental expenses will not be realized until the first quarter of 2005.
Several oil wells in the Bellshill area were tied-in during November
which will reduce crude oil trucking costs in the first quarter of 2005.
The Company is attempting to locate water disposal alternatives in the
Cooking Lake area and is actively searching for a disposal well to
reduce water disposal costs in this area. Increased production volumes
during 2005 will also help decrease operating costs on a boe basis.

Operating costs for the fourth quarter of 2004 were $6.38 per boe lower
than the same period in 2003. The decrease is due to a freehold mineral
tax adjustment recorded in the fourth quarter of 2003 totalling
$340,000. After taking this adjustment into account, the difference
between the two quarters is consistent with the difference experienced
on a year over year basis. Results for the fourth quarter are consistent
with Aquest's results for the 2004 year as a whole.

Transportation

Transportation costs for the year ended December 31, 2004 totaled
$735,937 or $1.09 per boe compared with $332,031 or $0.70 per boe for
2003. This increase is due to lower transportation costs on Eravista
natural gas production compared to that of Aquest on a stand alone basis
and the fact that 2004 combines the rates for both companies while 2003
only includes the lower Eravista rate.



Operating Netbacks

Three months ended Year ended
December 31 December 31
2004 2003 2004 2003
------------------------------------------------------------------------
Sales Price $ 45.85 $ 33.67 $ 42.91 $ 38.68
Royalties 12.44 8.55 9.14 9.00
Operating costs 7.37 13.75 7.65 9.05
Transportation 1.09 0.70 1.09 0.70
------------------------------------------------------------------------
Total $ 24.95 $ 10.67 $ 25.03 $ 19.93
------------------------------------------------------------------------
------------------------------------------------------------------------


Aquest's operating netback per boe increased by 25.6% over the past year
due to an increase of 11% in sales price and a 15.5% improvement in
operating costs. The Company hopes to further increase its operating
netbacks through the reduction of operating costs in the coming year.

Operating netbacks in the fourth quarter were consistent with results
for 2004, with higher sales prices being offset by increased royalties
per boe due to the adjustments mentioned. In comparison to 2003
operating netbacks for the fourth quarter were considerably higher as a
result of the mineral tax adjustment and lower commodity prices in the
fourth quarter of 2003.



General and Administrative

Three-months ended Year ended
December 31 December 31
2004 2003 2004 2003
------------------------------------------------------------------------
G&A costs $ 760,547 $ 366,961 $ 3,124,301 $ 1,326,802
Capitalized (474,600) (56,100) (1,003,957) (388,461)
------------------------------------------------------------------------
Net G&A costs $ 285,947 $ 310,861 $ 2,120,344 $ 938,341
------------------------------------------------------------------------
Net G&A per BOE $ 1.51 $ 2.82 $ 3.15 $ 1.96
------------------------------------------------------------------------
------------------------------------------------------------------------


On a per boe basis in 2004, general and administrative costs increased
by 60.7% to $3.15 per boe from $1.96 per boe in 2003. The increase in
costs was a result of Eravista being a private company in 2003 and not
having to incur many of the costs associated with operating a public
company. Aquest expects to reduce general and administrative costs in
2005 as significant one time costs were incurred during 2004. These
costs include severance and reorganization costs related with the
Eravista acquisition and public company costs associated with listing on
the Toronto Stock Exchange. In total these costs alone amount to
approximately $560,000 or 17.9% of total general and administrative
expense for 2004. General and administrative expenditures on a boe basis
are expected to decrease in 2005 as a result of the one time
expenditures being eliminated in 2005 and as the Company brings on more
production.

Capitalized general and administrative expenses as a percentage of gross
general and administrative costs increased from 29.3% in 2003 to 32.1%
in 2004. The increase was a result of the Company having a larger full
time exploration staff and incurring more direct exploration
expenditures during 2004 compared with 2003.

Interest Expense

Interest expense for 2004 totaled $1,004,095 versus $305,782 for 2003.
The increase is due to the combined Company carrying a higher debt level
for the entire year compared to the average debt outstanding for
Eravista during 2003. The increase in the revolving production line
reflects increased activity and a larger corporate asset base during
2004. Interest charges in 2004 also includes $450,000 of interest
charges on the outstanding debenture and $100,000 in part XII.6 tax
related to unspent flow-through funds throughout the year.

Depletion, Depreciation and Accretion

Depletion and depreciation for the year increased to $13,025,000 from
$4,593,079 in 2003. Increased depletion from the prior year is the
direct result of a higher asset base from the combination of Aquest and
Eravista during 2004, compared with only Eravista in 2003. The increase
is also due to the change in reserve estimation procedures imposed by
the National Instrument 51-101 guidelines at the end of 2003 which were
not accounted for by Eravista in their depletion estimation for the
first three quarters of 2003.

Accretion expense increased from $66,850 in 2003 to $125,599 for 2004.
The increase is due to the Company accreting a larger asset retirement
obligation from the combined companies in 2004 compared to just Eravista
in 2003. Accretion expense is expected to continue to increase on a
yearly basis as the Company continues to incur future obligations
related to its exploration and development activities.

Income and Capital Taxes

During 2004, Aquest recorded a future income tax recovery of $431,203
compared with a future income tax expense of $910,265 in 2003. This
change is due to the change in net income from 2003 to 2004 and is also
the result of a recovery of approximately $891,062 relating to changes
in the substantively enacted federal income tax rate. This rate
reduction will continue to benefit the Company through reduced future
income taxes in future years as further rate reductions are phased in.

Aquest's current tax provision for 2004 consists entirely of Large
Corporation's Tax. The Company does not expect to become cash taxable on
an income basis in 2005. The Company currently has approximately $51.7
million in pools to shelter taxable income in future years broken down
as follows:



Tax Pools 2004
------------------------------------------------------------------------
Canadian exploration expense $ 4,177,000
Canadian development expense 11,689,000
Canadian oil and gas property expense 12,725,000
Undepreciated capital cost 14,375,000
Non-capital loss carryforwards 4,713,000
Undeducted share issuance costs 1,210,000
Other 2,838,000
------------------------------------------------------------------------
Total $ 51,727,000
------------------------------------------------------------------------
------------------------------------------------------------------------


Cash Flows from Operations and Net Income

Cash flows from operations totaled $14,265,383 for the year ended
December 31, 2004 compared to $8,920,138 for 2003. The increase in cash
flows from operations is a direct result of a growing production base
combined with a significant increase in operating netbacks compared to
2003 results. The various factors contributing to the changes in cash
flows from operations and net income are outlined below.



Cash Flows Net Income
------------------------------------------------------------------------
Year ended December 31,2003 $ 8,920,138 $ 3,349,944

Increase in revenue, net of royalties 8,441,338 8,441,338
Less expenses (recovery)
Operating 829,194 829,194
Transportation 403,906 403,906
General and administrative 1,182,003 1,182,003
Stock based compensation - 581,071
Interest 698,313 698,313
Accretion - 58,749
Depletion and depreciation - 8,431,921
Taxes (17,323) (1,358,791)
------------------------------------------------------------------------
Year ended December 31,2004 $ 14,265,383 $ 964,916
------------------------------------------------------------------------
------------------------------------------------------------------------


Cash flows and net income per share are outlined in the table below
as follows.

Three-months ended Year ended
December 31 December 31
2004 2003 2004 2003
------------------------------------------------------------------------
Cash flows from
operations $ 4,497,834 $ 965,360 $ 14,265,383 $ 8,920,138
Cash flows from
operations per
share
Basic $ 0.16 $ 0.06 $ 0.49 $ 0.55
Diluted $ 0.15 $ 0.06 $ 0.49 $ 0.52


Net income(loss) $ 123,533 $(480,654) $ 964,916 $ 3,349,944
Net Income(loss)
per share
Basic $ 0.00 $ (0.03) $ 0.03 $ 0.21
Diluted $ 0.00 $ (0.03) $ 0.03 $ 0.19
------------------------------------------------------------------------
------------------------------------------------------------------------


Capital Expenditures

During 2004 Aquest's capital expenditures increased by 71% over 2003.
The Company drilled a total of 31 gross (16.74 net) wells in the year
resulting in 16 gross (6.29 net) gas wells, 10 gross (7.56 net) oil
wells, one gross (0.75 net) suspended well, one gross (0.075 net)
injection well and three gross (2.08 net) dry and abandoned wells. In
addition to the drilling program, Aquest made significant investments in
equipment and facilities and infrastructure during the year to help
control costs. The drilling activities for the year resulted in Aquest
adding 2,706,333 boe's of proven plus probable reserves, resulting in
proven plus probable finding cost of $19.00 per boe.

During the year, Aquest disposed of its properties in Saskatchewan and a
non-operated heavy oil property acquired with Eravista for total
proceeds of $4,294,229. Aquest also sold two sections of undeveloped
land in a non-core area for proceeds of $538,560.

Liquidity and Capital Resources

As at December 31, 2004, Aquest had drawn $14,779,559 on its credit
facility, had an outstanding debenture totaling $2,500,000 and a working
capital deficiency of $3,794,721 for total net debt of $21,074,280.
Effective December 16, 2004, the Company renegotiated its credit
facility to a maximum of $20.0 million. The maximum credit facility
amount is exclusive of the outstanding debenture.



Three-months ended Year ended
Investment December 31 December 31
Program Funding 2004 2003 2004 2003
------------------------------------------------------------------------
Cash flow from
operations $ 4,497,834 $ 965,360 $ 14,265,383 $ 8,920,138
Changes in non-cash
operating working
capital (414,345) 549,562 (3,159,774) (1,007,105)
Increase in bank
debt 5,418,852 888,138 979,582 4,239,825
Repayment of note
receivable - (10,316) 221,767 (10,316)
Deferred acquisition
cost - (760,000) 12,268 (760,000)
Asset retirement
expenditures (58,578) - (58,578) -
Issuance of shares - - 7,285,454 31,750
------------------------------------------------------------------------
Total $ 9,443,763 $ 1,632,744 $ 19,546,102 $ 11,414,292
------------------------------------------------------------------------
------------------------------------------------------------------------


Equity

On January 23, 2004, Aquest completed the business combination with
Eravista by issuing 65,330,736 common shares for all of the issued and
outstanding shares of Eravista. Immediately subsequent to the
acquisition, Aquest consolidated its outstanding common shares on the
basis of one new share for every four shares outstanding.

In June of 2004, Aquest closed a bought deal financing agreement whereby
the Company issued 2,199,818 common shares at a price of $2.75 per
common share for gross proceeds of $6,049,500.

During the year, individuals holding Aquest stock options and warrants
exercised 503,750 stock options and 7,159 warrants for cash proceeds of
$620,500 and $15,347 respectively. A total of 3,079,950 stock options
were issued to employees and directors during 2004 at exercise prices
ranging from $1.75 to $2.60 per option, representing the market price of
the Company's shares at the time of issuance. As at December 31, 2004,
Aquest had a total of 3,181,700 stock options outstanding to employees,
officers and directors of the Company.

Contractual Obligations

Aquest enters into many contractual obligations as part of conducting
day to day business. The only material obligation consists of our office
lease commitment which expires in March of 2009. Annual rental payments
inclusive of operating costs are estimated to be approximately $260,000
per annum.

The Company is also committed to short term physical commodity
commitments as described in the pricing and marketing section of the
MD&A. Aquest has not entered into any firm transportation commitments to
date.

Changes in Accounting Policy

Stock-based Compensation Costs

In 2003, the Company elected to prospectively adopt new Canadian
accounting standards for Stock-based Compensation and Other Stock-based
Payments. Under the transitional provisions of the standard, the Company
accounts for all stock options granted after December 31, 2002, using
the fair value method while stock options granted to employees and
directors during 2002 are accounted for using the intrinsic value
method. The Company discloses pro forma stock based compensation expense
and pro forma net earnings that would have resulted had the fair value
method been used to account for stock options granted to employees and
directors during 2002.

For the year ended December 31, 2003, the adoption of the new standard
had no effect on reported financial results.

Full Cost Accounting

On January 1, 2004, the Company amended its application of the full cost
method of accounting in accordance with amended Canadian standards. The
new standards modify the ceiling test calculation and outlines
additional disclosure requirements. Under the new standards, ceiling
test impairment is recognized if the carrying amount of petroleum and
natural gas properties, less the cost of unproved properties not subject
to depletion (the "adjusted carrying amount"), exceeds the estimated
undiscounted cash flows expected from the production of proved reserves.
The future cash flows are based on forecast prices and costs, as
provided by an independent third party. If recognized, the amount of the
impairment is measured by comparing the adjusted carrying amount to the
estimated, discounted future cash flows of the Company's proved plus
probable reserves, based on forecast prices and costs discounted at the
Company's risk-free interest rate. For purposes of the ceiling test,
future costs are exclusive of indirect costs such as financing charges,
general and administrative expenses and income taxes. Any impairment is
recognized as additional depletion and depreciation expense.

There was no impact on the reported financial results as a result of
applying the new policy.

Hedging Relationships

Also effective January 1, 2004, Aquest adopted the new Canadian
accounting standard for the recognition of hedging relationships. The
new standard sets out certain conditions when hedge accounting may be
applied; otherwise the fair value of derivative financial instruments
are recorded as an asset or liability on the balance sheet. Aquest did
not have any hedges or forward sale contracts during 2004. Aquest has a
series of forward sale gas contracts in place covering the period of
November 1, 2004 to March 31, 2005. In addition, the Company has an oil
price collar in place covering 100 bopd for the period January 1 to
December 31, 2005 and an additional 100 bopd from February 1 to December
31, 2005. These fixed price, physical contracts are disclosed in note 14
of the consolidated financial statements.

Asset Retirement Obligations

For the fiscal year beginning January 1, 2004, Aquest adopted the new
accounting standard on Asset Retirement Obligations. This new accounting
standard requires reclamation and abandonment obligations be recognized
on the balance sheet by increasing oil and gas properties along with a
corresponding liability. Comparative numbers for 2003 and prior periods
have been restated and the impact is disclosed in note 3(b) of the
consolidated financial statements. The adoption of this standard does
not have a material adverse impact on the Company's financial position
or results of operations.

Transportation

During 2004, Aquest amended the presentation of transportation costs for
petroleum and natural gas products to report those costs as a separate
expense. Previously those costs had been classified as a reduction of
petroleum and natural gas sales. Revenue and transportation costs both
increased by $332,031 for 2003, from previously reported amounts as a
result of this new policy. There was no impact on net income or cash
flow from operations during 2003 as a result of this change.

Critical Accounting Estimates

The significant accounting policies used by Aquest are disclosed in Note
2 of the consolidated financial statements. Certain accounting policies
require management to make appropriate decisions in determining
estimates and making assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Management reviews its
estimates regularly. The emergence of new information and changed
circumstance may result in actual results or changes to estimated
amounts that may differ materially from current estimates. The following
discussion helps assess the accounting policies and practices of the
Company as they relate to estimates and the likelihood of material
differences occurring.

Proved Oil and Gas Reserves

Under National Instrument 51-101, "Proved" reserves are defined as those
reserves that can be estimated with a high degree of certainty to be
recoverable. In accordance with this definition, the level of certainty
targeted by the reporting company should result in at least a 90 percent
probability that the quantities actually recovered will equal or exceed
the estimated Proved reserves. In the case of "Probable" reserves it
must be equally likely that the actual remaining quantities recovered
will be greater or less than the sum of the estimated Proved plus
Probable reserves. With respect to the consideration of certainty, in
order to report reserves as Proved plus Probable, the reporting company
must believe that there is at least a 50 percent probability that the
quantities actually recovered will equal or exceed the sum of the
estimated Proved plus Probable reserves.

Reserve estimates are made using all available geological and reservoir
data, as well as historical production information. Estimates are
reviewed internally on a quarterly basis, and at least annually by
external engineers, and are revised as appropriate. Revisions can occur
as a result of various factors including: actual reservoir production,
changes in commodity price forecasts and relevant operating costs or
changes in the Company's plans. Changes in proved oil and gas reserves
will impact financial results as reserves are used in the depletion
calculation and are used to assess asset valuation and impairment.
Reserve changes also affect other industry financial benchmarks such as
finding and development costs, recycle ratios and net asset value
calculations.

Depletion

The Company applies the full cost method of accounting for exploration
and development activities. Under this method, all costs associated with
the acquisition of, exploration for, and development of petroleum and
natural gas reserves are capitalized whether or not the activities are
successful. The aggregate of net capitalized costs and estimated future
development costs, less undeveloped land, is depleted using the
unit-of-production method based on production volumes in relation to
estimated proven reserves. An increase in estimated proved oil and gas
reserves would result in a corresponding reduction in depletion expense.
A decrease in estimated future development costs would also result in a
corresponding reduction in depletion expense.

Unproved Properties

Certain costs related to the acquisition and evaluation of unproved
properties may be excluded from costs subject to depletion. These
properties are reviewed quarterly to determine whether any impairment in
value has occurred. When proved reserves are assigned or an unproved
property is considered to be impaired, the cost of the unproved
property, or the amount of the impairment will be added to the
capitalized costs subject to depletion.

Ceiling Test

The Ceiling test is a two part cost recovery test to assess the
valuation of the Company's petroleum and natural gas properties. The
first part measures whether impairment has occurred based on
undiscounted future cash flows using estimated future prices, costs and
proved reserves. When the first part indicates impairment exists, the
second part of the test measures the amount of impairment based on
discounted future cash flows from proved and probable reserves. The
Company reviews the related estimates when it performs its ceiling test
on a quarterly basis. The impact of changes in the estimates of future
prices, costs and proved and probable reserves on the financial
statements could be material.

Asset Retirement Obligations

In recognizing its asset retirement obligation, the Company records a
liability equal to the discounted fair value of the estimated costs to
abandon petroleum and natural gas wells, dismantle and remove tangible
equipment and return land to its original condition. Arriving at a
discounted fair value requires the Company to make estimates relating to
the projected timing of incurring costs, inflation rates and risk
adjusted discount rates. These estimates will vary over time as new
information becomes available and will impact both the liability
recorded as well as the accretion expense. These estimates are reviewed
by the Company on a quarterly basis to ensure circumstances supporting
the estimates are still considered reasonable.

Income Taxes

The determination of the Company's income and other tax liabilities
requires interpretation of complex laws and regulations often involving
multiple jurisdictions. All tax filings are subject to audit and
potential reassessment after the lapse of considerable time.
Accordingly, the actual income tax liability may differ significantly
from that estimated and recorded by management.

Stock-based Compensation

The fair value of stock options granted is calculated using the
Black-Scholes option pricing model and is recorded over the vesting
period of the related options. The calculation involves estimates of the
expected volatility in the trading value of Aquest's shares, the price
of the underlying shares, the expected life of the option, expected
dividends and the risk-free rate of interest. All of these estimates are
subjective and are reviewed by management on a quarterly basis.

Business Combinations

As disclosed in Note 4 to the consolidated financial statements Aquest
merged with Eravista and accounted for the transaction using the
purchase method of accounting for business combinations based on fair
values. The determination of fair value necessarily involves many
assumptions. The valuation of petroleum and natural gas properties is
based on Aquest's estimate of proved plus probable reserves relying on
economic forecasts of future prices and costs at the time of
acquisition. The Company also estimates the value of unproved properties
and other assets and liabilities acquired. The allocation of fair value
between the acquired assets and liabilities could differ materially by
changing assumptions used which would impact the composition of the
balance sheet items including goodwill.

Goodwill

In the process of accounting for the purchase of a company as described
above, goodwill is recognized as the excess of the purchase price over
the fair value allocated to the other assets and liabilities. Since
goodwill is a residual value, changes in the estimates used to determine
the value of other items in the purchase equation could have a material
effect on the value allocated to goodwill. Goodwill is not amortized but
is assessed quarterly for impairment.

Business Conditions and Risk

The business of exploration, development and acquisition of oil and gas
reserves involves a number of uncertainties and as a result, Aquest is
exposed to a number of risks inherent to the oil and gas industry.
Operationally Aquest faces risks that are associated with finding,
developing and producing these oil and gas reserves. These include risks
associated with governmental access regulations, cost and availability
of third party services, environmental and safety concerns, and access
to processing facilities. Aquest is subject to financial risks due to
fluctuating commodity prices, interest rates and the Canadian/US dollar
exchange rate. Aquest's growth is dependant on external sources of
financing which may not be available on acceptable terms.

Aquest mitigates these risks through hiring a highly competent
management team with significant experience in the oil and gas industry.
The Company may enter into commodity or interest rate hedging strategies
to protect certain levels of cash flow. In the field, Aquest adheres to
operational, safety and environmental standards that meet or exceed
recognized levels. Finally, Aquest maintains an insurance program
consistent with industry practice to protect against destruction of
assets, well blowouts, environmental problems and other business
interruptions.



AQUEST ENERGY LTD.
QUARTERLY INFORMATION


Year Ended December 31, 2003
Q1(1) Q2(1) Q3(1) Q4(1) Total
------------------------------------------------------------------------
Financial (thousands except
per share data)
Petroleum and natural
gas sales $ 5,971 $ 5,094 $ 4,175 $ 3,922 $ 19,162
Royalties 1,333 1,024 1,000 942 4,299
Production expenses 675 1,092 1,120 1,439 4,326
Net backs $ 3,963 $ 2,978 $ 2,055 $ 1,541 $ 10,537
Cash flow from operations $ 3,694 $ 2,292 $ 1,969 $ 965 $ 8,920
Per Share - Basic .23 .14 .12 .06 .55
- Diluted .21 .13 .11 .06 .52
Net income (loss) $ 1,904 1,203 724 (481) 3,350
Per Share - Basic .12 .07 .04 (.03) .20
- Diluted .11 .07 .04 (.03) .19
Additions to capital assets $ 4,375 $ 1,514 $ 3,892 $ 1,633 $ 11,414
Net debt $10,130 $ 7,416 $ 8,921 $10,131 $ 10,131
Shares outstanding
Basic 16,333 16,333 16,333 16,333 16,333
Diluted 17,371 17,371 17,371 17,371 17,371

Year Ended December 31, 2003
Q1 Q2 Q3 Q4 Total
------------------------------------------------------------------------
Operations
Average daily production
Natural gas (mcfpd) 5,253 4,589 4,584 4,022 4,575
Liquids & crude oil (bpd) 604 606 450 527 547
Combined (boepd) 1,479 1,371 1,214 1,197 1,309
Average prices received
Natural gas ($/mcf) $ 7.79 $ 7.36 $ 6.66 $ 6.21 $ 7.02
Liquids & crude oil ($/bbl) 38.14 30.77 29.78 28.20 32.07
Combined ($/boe) $ 44.86 $ 38.98 $ 36.27 $ 33.67 $ 38.68
Royalties ($/boe) 10.02 8.20 8.95 8.55 9.00
Production expenses ($/boe) 3.07 8.76 9.35 13.75 9.05
Transportation expenses
($/boe) 0.70 0.70 0.70 0.70 0.70
Netback received ($/boe) $ 31.07 $ 21.32 $ 17.27 $ 10.67 $ 19.93

(1) In accordance with reverse take-over accounting, information
presented for 2003 is that of Eravista Energy Corp., a private
oil and company, and does not include the results of Aquest until
completion of the business combination on January 23,2004.


Year Ended December 31,2004
Q1 Q2 Q3 Q4 Total
------------------------------------------------------------------------
Financial (thousands except
per share data)
Petroleum and natural
gas sales $ 5,796 $ 7,387 $ 7,314 $ 8,966 $29,463
Royalties 1,323 1,479 993 2,313 6,158
Production expenses 1,179 1,355 1,219 1,402 5,155
Net backs $ 3,294 $ 4,553 $ 5,102 $ 5,201 $18,150
Cash flow from operations $ 2,288 $ 3,374 $ 4,105 $ 4,498 $14,265
Per Share - Basic .09 .12 0.13 0.15 0.49
- Diluted .09 .12 0.13 0.15 0.49
Net income (loss) 125 180 536 124 965
Per Share - Basic .00 .01 .02 .00 .03
- Diluted .00 .01 .02 .00 .03
Additions to capital assets $ 5,514 $ 3,395 $ 5,247 $10,223 $24,379
Net debt $20,782 $14,969 $16,049 $20,939 $20,939
Shares outstanding
Basic 25,327 28,969 30,874 30,892 28,990
Diluted 25,572 29,194 30,983 31,075 29,164

Year Ended December 31,2004
Q1 Q2 Q3 Q4 Total
------------------------------------------------------------------------
Operations
Average daily production
Natural gas (mcfpd) 6,697 8,480 7,677 7,187 7,510
Liquids & crude oil (bpd) 408 537 542 868 589
Combined (boepd) 1,524 1,950 1,822 2,066 1,840
Average prices received
Natural gas ($/mcf) $ 7.22 $ 6.99 $ 6.45 $ 7.17 $ 6.94
Liquids & crude oil ($/bbl) 37.24 40.84 50.08 49.72 45.54
Combined ($/boe) $ 41.80 $ 40.30 $ 41.95 $ 45.85 $ 42.91
Royalties ($/boe) 9.53 8.33 5.92 12.44 9.14
Production expenses ($/boe) 8.50 7.63 7.27 7.37 7.65
Transportation expenses
($/boe) 1.09 1.09 1.09 1.09 1.09
Netback received ($/boe) $ 22.68 $ 23.25 $ 27.87 $ 24.45 $ 25.03



CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003


2004 2003
(restated note 3(b))
------------------------------------------------------------------------
Assets
Current assets:
Accounts receivable $ 12,285,577 $ 2,238,961
Prepaid expenses 644,546 170,000
Note receivable - 221,767
------------------------------------------------------------------------
12,930,123 2,630,728
Deferred charges - 760,000
Goodwill (note 4) 16,613,598 -
Property, plant and equipment (note 5) 64,078,964 31,827,475
------------------------------------------------------------------------
$ 93,622,685 $ 35,218,203
------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (note 6(a)) $ 14,779,559 $ 7,632,283
Accounts payable and
accrued liabilities 16,724,844 5,128,935
------------------------------------------------------------------------
31,504,403 12,761,218

Long term debt (note 6(b)) 2,500,000 -
Asset retirement obligations
(note 7) 2,480,962 1,418,704
Future income taxes (note 8) 8,362,292 5,372,216
------------------------------------------------------------------------
44,847,657 19,552,138

Shareholders' equity:
Share capital (note 9) 38,721,268 8,548,787
Contributed surplus (note 10) 1,971,566 -
Retained earnings 8,082,194 7,117,278
------------------------------------------------------------------------
48,775,028 15,666,065
------------------------------------------------------------------------
$ 93,622,685 $ 35,218,203
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

Approved by the Board:


Director Director


CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Years ended December 31, 2004 and 2003

2004 2003

------------------------------------------------------------------------
Revenues
Petroleum and natural gas sales $ 29,462,500 $ 19,161,982
Less royalties
(net of Alberta Royalty Tax Credit) (6,158,388) (4,299,208)
------------------------------------------------------------------------
23,304,112 14,862,774
------------------------------------------------------------------------

Expenses
Operating 5,154,955 4,325,762
Transportation 735,937 332,031
General and administrative 2,120,344 938,341
Stock-based compensation 581,071 -
Interest 1,004,095 305,782
Accretion 125,599 66,850
Depletion, depreciation
and amortization 13,025,000 4,593,079
------------------------------------------------------------------------
22,747,001 10,561,845
------------------------------------------------------------------------

Income before taxes 557,111 4,300,929

Taxes (note 8)
Capital taxes 23,398 40,720
Future income taxes (431,203) 910,265
------------------------------------------------------------------------
(407,805) 950,985
------------------------------------------------------------------------

Net income $ 964,916 $ 3,349,944
------------------------------------------------------------------------

Retained earnings,
beginning of year 6,906,563 3,639,623
Change in accounting policy
(note 3(b)) 210,715 127,711
------------------------------------------------------------------------
Retained earnings,
beginning of year as restated 7,117,278 3,767,334
------------------------------------------------------------------------
Retained earnings, end of year $ 8,082,194 $ 7,117,278
------------------------------------------------------------------------
------------------------------------------------------------------------

Net income per share (note 11)
Basic $ 0.03 $ 0.21
Diluted $ 0.03 $ 0.19
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2004 and 2003

2004 2003

------------------------------------------------------------------------
Cash provided by (used for):

Operations:
Net income $ 964,916 $ 3,349,944
Items not affecting cash:
Depletion, depreciation
and amortization 13,025,000 4,593,079
Stock-based compensation 581,071 -
Accretion 125,599 66,850
Future income taxes (recovery) (431,203) 910,265
------------------------------------------------------------------------
14,265,383 8,920,138

Changes in non-cash
working capital (5,529,620) (2,381,211)
------------------------------------------------------------------------
8,735,763 6,538,927
------------------------------------------------------------------------

Financing:
Issue of common shares,
net of issue costs 7,285,454 31,750
Increase in bank indebtedness 979,582 4,239,825
Repayment of (proceeds from)
note receivable 221,767 (10,316)
Net change in non-cash
working capital items (35,991) -
------------------------------------------------------------------------
8,450,812 4,261,259
------------------------------------------------------------------------

Investments:
Deferred acquisition costs 12,268 (760,000)
Property, plant and equipment
expenditures (24,378,890) (11,414,292)
Proceeds on disposal of property,
plant and equipment 4,832,789 -
Asset retirement expenditures (58,578) -
Net change in non-cash
working capital items 2,405,836 1,374,106
------------------------------------------------------------------------
(17,186,575) (10,800,186)
------------------------------------------------------------------------

Change in cash - -

Cash, beginning and end of year $ - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of operations

On January 23, 2004, Aquest Explorations Ltd. ("Aquest Explorations")
acquired all of the shares of Eravista Energy Ltd. ("Eravista"), a
private company, in exchange for Aquest Explorations common shares,
resulting in Eravista becoming a wholly-owned subsidiary of Aquest
Explorations. The transaction was accounted for as a reverse takeover
and accordingly, the results of operations include those of Eravista
from inception and those of the combined companies from the date of
acquisition to December 31,2004.

Concurrent with the acquisition, the shareholders of Aquest Explorations
approved a name change from Aquest Explorations Ltd. to Aquest Energy
Ltd. ("Aquest" or the "Company") and approved a share consolidation on
the basis of one new share for every four existing common shares.

The Company's business is the exploration for, exploitation, development
and production of petroleum and natural gas reserves. All activity is
conducted in Western Canada and comprises a single business segment.

2. Significant accounting policies

The consolidated financial statements of the Company have been prepared
in accordance with Canadian generally accepted accounting principles.
The timely preparation of financial statements requires that management
make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses as they primarily relate to
unsettled transactions and events as of the date of the consolidated
financial statements. Accordingly, actual results may differ from those
estimated.

Specifically, the amounts reported for depletion, depreciation and
amortization of petroleum and natural gas properties, the provision for
asset retirement obligation costs and the ceiling test calculation are
based on estimates of proved reserves, production rates, commodity
prices, future costs and other relevant assumptions. The amounts
recorded relating to fair values of stock options and warrants issued
are based on estimates of future volatility of the Company's share
price, expected lives of options and warrants, expected dividends to be
paid by the Company and other relevant assumptions. By their nature,
these estimates are subject to measurement uncertainty and the effect on
the consolidated financial statements of changes in such estimates in
future periods could be significant.

(a) Principles of consolidation

The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All inter-company
transactions and outstanding balances have been eliminated.

(b) Petroleum and Natural Gas Operations

(i) Capitalized costs

The Company follows the Canadian accounting standards guideline on full
cost accounting for its petroleum and natural gas operations, whereby
all costs associated with the acquisition of, exploration for and the
development of, petroleum and natural gas reserves, including asset
retirement costs are capitalized and accumulated in one cost center.
Proceeds from the disposition of petroleum and natural gas properties
are accounted for as a reduction of capitalized costs, with no gain or
loss recognized unless such disposition would alter the depletion and
depreciation rate by 20% or more.

(ii) Ceiling test

Under the full cost method of accounting, a "ceiling test" is performed
to recognize and measure impairment, if any, of the carrying amount of
petroleum and natural gas properties. Impairment is recognized if the
carrying amount of petroleum and natural gas properties, less the cost
amount of undeveloped properties not subject to depletion, exceeds the
estimated undiscounted future cash flows from the Company's proved
reserves. The future cash flows are based on a forecast of prices and
costs, as provided by an independent third party. If recognized, the
magnitude of the impairment is then measured by comparing the adjusted
carrying amount to the estimated discounted future cash flows from the
Company's proved and probable reserves. The future cash flows are
discounted at the Company's risk-free interest rate, using forecasted
prices and costs, and are exclusive of indirect costs such as interest
charges, general and administrative expenses and future income taxes.

Any impairment recognized is recorded as additional depletion and
depreciation expense.

(iii) Depletion and depreciation

Depletion and depreciation of petroleum and natural gas properties is
calculated using the unit-of-production method based upon production
volumes, before royalties, in relation to total proved petroleum and
natural gas reserves as estimated by independent engineers. In
determining costs subject to depletion, the Company includes estimated
future costs to be incurred in developing proved reserves and excludes
estimated salvage values. The cost of undeveloped properties are
excluded from costs subject to depletion until it is determined that
proved reserves are attributable to the property or impairment has
occurred. For depletion and depreciation purposes, natural gas volumes
are converted to equivalent oil volumes based upon a relative energy
content of six thousand cubic feet of natural gas to one barrel of oil.

(iv) Asset retirement obligations

The fair value of estimated asset retirement obligations ("ARO") is
recognized in the consolidated financial statements in the period in
which they are identified and a reasonable estimate of fair value can be
made. The ARO includes the costs of abandonment of petroleum and natural
gas wells, dismantling and removing tangible equipment, and returning
land to its original condition. The asset retirement cost, equal to the
estimated fair value of the asset retirement obligation, is capitalized
as part of the cost of the related long-lived asset. Asset retirement
costs for petroleum and natural gas assets are amortized using the unit
of production method and are included in the depletion, depreciation and
amortization on the consolidated statement of income.

Increases in the asset retirement obligation resulting from the passage
of time are recorded as accretion on the consolidated statement of
income. Any revisions to the original estimate of cost or the timing of
the cash outflows may result in a charge to the ARO. Actual expenditures
incurred to abandon petroleum and natural gas properties reduce the ARO
liability.

(v) Joint ventures

A portion of the exploration, development and production activities is
conducted jointly with others. These financial statements reflect only
the Company's proportionate interest in such activities.

(c) Depreciation

Depreciation of other assets is provided for on a declining balance
basis at rates ranging between 10% and 30% per annum.

(d) Future income taxes

The Company uses the liability method of accounting for income taxes.
Under this method, future income tax assets and liabilities are
determined based on differences between the carrying value and tax basis
of assets and liabilities. Income tax assets are also recognized for the
benefits from tax losses and deductions that cannot be identified with
particular assets or liabilities, provided those benefits are more
likely than not to be realized. Future income tax assets and liabilities
are measured using substantially enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

(e) Flow-through shares

The resource expenditure deductions for income tax purposes related to
exploration and development activities funded by flow-through share
arrangements are renounced to shareholders. To recognize the forgone tax
benefits to the Company, the carrying value of the shares issued is
reduced by the tax effect of the tax benefits renounced to subscribers.
The tax effect is recorded at the effective date of renouncement.

(f) Stock-based compensation

The Company records stock-based compensation expense for stock options
granted to employees, officers and directors after December 31, 2002
using the fair value method. Under this method, stock-based compensation
is recorded over the vesting period of the option, based on the fair
value of the option at the grant date. The fair value of each option
granted is estimated using the Black-Scholes option pricing model that
takes into account, on the grant date: the exercise price and expected
life of the option; the price of the underlying security; the expected
volatility and dividends, if any, on the underlying security; and the
risk free interest rate.

Stock based compensation is recorded with a corresponding increase to
contributed surplus. Consideration received on the exercise of options,
together with the amount previously credited to contributed surplus, is
recognized as an increase in share capital.

The Company accounts for stock options granted to employees and
directors prior to January 1,2003 using the intrinsic value method.
Under this method, no compensation is recognized when options are
granted at prevailing market rates. Consideration received on the
exercise of an option is recorded as share capital.

(g) Per share amounts

Basic per share amounts are computed by dividing net income by the
weighted average number of common shares outstanding during the year.
Diluted per share amounts are calculated using the treasury stock
method, whereby any proceeds from stock options or other dilutive
instruments are assumed to be used to purchase common shares at the
average market price during the year.

(h) Revenue recognition

Revenue from the sale of petroleum and natural gas is recognized based
on volumes delivered to customers at contractual delivery points and
rates. The costs associated with the delivery, including operating,
transportation, and production based royalties are recognized in the
same period in which the related revenue is earned.

(i) Cash and cash equivalents

Cash and cash equivalents are comprised of cash and all investments with
a maturity date of three months or less.

(j) Goodwill

Goodwill, at the time of acquisition, represents the excess of purchase
price of a business compared to the fair value of the net assets
received. Thereafter, goodwill is assessed by the Company for impairment
annually, or more frequently, if events or changes in circumstances
indicate that the asset may be impaired. When the carrying amount of an
acquired company's goodwill exceeds the implied fair value of the
goodwill, an impairment loss is recognized in an amount equal to the
excess and will be charged to income in the period of the impairment.

(k) Comparative information

Certain comparative information has been reclassified to conform to the
current financial statement presentation.

3. Changes in accounting policies

(a) Full cost accounting

On January 1,2004 the Company amended its application of the full cost
method of accounting in accordance with amended Canadian standards. The
new standards modify the ceiling test calculation and outlines
additional disclosure requirements. Under the new ceiling test
impairment is recognized if the carrying amount of petroleum and natural
gas properties, less the cost of unproved properties not subject to
depletion (the "adjusted carrying amount"),exceeds the estimated
undiscounted cash flows expected from the production of proved reserves.
The future cash flows are based on forecast prices and costs, as
provided by an independent third party. If recognized, the amount of the
impairment is measured by comparing the adjusted carrying amount to the
estimated, discounted future cash flows of the Company's proved plus
probable reserves, based on forecast prices and costs discounted at the
Company's risk-free interest rate. For purposes of the ceiling test,
future costs are exclusive of indirect costs such as financing charges,
general and administrative expenses and income taxes. Any impairment is
recognized as additional depletion and depreciation expense.

There was no impact on the reported financial results as a result of
applying the new policy.

(b) Asset retirement obligations

Effective January 1,2004 the Company adopted the new Canadian accounting
standard on Asset Retirement Obligations. The change in accounting
policy was applied retroactively, with restatement of prior period
results. The new standard requires liability recognition for retirement
obligations associated with long-lived assets, such as petroleum and
natural gas wells and related equipment. The asset retirement obligation
is recognized in the period it is incurred when a reasonable estimate of
the fair value can be made.

Prior to implementation of the new standard, the Company estimated a
provision for future site restoration costs and recognized them in the
financial statements on a unit-of-production method based on the
remaining life of proved reserves. The annual provision was included in
depletion and depreciation expense and was accumulated as a site
restoration liability on the balance sheet. Actual restoration
expenditures were charged to the accumulated obligation as incurred.



The adoption of the new standard resulted in the following effects on
the Company's results for the year ended December 31,2003:

Balance Sheet As Reported Change As Restated
------------------------------------------------------------------------
Property, plant and
equipment $ 42,163,533 $ 1,232,844 $ 43,396,377
Accumulated depletion
and depreciation (11,164,240) (404,662) (11,568,902)
Asset retirement obligations - 1,418,704 1,418,704
Future removal and site
restoration costs 904,553 (904,553) -
Future income taxes 5,268,900 103,316 5,372,216
Retained earnings, end
of year $ 6,906,563 $ 210,715 $ 7,117,278

Statement of Income
------------------------------------------------------------------------
Depletion and depreciation $ 4,783,630 $ (190,551) $ 4,593,079
Accretion expense - 66,850 66,850
Future Income taxes 869,568 40,697 910,265
Net Income 3,266,940 83,004 3,349,944
Retained earnings,
beginning of year $ 3,639,623 $ 127,711 $ 3,767,334
------------------------------------------------------------------------
------------------------------------------------------------------------


(c) Stock based compensation

In 2003, the Company elected to prospectively adopt new Canadian
accounting standards for Stock-based Compensation and Other Stock-based
Payments. Under the transitional provisions of the standard, the Company
accounts for all stock options granted after December 31, 2002 using the
fair value method while stock options granted to employees and directors
during 2002 are accounted for using the intrinsic value method. The
Company discloses pro forma stock based compensation expense and pro
forma net earnings that would have resulted had the fair value method
been used to account for stock options granted to employees and
directors during 2002.

For the year ended December 31,2003,the adoption of the new standard had
no effect on reported financial results.

(d) Transportation costs

In 2004 the Company amended the presentation of transportation costs for
delivery of petroleum and natural gas products to report these costs as
a separate expense. Previously these costs were classified as a
reduction of revenue. Revenue and transportation costs both increased by
$332,031 for the year ended December 31, 2003, from previously reported
amounts as a result of this new policy. There was no impact on net
income or cash flow from operations during 2003 as a result of this
change.

4. Business combination

Pursuant to a Plan of Arrangement effective January 23, 2004, Aquest
Explorations acquired all of the issued and outstanding shares of
Eravista. Upon the arrangement becoming effective, the former
shareholders of Eravista owned approximately 60% of the issued and
outstanding shares of the Company. Accordingly, the business combination
has been accounted for as a reverse takeover, using the purchase method,
with Eravista as the acquirer.

As consideration, Aquest Explorations issued 3.4 common shares for each
common share of Eravista. The fair value of the share consideration,
$0.52 per share, was determined based on the adjusted trading value of
Aquest Explorations' shares on the TSX Venture Exchange. The aggregate
purchase price of $24,484,926 was comprised of 65,330,736 common shares
(pre-consolidation) of Aquest Explorations,$8,000,000 cash and $347,000
in transaction fees. The fair value of the assets acquired and the
liabilities assumed on January 23,2004 are as follows:



Current assets $ 1,745,820
Property, plant and equipment 25,080,670
Goodwill 16,613,598
Bank indebtedness (6,167,694)
Accounts payable and accrued liabilities (5,959,340)
Long term debt (2,500,000)
Asset retirement obligation (799,849)
Future income taxes (3,528,279)
------------------------------------------------------------------------
$ 24,484,926
------------------------------------------------------------------------
------------------------------------------------------------------------
Consideration paid
Shares (note 9(b)) $ 22,149,566
Options and warrants assumed on acquisition (note 10) 1,988,360
Transaction costs 347,000
------------------------------------------------------------------------
$ 24,484,926
------------------------------------------------------------------------
------------------------------------------------------------------------


All unvested options under Aquest Explorations' stock option plan
outstanding on January 22,2004 vested immediately and were assumed as
outstanding options of Aquest. Of Eravista's 1,685,000 outstanding
options 1,465,328 were exercised prior to closing. The remaining 219,672
options were repurchased by Eravista for proceeds of $180,029.These
proceeds and severance costs relating to Eravsita's employees of $61,200
have been expensed in the current year.



5. Property, plant and equipment

2004
------------------------------------------------------------------------
Accumulated
Depletion & Net Book
Cost Depreciation Value
------------------------------------------------------------------------
Petroleum and natural
gas properties $ 88,366,655 $ 24,482,388 $ 63,884,267
Other 306,211 111,514 194,697
------------------------------------------------------------------------
$ 88,672,866 $ 24,593,902 $ 64,078,964
------------------------------------------------------------------------
------------------------------------------------------------------------


2003
(Restated note 3(b))
------------------------------------------------------------------------
Accumulated
Depletion & Net Book
Cost Depreciation Value
------------------------------------------------------------------------
Petroleum and natural
gas properties $ 43,287,223 $ 11,506,923 $ 31,780,300
Other 109,154 61,979 47,175
------------------------------------------------------------------------
$ 43,396,377 $ 11,568,902 $ 31,827,475
------------------------------------------------------------------------
------------------------------------------------------------------------


During the year ended December 31, 2004, the Company capitalized general
and administrative expenses in the amount of $1,004,000 (2003 -
$388,461) and stock based compensation costs of $387,300 (2003 - nil)
related to exploration and development activities.

Estimated future development costs of $237,300 were included in the
calculation of depletion expense for the year ended December 31,2004
(2003 - $187,000).As at December 31,2004 undeveloped land costs of
$2,938,000 were excluded from assets subject to depletion (2003 -
$2,320,400).

The Company performed a ceiling test calculation at December 31, 2004 to
assess the recoverable value of the property, plant and equipment. The
oil and gas prices used in the calculation are based on the January 1,
2005 commodity price forecast of our independent reserve evaluators. The
benchmark prices used in the December 31,2004 ceiling test calculation
are as follows:



Petroleum Natural Gas
------------------------------------------------------------------------
Company AECO-C Company
WTI Average Spot Price Average
------------------------------------------------------------------------
(US$/bbl) (Cdn$/bbl) (CDN$/GJ) (Cdn$/mcf)
2005 42.00 43.66 6.45 6.94
2006 39.50 41.44 6.20 6.70
2007 37.00 38.78 6.05 6.50
2008 35.00 37.30 5.80 6.22
2009 34.50 36.46 5.70 6.12
2010 34.30 36.71 5.60 6.01
------------------------------------------------------------------------


Prices increase at rates of 1.5 to 3.0 percent per year after 2010.In
this price forecast US dollars have been converted to Canadian dollars
at an exchange rate of 0.83.

Based on these assumptions, the carrying value of property, plant and
equipment exceeded the undiscounted value of future net revenues from
the Company's proved reserves at December 31, 2004 by approximately
$430,000. No impairment write down was recorded as the discounted future
cash flows from proved plus probable reserves were still in excess of
the carrying value of petroleum and natural gas properties.

6. Credit Facilities and long-term debt

(a) Bank indebtedness

The Company has a revolving production loan with a Canadian chartered
bank to a maximum of $20,000,000.The loan bears interest at the bank's
prime rate plus an applicable margin of between 0.25 to 1.25 percent.
The margin is adjusted quarterly and is calculated based on the previous
quarter's net debt to cash flow ratio. As at December 31,2004 the
applicable margin was 0.50%.The loan is due on demand and is secured by
floating debentures totaling $100,000,000 over all assets of the
Company, promissory notes totaling $43,000,000 and a general security
agreement covering all present and after acquired property. Under the
terms of this agreement the Company is required to meet certain
financial covenants.

(b) Long term debt

Long term debt consists of a debenture in the amount of $2,500,000
issued to a merchant bank and bears interest at 8 percent per annum. The
debenture matures February 2006, is secured by the assets of the Company
and is subordinated to the revolving production loan. The debenture has
an interest bonus equal to 10 percent of the weighted average amount
outstanding during the period on each anniversary date, which may be
accrued to the principal, at the option of the Company. Repayment of the
debenture before the end of the three-year term would subject the
Company to a penalty equal to six months interest.



7. Asset retirement obligations

The following table presents the reconciliation of the beginning and
ending carrying amount of the asset retirement obligations:

2003
(restated -
2004 Note 3(b))
------------------------------------------------------------------------
Balance, beginning of year $ 1,418,704 $ 1,116,284
Liabilities incurred 1,053,197 235,570
Liabilities settled on asset disposal (57,960) -
Liabilities settled for cash (58,578) -
Accretion expense 125,599 66,850
------------------------------------------------------------------------
Balance, end of year $ 2,480,962 $ 1,418,704
------------------------------------------------------------------------
------------------------------------------------------------------------


Total estimated future asset retirement costs of $3,464,000 (2003 -
$1,841,000) have been discounted using an average credit-adjusted risk
free rate of 6 percent. These obligations are to be settled based on the
economic lives of the underlying assets, which currently extend up to 16
years into the future and will be funded from general corporate
resources at the time of abandonment.



8. Future income taxes

The provision for income tax differs from that which would be obtained
from applying the combined Canadian federal and provincial income tax
rate to income before taxes. The difference results from the following:

2003
2004 (restated - Note 3(b))
------------------------------------------------------------------------
Corporate tax rate 38.62% 40.62%
Expected income tax expense $ 215,156 $ 1,747,037
Increase (decrease) resulting from:
Non-deductible crown charges 898,040 637,408
Resource allowance (1,008,308) (955,910)
Change in effective tax rate applied (891,062) (624,082)
Capital taxes 23,398 40,720
Non-deductible stock based
compensation expense 373,996 -
Other (19,025) 105,812
------------------------------------------------------------------------
Income tax provision $ (407,805) $ 950,985
------------------------------------------------------------------------
------------------------------------------------------------------------

Included in other for 2003 is $110,000 related to a reduction of the
Company's resource pools as a result of reassessments of the 2000, 2001,
and 2002 federal income tax returns by the Canada Revenue Agency.

The following table identifies the individual components of the
Company's future income tax liability at December 31,2004 and 2003:

2003
2004 (restated - Note 3(b))
------------------------------------------------------------------------
Liability related to carrying amount
of property and equipment in excess
of available tax deductions $ 7,259,473 $ 5,877,546
Asset retirement obligations (813,756) (465,330)
Benefit of undeducted share issuance
costs (420,918) -
Non-capital losses carried forward (1,640,224) -
Partnership deferral 4,178,797 -
Alberta royalty tax deduction carry
forward (201,080) (40,000)
------------------------------------------------------------------------
$ 8,362,292 $ 5,372,216
------------------------------------------------------------------------
------------------------------------------------------------------------

As at December 31,2004,the Company has available non-capital losses,
which may be applied to reduce future year's taxable income. These non
capital losses expire as follows:

Expiry date Amount
------------------------------------------------------------------------
2005 $ 293,000
2006 595,000
2007 472,000
2009 22,000
2011 2,246,000
------------------------------------------------------------------------
$ 3,628,000
------------------------------------------------------------------------
------------------------------------------------------------------------

9. Share Capital

(a) Authorized:

Unlimited number of common shares without par value
Unlimited number of preferred shares, issuable in series

(b) Issued and outstanding:

Common Voting Shares Number of Shares Amount
------------------------------------------------------------------------
Balance, December 31, 2002 7,697,468 $ 804,659
Stock options exercised 35,000 31,750
------------------------------------------------------------------------
Balance, December 31, 2003 7,732,468 836,409
Shares issued on conversion of
class B shares 14,257,753 7,712,378
Stock options exercised 1,465,328 1,031,500
------------------------------------------------------------------------
23,455,549 9,580,287
----------------------------------------------------------
----------------------------------------------------------

Aquest Explorations balance at
January 23, 2004 47,396,655 -
Issued on business combination (note 4) 65,330,736 22,149,566
Share consolidation, 1:4 (84,545,544) -
Issued for cash 2,199,818 6,049,500
Stock options exercised 503,750 1,605,693
Warrants Exercised 7,159 15,347
Share issue costs (net of tax effect
of $153,000) - (679,125)
------------------------------------------------------------------------
Balance, December 31, 2004 30,892,574 $ 38,721,268
------------------------------------------------------------------------
------------------------------------------------------------------------


Under reverse takeover accounting, the authorized and issued share
capital is that of Aquest while the stated value is that of Eravista. As
at December 31, 2003 Eravista had 14,257,753 Class B voting shares
outstanding with a stated value of $7,712,378. Immediately prior to
completion of the business combination with Aquest Explorations, the
shares were converted into common voting shares of Eravista on a
one-for-one basis. Aquest does not have any Class B shares authorized.

(c) Stock options:

The Company has a stock option plan that provides for the issuance of
options to employees, officers, directors and consultants. Under the
plan, the exercise price of options granted cannot be less than the
closing market price on the day immediately preceding the date of grant.
Options typically vest over a three-year period and expire five years
from the date of grant. The aggregate number of shares to be issued upon
exercise of all options granted under the plan may not exceed the
maximum number of shares permitted under the rules of any stock exchange
on which the Company's common shares are listed. A summary of the
Company's options outstanding as at December 31,2004 and 2003 and the
changes for the years ending on those dates is presented below:



2004 2003
------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Number Exercise Number Exercise
of Options Price of Options Price
------------------------------------------------------------------------
Outstanding
- beginning of year 1,685,000 $ 0.81 1,915,000 $ 0.84
Eravista options exercised
on acquisition (1,465,328) 0.81 - -
Eravista options
repurchased for cash (219,672) 0.81 - -
Aquest Exploration options
assumed on business
combination (note 4) 760,000 1.57 - -
Granted 3,079,950 2.45 15,000 1.25
Exercised (503,750) 1.23 (35,000) 0.91
Cancelled (154,500) 2.53 (210,000) 1.08
------------------------------------------------------------------------
Outstanding - end of year 3,181,700 $ 2.43 1,685,000 $ 0.81
------------------------------------------------------------------------
Exercisable - end of year 237,500 $ 2.22 1,131,933 $ 0.42
------------------------------------------------------------------------
------------------------------------------------------------------------

The following table summarizes information about the stock options
outstanding and exercisable at December 31,2004:


Weighted-average
Remaining Weighted-
Outstanding Contractual Average
Exercise price Options Life in Years Exercise Price
------------------------------------------------------------------------
$1.20 - $1.99 230,450 4.7 $ 1.90
$2.00 - $2.55 2,951,250 4.2 2.47
------------------------------------------------------------------------
3,181,700 4.2 $ 2.43
------------------------------------------------------------------------
------------------------------------------------------------------------


(d) Stock based compensation

The Company has calculated its stock based compensation expense using
the Black Scholes option pricing model to estimate the fair value of
stock options issued at the date of grant. The weighted average fair
market value of options granted during 2004 and the relevant assumptions
used are as follows:



Weighted average fair value per option $ 1.32
Risk-free interest rate (%) 3.65
Volatility (%) 60
Expected Life (years) 5


On a pro forma basis, had compensation cost for stock options been
recorded based on the fair value method for options granted during
2002,the effect would have been as follows:



2004 2003
------------------------------------------------------------------------
Compensation cost $ 70,400 $ 54,200
Net income - as reported $ 964,916 $ 3,349,944
Net income - pro forma $ 894,516 $ 3,295,744
Net income per share - basic
As reported $ 0.03 $ 0.21
Pro forma $ 0.03 $ 0.20
------------------------------------------------------------------------
------------------------------------------------------------------------

There was no change in diluted net income per share for either year as
a result of the pro forma adjustment.

(e) Warrants:

The following table summarizes information about the warrants
outstanding and exercisable at December 31,2004:

Weighted-
Number of Average
Warrants Exercise Price
------------------------------------------------------------------------
Balance outstanding December 31,2003 - -
Aquest Exploration warrants assumed
on business combination (note 4) 606,915 $ 2.02
Exercised for cash (7,159) 2.14
Expired (349,756) 2.60
------------------------------------------------------------------------
Balance outstanding and exercisable,
December 31,2004 250,000 $ 1.20
------------------------------------------------------------------------
------------------------------------------------------------------------


Warrants outstanding at December 31,2004 are scheduled to expire on
February 20,2006.Each warrant entitles the holder to acquire one common
share at a price of $1.20 per common share.

(f) Flow-through shares:

Pursuant to flow-through share offerings completed during 2003, Aquest
Explorations renounced $8,300,000 of qualifying expenditures effective
December 31, 2003. As at December 31, 2004, the Company has incurred all
of the qualifying expenditures in relation to these offerings.

10. Contributed Surplus

A summary of the change in the Company's contributed surplus balance for
the year ended December 31,2004 is as follows:



Amount
------------------------------------------------------------------------
Balance, December 31,2003 -
Options and warrants acquired in business
combination (note 4) $ 1,988,360
Options and warrants exercised (985,115)
Options granted 968,321
------------------------------------------------------------------------
Balance, December 31,2004 $ 1,971,566
------------------------------------------------------------------------
------------------------------------------------------------------------


11. Per share amounts

2004 2003
------------------------------------------------------------------------
Earnings per share
Basic $ 0.03 $ 0.21
Diluted $ 0.03 $ 0.19
Weighted average number of shares outstanding
Basic 28,990,373 16,332,684
Diluted 29,163,869 17,255,323
------------------------------------------------------------------------
------------------------------------------------------------------------


For the year ended December 31, 2004, 173,500 shares (2003 - 922,600)
were added to the weighted average number of common shares outstanding
for the dilutive effect of stock options and warrants.

12. Related party transactions

At December 31,2004,accounts receivable include $60,000 due from
companies controlled by an officer and two directors of the Company.
These amounts arise as a result of common Eravista joint venture
interests held by the officer and two directors.

A director of the Company is a partner at a law firm that provides legal
services to the Company. During 2004, the Company paid a total of
$385,400 (2003 - $11,500) to this firm for legal fees and disbursements.

These transactions have been recorded under the same terms and
conditions as transactions with unrelated parties.

13. Commitments

The company has a lease commitment for its office space through to March
2009. The annual amount due under this commitment, including rent and
office space is approximately $260,000.

14. Financial instruments

Fair values:

The carrying values of the financial assets and the financial
liabilities approximate their fair value due to the relatively short
periods to maturity of the instruments.

Foreign currency exchange risk:

While substantially all of the Company's sales are denominated in
Canadian dollars, the market price in Canada for petroleum and natural
gas products is impacted by changes in the exchange rate between the
Canadian and United States dollar.

Credit risk:

A portion of the Company's accounts receivable are with joint venture
partners in the oil and gas industry and are subject to normal industry
credit risks. Purchasers of the Company's petroleum and natural gas
production are subject to an internal credit review designed to minimize
the risk of non-payment.

Interest rate:

The Company is exposed to interest rate risk to the extent that its bank
indebtedness is at a floating rate of interest.

Commodity price risk management:

The Company uses various types of financial and physical sales contracts
to manage risk related to fluctuating commodity prices. At December
31,2004,the Company had the following fixed price physical and costless
collar arrangements:



Volume Price
------------------------------------------------------------------------
Natural Gas
November 2004 to March 2005 3000 GJ/d $8.05/GJ
Crude Oil
January to December 2005 100 bbl/d $45.40US to $51.40US/bbl
February to December 2005 100 bbl/d $46.80US/bbl
------------------------------------------------------------------------
------------------------------------------------------------------------


15. Supplemental cash flow information

2004 2003
------------------------------------------------------------------------
Changes in non-cash working capital
Accounts receivable $(8,873,705) $ (343,808)
Accounts payable and accrued liabilities 6,215,150 (663,297)
Prepaid expenses and deposits (501,220) -
------------------------------------------------------------------------
$(3,159,775) $(1,007,105)
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash payments included in the statement
of cash flows
Taxes $ 11,109 $ 24,540
Interest and financing charges $ 904,095 $ 305,782
------------------------------------------------------------------------
------------------------------------------------------------------------


-30-

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