Arrow Energy Ltd.
TSX VENTURE : AOF

Arrow Energy Ltd.

August 29, 2005 15:52 ET

Arrow Energy Ltd. Announces Filing of Its Financial Statements and Management's Discussion and Analysis for the Six Months Ended June 30, 2005 and 2004

CALGARY, ALBERTA--(CCNMatthews - Aug. 29, 2005) -

Not for dissemination in the United States of America

Arrow Energy Ltd. (TSX VENTURE:AOF) ("Arrow" or the "Company") (formerly Red Chip Inc.) is pleased to announce its financial and operating results for the six month periods ending June 30, 2005 and 2004.



HIGHLIGHTS

Three months Six months
June 30 June 30
OPERATIONS 2005 2004 2005 2004
------------------------------------
Reported Production
Natural gas - for the year 129,811 43,546 262,480 77,610
Natural gas (Mcf/d) 1,426 478 1,450 426
Oil equivalent (BOE/d) (6:1) 238 80 242 71

Prices
Gas ($/Mcf) $ 7.45 $ 7.05 $ 7.31 $ 6.77

Per BOE
Revenue, net of royalties & ARTC $ 36.36 $ 34.59 $ 35.35 $ 32.56
Operating costs $ 9.86 $ 4.83 $ 8.53 $ 4.22
Field Net Back $ 26.50 $ 29.76 $ 26.82 $ 28.34
Depletion, depreciation & accretion $ 20.56 $ 12.61 $ 19.90 $ 14.01


Operational Review

Arrow Energy Ltd. is pleased to report that the Company tied-in two new operated wells during the second quarter of 2005. In spite of these two new wells coming on stream, sales volumes over the three months ended June 30, 2005 were essentially unchanged from the first quarter of 2005. The incremental sales volumes brought on stream led to only a temporary increase in volumes as a result of lost production, primarily from four wells (1.225 net), at the Company's Redwater property. Field operations designed to reactivate production at these wells is ongoing at this time, however, it is anticipated that the Company will have to re-drill one of these wells (35% W.I) to capture the existing reserves. Current Company production remains at 245 BOE/d.

At Sakwatama, Arrow recently production tested a gas well (87.5% W.I., Arrow operated) establishing commercial viability and are proceeding with tie-in operations. It is anticipated that production will start flowing in early October 2005. At Westlock, the Company drilled and cased (40% W.I.) an exploratory test of a seismic anomaly resulting in the discovery of 10.9 meters of natural gas pay in two separate zones. The well is located close to Arrow interest infrastructure and the company expects to complete and tie-in this well in a timely fashion. At Ghostpine (50% W.I., Arrow operated) another gas well is currently being evaluated and has tested natural gas. Expected production rates from these wells will be reported once evaluation is completed.

Arrow has submitted its sour gas (H2S) release rate calculation and supporting documents to the Alberta Energy and Utilities Board (AEUB) regarding to the drilling of the Company's "High Impact" Leduc Pinnacle reef prospect (50% W.I., Arrow operated) at Westlock. The Company anticipates receiving approval and a license to drill by the end of September 2005. Management is excited to see progress towards the drilling of this well, as it is the type of opportunity that the Company would like to expose to its shareholders and which holds considerable upside potential.

Outlook

The second quarter of 2005 has proved to be challenging. The loss of production and substantial cost overruns at our non-operated Redwater and Westlock properties, in conjunction with historic chronic under-funding, has hindered the Company's ability to grow at a satisfactory pace. Substantial amounts of capital will be required in the short term to re-drill certain wells and to continue to exploit the Company's list of prospects, which has now grown to over 20 potential locations on lands in which Arrow has an interest.

It is Management's intention to enter into a strategic process to put Arrow firmly on a growth profile by providing the appropriate level of funding for an aggressive junior exploration and production company and maximize to its value.

The Company has engaged Canaccord Capital Corporation to advise Management and the Board of Director's with regards to identifying strategic alternatives that will facilitate the exploitation of the opportunities Arrow has on its books, while reducing the risk for our shareholders.

This press release includes forward-looking statements and assumptions respecting the Company's strategies, future operations, expected financial results, financing sources, commodity prices, costs of production and quantum of oil and natural gas reserves and discusses certain issues, risks and uncertainties that can be expected to impact on any of such matters. By their nature, forward-looking statements are subject to numerous risks and uncertainties that can significantly affect future results. Actual future results may differ materially from those assumed or described in such forward-looking statements as a result of the impact of issues, risks and uncertainties whether described herein or not, which the Company may not be able to control. The reader is therefore cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any intention or obligation to update or revise these forward-looking statements, as a result of new information, future events or otherwise.

Notes on Abbreviations

"BOE" means a barrel of oil equivalent on the basis of 1 BOE to 6 Mcf of natural gas. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 1 BOE for 6 Mcf is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

"BOE/d" means a barrel of oil equivalent per day.

Mcf means a thousand cubic feet of natural gas. Mcf/d means Mcf per day.

Mmcf means a million cubic feet of natural gas. Mmcf/d means Mmcf per day.

W.I. means working interest

PV means present value

Common shares outstanding - 14,138,914

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis of financial results and related data is prepared effective August 19, 2005, is reported in Canadian dollars and has been prepared in accordance with Canadian generally accepted accounting principles. It should be read in conjunction with the unaudited interim financial statements for the six months ended June 30, 2005 and the financial statements as at and for the year ended December 31, 2004.

This disclosure includes forward-looking statements and assumptions respecting the Company's strategies, future operations, expected financial results, financing sources, commodity prices, costs of production and quantum of oil and natural gas reserves and discusses certain issues, risks and uncertainties that can be expected to impact on any of such matters. By their nature, forward-looking statements are subject to numerous risks and uncertainties that can significantly affect future results. Actual future results may differ materially from those assumed or described in such forward-looking statements as a result of the impact of issues, risks and uncertainties whether described herein or not, which the Company may not be able to control. The reader is therefore cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any intention or obligation to update or revise these forward-looking statements, as a result of new information, future events or otherwise.

Notes on Abbreviations

"BOE" means a barrel of oil equivalent on the basis of 1 BOE to 6 Mcf of natural gas. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 1 BOE for 6 Mcf is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

"BOE/d" means a barrel of oil equivalent per day.

Mcf means a thousand cubic feet of natural gas. Mcf/d means Mcf per day.

Mmcf means a million cubic feet of natural gas. Mmcf/d means Mmcf per day.

W.I. means working interest

PV means present value

Arrow is a Calgary, Alberta based public company engaged primarily in the exploration for and production of petroleum and natural gas reserves in Western Canada. The Company's common shares are listed on the TSX Venture Exchange under the trading symbol "AOF".

Selected Financial Information

The table below sets out selected financial information for Arrow for the six months ended June 30, 2005 and 2004.



Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
-------------------------------------------
$ $ $ $
Revenue (net of royalties) 786,661 250,861 1,546,490 428,786
Working Capital (24,979) 178,152 (24,979) 178,152
Shareholders' Equity 8,117,646 5,398,978 8,117,646 5,398,979
Cash flow from operations (2) 282,757 (85,245) 616,077 (210,866)
Per share basic 0.02 (0.01) 0.04 (0.02)
Per share diluted (1) 0.02 N/A 0.04 N/A
Net Income (Loss) (167,576) 41,753 (237,888) (152,146)
Per share basic (0.01) 0.00 (0.02) (0.02)
Per share diluted (1) N/A 0.00 N/A N/A
Capital Assets 10,034,467 6,136,911 10,034,467 6,136,911
Long-term liabilities 1,891,842 916,084 1,891,842 916,084

Notes:

(1) With negative cash flow or a net loss, a diluted per share
calculation would be anti-dilutive and is therefore not applicable

(2) Cash flow from operations and cash flow per share are non-GAAP
terms that represent cash generated from operating activities
before changes in non-cash working capital and other operating
items. Arrow's cash flow from operations may not be comparable to
other companies. Arrow considers cash flow a key measure of
performance as it demonstrates Arrow's ability to generate the cash
flow necessary to fund future capital investments.


Quarterly Information

The following table summarizes revenue from petroleum and natural gas sales, net of royalties, cash flow from operations and net income for Arrow for the periods indicated.



Quarterly Financial Data

2005 2004
------------------------------------ -----------------------------------
Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
------------------ -----------------------------------
Production
Revenue,
net of
royalties 781,467 753,782 582,564 223,535 250,738 174,888
Cash Flow (Loss) 282,757 249,226 54,063 3,616 (85,246)(124,332)
Per share basic $ 0.02 $ 0.02 $ 0.01 $ 0.00 $ (0.01) $ (0.01)
Per share
diluted (1) $ 0.02 $ 0.02 $ 0.01 $ 0.00 N/A N/A
Net Income (Loss) (167,576) (70,312)(340,537)(184,188) 41,751 (193,899)
Per share basic $ (0.01) $ (0.01) $ (0.03) $ (0.02) $ 0.00 $ (0.02)
Per share
diluted (1) N/A N/A N/A $ 0.00 N/A N/A



2003
------------------------------------
Dec 31 Sep 30
-----------------
Production
Revenue,
net of
royalties 113,046 28,222
Cash Flow (Loss) (65,128)(128,105)
Per share basic $ (0.01) $ (0.03)
Per share
diluted (1) N/A N/A
Net Income (Loss) (146,085)(150,676)
Per share basic $ (0.02) $ (0.03)
Per share
diluted (1) N/A N/A

Notes:

(1) With negative cash flow or a net loss, a diluted per share
calculation would be anti-dilutive and is therefore not applicable.

(2) Cash flow from operations and cash flow per share are non-GAAP
terms that represent cash generated from operating activities
before changes in non-cash working capital and other operating
items. Arrow's cash flow from operations may not be comparable to
other companies. Arrow considers cash flow a key measure of
performance as it demonstrates Arrow's ability to generate the cash
flow necessary to fund future capital investments.


Financial Review

Gross revenues for the three and six month periods ended June 30, 2005 were $971,209 and $1,926,064 compared to $314,094 and $525,138 for the same period in 2004. The increase in gross revenue resulted from an increase in daily production from 80 Boe/d for the second quarter in 2004 to 238 Boe/d in 2005. In addition, the average price received on natural gas sales was $7.45 per Mcf in 2005 as compared to $7.05 for the second quarter 2004. This represents a 198% increase in daily production over the previous year and a 6% price increase. Arrow derives all its revenue from the sale of natural gas and a small amount of natural gas liquids and oil.

For the three months and six months ended June 30, 2005, Arrow's royalty expense, net of ARTC, was $189,742 or 20% and $390,815 or 20% of gross sales respectively. For the comparable periods in 2004, the Company's royalty expense, net of ARTC, was $63,356 or 20% and $99,512 or 19% of gross sales respectively.

Operating expenses for the three and six month periods were $213,405 and $373,059 ($9.86/boe and $8.53/boe respectively) compared to $27,559 and $43,235 ($4.83/boe and $4.22/boe respectively) for the same period in 2004. Transportation costs were $33,899 and $54,509 for the three and six months ended June 30, 2005 compared to $7,444 and $11,874 during the same periods in 2004. For the first six months of 2005 operating expenses increased 102 percent per boe and transportation costs increased 36 percent per boe compared to the same time period in 2004. The increase in expense per boe is mainly attributable to chemicals required for the sour gas wells brought on stream in the second half of 2004 as well as the further processing required to bring the gas to pipeline specifications. Unit operating expenses increased 14% for the three months ended June 30, 2005 compared to the first quarter 2005. The increase in the cost to operate a unit of production is due to workovers performed during the second quarter.



Operating expenses and transportation costs
------------------------------------------------------------------------
Three months ended Six months ended
June 30 % June 30 %
2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
Operating expenses
($000) 213.4 27.5 6.76 373.0 43.2 7.63
Operating expenses
($/boe) 9.86 4.83 1.04 8.53 4.22 1.02
------------------------------------------------------------------------

------------------------------------------------------------------------
Transportation costs
($000) 33.9 7.4 3.58 54.5 11.8 3.62
Transportation costs
($/boe) 1.57 1.02 0.54 1.25 0.92 0.36
------------------------------------------------------------------------
------------------------------------------------------------------------


The Company has capitalized $71,146 and $140,212 in general and administrative expense for the three and six month periods ended June 30, 2005 (2004- $165,490 and $248,242). General and administrative expenses, net of capitalization, averaged $12.66 and $11.83 per boe for the three and six months ended June 30, 2005 representing a decrease of 60 and 68 percent when compared to $31.91 and $37.01 during the same periods in 2004.

The Company operated with a complete staff for the entire 2004 year and at December 31, 2004 Arrow employed seven full-time staff and three consultants. This level of staffing remained unchanged through the second quarter of 2005.



General and Administrative Expenses
------------------------------------------------------------------------
Three months ended Six months ended
June 30 % June 30 %
($000)s 2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
G & A expense, gross 345 397 (0.13) 658 724 (0.09)
Capitalized overhead (71) (165) (0.57) (140) (248) (0.44)
------------------------------------------------------------------------
G & A expense, net $ 274 $ 231 0.18 $ 517 476 0.09
------------------------------------------------------------------------
G & A expense per BOE,
net $12.66 $31.91 (0.60) $11.83 $37.01 (0.68)
------------------------------------------------------------------------
------------------------------------------------------------------------


Interest expense of $9,053 for the three months ended June 30, 2005 and $6,780 for the three months ended June 30, 2004 represents Part XII.6 tax on flow-through expenditures incurred in the year subsequent to the year in which the expenditures were renounced. For the second quarter of 2005, expenditures not incurred bear a monthly tax at prescribed rates.

Pursuant to two flow-through share agreements dated July 16, 2004 and December 23, 2004, Arrow issued 2,000,000 flow through common shares at a price of $1.25 per share and 429,950 flow through common shares at a price of $0.95 per share respectively. The Company has agreed to renounce resource expenditures of $2,908,453 for the year ended December 31, 2004. The company is obligated to incur approximately $354,000 of eligible expenses by December 31, 2005.

Pursuant to the flow-through share agreement dated January 28, 2005, Arrow issued 526,500 common shares at a price of $0.95 per share and agreed to renounce resource expenditures of $500,175 by December 31, 2005. As of June 30, 2005, none of the expenditures had been incurred. The proceeds from the financings are being used for the Company's 2005 central Alberta capital expenditure program.

Depletion and depreciation increased from $101,317 in the second quarter of 2004 to $458,021 in the second quarter of 2005. Depletion expense was calculated on production of 129,811 Mcf and a depletion base of $9,036,207 resulting in an average depletion of $20.56 per BOE or $444,719. This represents a 63% increase per BOE over the comparable period for 2004 of $12.61 per BOE. Depreciation expense on office equipment, furniture and computer costs was $3,596, and the provision for accretion expense was $3,582.

Arrow has a net loss, after tax, of $(167,576) and $(237,888) for the three and six month periods ended June 30, 2005 or $(0.01) and $(0.02) per share respectively, compared to a net income of $41,753 and a net loss of $(152,146) or $(0.00) and $(0.02) per share for the same period in 2004.

Outstanding Share Capital

To further capitalize Arrow, the following placement was completed in the first quarter of 2005 for total gross proceeds of $500,175.

On January 28, 2005, Arrow completed a non-brokered private placement for gross proceeds of $500,175. Pursuant to the private placement, Arrow issued 526,500 flow-through common shares at $0.95 per share for gross proceeds of $500,175.

Arrow is authorized to issue an unlimited number of common shares and an unlimited number of preferred shares, in series. The following securities of Arrow were outstanding as at August 19, 2005:

- 14,138,914 common shares;

- 555,500 warrants exercisable to acquire common shares at a price of $1.15 each until December 23, 2005;

- 60,000 warrants exercisable to acquire common shares at a price of $0.80 each until May 3, 2007; and

- 850,000 options to purchase common shares at a weighted average exercise price of $0.81 each.

Results of Operations

With a focus on natural gas, the management team has adopted a balanced approach to risk. Arrow's primary area of exploration is in central and southern Alberta where approximately 90% of its capital budget is directed. Arrow is pursuing natural gas zones at depths ranging from 500 to 1,500 meters with capital costs of $250,000 to $400,000 per well. These prospects are low to medium risk and have good access to pipelines. The remaining 10% of capital expenditures are directed towards high impact wells, 5 to 10 Mmcf of natural gas per day, and where Arrow can leverage its intellectual capital. Risk and capital are limited through prospect generation, land acquisitions and farm outs.

Production Summary

The table below provides a summary of Arrow's natural gas production and prices received for the three and six month periods ended June 30, 2005 and 2004.



Three months Six months
June 30 June 30
OPERATIONS 2005 2004 2005 2004
----------------------------------------
Reported Production
Natural gas - for the year 129,811 43,546 262,480 77,610
Natural gas (Mcf/d) 1,426 478 1,450 426
Oil equivalent (BOE/d) (6:1) 238 80 242 71

Prices
Gas ($/Mcf) $ 7.45 $ 7.05 $ 7.31 $ 6.77

Per BOE
Revenue, net of royalties
& ARTC $ 36.36 $ 34.59 $ 35.35 $ 32.56
Operating costs $ 9.86 $ 4.83 $ 8.53 $ 4.22
Field Net Back $ 26.50 $ 29.76 $ 26.82 $ 28.34
Depletion, depreciation
& accretion $ 20.56 $ 12.61 $ 19.90 $ 14.01

Notes: (1) BOE means barrel of oil equivalent on the basis of 1 BOE to
6 Mcf of natural gas. BOEs may be misleading, particularly if
used in isolation. A BOE conversion ratio of 1 BOE for 6 Mcf is
based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value
equivalency at the wellhead.


Capital Expenditures

The following table summarizes the amounts expended, net of recovered overhead, on land, exploration and drilling, development and facilities for Arrow for the three and six month periods ended June 30, 2005 and 2004.



Three months Six months
June 30 June 30
Expenditures 2005 2004 2005 2004
------------------------------------------------------------------------
Crown lease acquisitions $ 37,766 $ 163,467 $ 205,222 $ 423,816
Geological & geophysical 94,988 117,244 168,399 270,635
Intangible drilling 76,395 238,832 601,816 666,442
Tangible completion 94,865 456,393 163,110 544,634
Capitalized G & A 71,146 165,490 140,212 248,242
--------------------------------------------
$ 375,159 $1,141,426 $1,278,759 $2,153,769
--------------------------------------------
--------------------------------------------


Drilling Activity

The following table summarizes the results of the wells that Arrow drilled or participated in drilling for the six months ended June 30, 2005 and 2004.



Three months ended June 30 Six months ended June 30
2005 2004 2005 2004
Gross Net Gross Net Gross Net Gross Net
--------------------------------------------------------
Natural Gas 0.00 0.00 2.00 0.65 1.00 0.28 2.00 1.25
Dry/Abandoned 0.00 0.00 1.00 0.25 1.00 0.50 1.00 1.00
--------------------------------------------------------

Total 0.00 0.00 3.00 0.90 2.00 0.78 3.00 2.25
--------------------------------------------------------
--------------------------------------------------------


Oil and Natural Gas Wells

The following table summarizes Arrow's interest, as at June 30, 2005, in wells that are producing or which Arrow considers to be capable of production.



Non-Producing
Producing Wells Wells
----------------- ----------------
Natural Gas Natural Gas
----------------- ----------------
Gross Net Gross Net
-------- -------- -------- -------
15.0 6.2 2.0 0.8
----------------------------------


Undeveloped Land Holdings

The undeveloped land holdings of Arrow as at June 30, 2005 and 2004 are set forth in the following table:



Undeveloped Land
Gross Acres Net Acres
--------------------------------
2005 2004 2005 2004
--------------------------------

Total 26,049 22,080 13,055 10,339
--------------------------------
--------------------------------


Working Capital, Liquidity and Capital Resources

At the beginning of 2005, Arrow had a cash balance of $1,245,339, which decreased to $458,426 as at June 30, 2005 for a net decrease in cash of $786,913. Uses of cash included a net change in non-cash working capital items of $588,139 and additions to capital assets of $1,280,681 for the six months ended June 30, 2005, of which $375,159 was incurred during the second quarter. Sources of cash for the second quarter 2005 include cash flows from operations of $282,757. At June 30, 2005, Arrow had a working capital deficiency of $24,979. The Company also had access to an unused operating line of $1,000,000.

In February 2005, the Company's credit facility was increased to a $1,000,000 revolving term credit facility from a Canadian Chartered Bank. The facility bears interest at the Bank's prime lending rate plus 75 basis points, payable monthly. The loan is a revolving facility until May 31, 2006 at which time the credit facility may be converted to a term facility, at the Bank's option. At June 30, 2005, the Company had no amounts outstanding on its credit facility.

Collateral pledged for the facility consists of a first floating charge demand debenture in the amount of $10,000,000 over all assets of the Company.

For the six months ended June 30, 2005, Arrow's source of capital was through a combination of cash flow from operations and the issuance of flow-through shares. Arrow has no debt. Arrow's principal uses of cash are capital expenditures on oil and gas exploration and development, crown land sales and seismic acquisition. Arrow's main short-term commitments planned for 2005 are exploration drilling, well completion and tie-ins.

During the fourth quarter of 2004, Arrow attained a sufficient level of production to provide positive cash flow on a monthly basis.

Commitments

A limited number of short-term operating lease commitments are in place for the use of office premises and equipment. Arrow's maximum commitment under the remaining term of such leases is approximately $50,000 for 2005 and $34,000 for 2006.

The Company has agreed to renounce resource expenditures of $408,553 by December 31, 2004 and incur eligible expenditures of $354,000 the end of December 31, 2005. In addition, the Company has agreed to renounce resource expenditures of $500,175 by December 31, 2005 and incur eligible expenditures of this amount by the end of 2006 for an aggregate commitment to incur eligible expenses of $854,175.

The Company has no commodity price contracts.

The Company is involved in certain claims associated with the normal course of operations. Management believes that settlements, if any, would not have a material impact on the Company's financial statements.

Business Risks

The business of exploring for, developing and producing oil and natural gas reserves is inherently risky. There is substantial risk that the manpower and capital employed will not result in the finding of new reserves in economic quantities. There is a risk that the sale of reserves may be delayed indefinitely due to processing constraints, lack of pipeline capacity or lack of markets. The price Arrow receives for its natural gas production fluctuates continuously and, for the most part, is beyond the Company's control. Arrow is exposed to financial risks including fluctuation in interest rates and the Canadian/US dollar exchange rate. Arrow is also subject to the risks associated with owning oil and natural gas properties, including environmental risks associated with air, land and water. In all areas of our business, we compete against entities that may have greater technical and financial resources. Arrow's growth is dependent upon external sources of financing which may not be available on acceptable terms. There are numerous uncertainties in estimating Arrow's reserve base due to the complexities in estimating the magnitude and timing of future production, revenue, expenses and capital.

Arrow mitigates these risks by diligent management of those factors that it can control, including the engagement of highly qualified and experienced professionals, the latest technology and a focus on low cost reserves.

Arrow carries insurance coverage to protect itself against potential losses due to accidental destruction of assets, well blowouts and environmental damages. Arrow also follows all government regulations and has in place an emergency response plan.

Transactions with Related Parties

Arrow does not enter into transactions with related parties other than in the normal course of business.

In May 2002, Arrow entered into loan agreements with two executives of Arrow to provide loans in the amount of $75,000. The loans are secured by 100,000 common shares of Arrow, bear interest at prime and are due December 31, 2005. The loans have been treated as a reduction of share capital for accounting purposes. In addition, interest in the amount of $9,196 has been accrued on these loans as at June 30, 2005.

Critical Accounting Estimates

Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The following is included in MD&A to aid the reader in assessing the critical accounting policies and practices of the Company. The information will also aid in assessing the likelihood of materially different results being reported depending on management's assumptions and changes in prevailing conditions which affect the application of these policies and practices.

Oil and Gas Reserves Determination

The process of estimating reserves is complex. It requires significant judgment and decisions based on available geological, geophysical, engineering and economic data. Reserve estimates are based on current production forecasts, prices and economic conditions. These estimates may change substantially as additional data from ongoing development and production activities becomes available and as economic conditions impact oil and gas prices and costs. All of the Company's properties are evaluated by independent petroleum engineering consultants.

Full Cost Accounting for Oil and Gas Activities

Asset Retirement Obligation

The present value of expected future abandonment and reclamation costs is recorded on the balance sheet as liability with a corresponding increase in the amount of the related asset. The capitalized amount is depleted over the life of the reserves using the unit of production method. The amount of the liability increases with the passage of time and the amount of the accretion is charged to earnings in the period. Revisions resulting from changes to estimates or timing of future cash flows may increase or decrease the liability. Actual abandonment and reclamation costs incurred are recorded as a reduction of the liability on the balance sheet.

The total future asset retirement obligations were estimated by management based on the Company's net ownership interest in all wells and facilities, estimated costs to reclaim and abandon the wells and facilities, and the estimated timing of the costs to be incurred in future periods. The Company's credit adjusted risk free rate of 8.0% and an inflation rate of 1.5% were used to calculate the present value of the asset retirement obligations.

Depletion Expense

The Company uses the full cost method of accounting for exploration and development activities. In accordance with this method of accounting, all costs associated with exploration and development are capitalized whether successful or not. The aggregate of net capitalized costs, estimated future development costs less estimated salvage values is amortized using the unit of production method based on estimated proved oil and gas reserves.

An increase in estimated proved oil and gas reserves will result in a corresponding reduction in depletion and depreciation expense. A decrease in estimated future development costs will result in a corresponding reduction in depletion and depreciation expense.

Unproved Properties

Costs related to unproved properties are excluded from costs subject to depletion until proved reserves have been determined or their value is impaired. These properties are reviewed quarterly and any impairment is transferred to the costs being depleted.

Impairment of Oil and Natural Gas Properties

Effective January 1, 2004, the Company adopted Accounting Guideline 16 "Oil and Gas Accounting - Full Cost", which replaces Accounting Guideline 5 "Full Cost Accounting in the Oil and Gas Industry". Accounting Guideline 16 ("AcG-16") modifies how impairment is tested. Under AcG-16, impairment is recognized if the carrying amount of the petroleum and natural gas assets exceed the sum of the undiscounted cash flows expected to result from the Company's proved reserves.

If the carrying value is not fully recoverable, the amount of the impairment is measured by comparing the carrying amounts of the petroleum and natural gas assets to an amount equal to the estimated net present value of future cash flows from proved plus probable reserves. This calculation incorporates risks and uncertainties in the expected future cash flows, which are discounted using a risk-free rate. Any excess carrying value above the net present value of the future estimated cash flows would be recorded as a permanent impairment and charged to earnings.

Income Tax Accounting

The determination of the Company's income and other tax liabilities requires interpretation of complex laws and regulations. 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.

Off Balance Sheet Arrangements and other Financial Instruments

Arrow does not, at present, have any commitments under oil and gas forward sales contracts or other types of hedging arrangements which might expose it to commodity price or production volume risks. The Company does not have in place any off-balance sheet financing type commitments.

New Accounting Pronouncements

The Company adopted a number of new accounting policies as described in the December 31, 2004 MD&A. The following standards or revisions by the CICA do not currently impact Arrow:

- Section 3855, "Financial Instruments - Recognition and Measurement, effective for fiscal periods beginning on or after October 1, 2006.

- Section 3861, "Financial Instruments - Disclosure and Presentation", effective for fiscal periods beginning on or after October 1, 2006.

- Section 3461, "Employee Future Benefits", effective for fiscal years ending on or after June 30, 2004.

The Company will continue to monitor the applicability of these standards in the future.

Additional Information

Additional information relating to Arrow, including an Annual Information Form, can also be found on SEDAR at www.sedar.com.



Financial Statements of

ARROW ENERGY LTD.

(Unaudited)

June 30, 2005 and 2004



ARROW ENERGY LTD.

Balance Sheets
(Unaudited)
June 30, December 31,
2005 2004
$ $
-----------------------------

Assets

Current
Cash 458,426 1,245,339
Accounts receivable 532,299 882,315
Prepaid expenses 125,464 76,968
-----------------------------
1,116,189 2,204,622

Capital assets (Note 3) 10,034,467 9,617,257
-----------------------------
11,150,656 11,821,879
-----------------------------
-----------------------------

Liabilities

Current
Accounts payable and accruals 1,141,168 2,030,827
-----------------------------

Future income taxes 1,705,555 788,808
Asset retirement obligations (Note 4) 186,287 179,123
-----------------------------
3,033,010 2,998,759
-----------------------------

Shareholders' equity

Share Capital (Note 5) 9,918,458 10,412,449
Share purchase loans (Note 6(b)) (84,991) (83,457)
Contributed surplus 263,525 237,120
Deficit (1,979,346) (1,742,992)
-----------------------------
8,117,646 8,823,121
-----------------------------
11,150,656 11,821,879
-----------------------------
-----------------------------

See accompanying notes to the financial statements


APPROVED BY THE BOARD
(signed) "Paul Infuso", Director
(signed) "Pat Oliver", Director


ARROW ENERGY LTD.

Statements of Operations and Deficit

Three and six months ended June 30 (Unaudited)

Three Three Six Six
Months Months Months Months
2005 2004 2005 2004
$ $ $ $
---------------------------------------------
REVENUE
Petroleum and natural
gas sales 971,209 314,094 1,926,064 525,138
Royalties - net of ARTC (189,742) (63,356) (390,815) (99,512)
---------------------------------------------
781,467 250,738 1,535,249 425,626
Other income 5,194 123 11,241 3,160
---------------------------------------------
786,661 250,861 1,546,490 428,786

EXPENSES
Production 213,405 27,559 373,059 43,235
Transportation Costs 33,899 7,444 54,509 11,874
General and
Administrative - Schedule 273,952 231,311 517,406 475,645
Reorganization costs - 63,012 - 94,602
Interest 9,053 6,780 11,844 14,296
Depletion, depreciation
and accretion (Note 3) 458,021 101,317 870,633 193,868
---------------------------------------------
988,330 437,423 1,827,451 833,520
---------------------------------------------
LOSS BEFORE INCOME TAXES (201,669) (186,562) (280,961) (404,734)
---------------------------------------------

RECOVERY OF FUTURE
INCOME TAXES (34,093) (228,315) (43,073) (252,588)
---------------------------------------------

NET (LOSS) INCOME (167,576) 41,753 (237,888) (152,146)

DEFICIT, BEGINNING
OF PERIOD (1,812,565)(1,262,136)(1,742,992)(1,069,097)
---------------------------------------------

INTEREST RECEIVABLE
ON SHARE PURCHASE LOANS 795 841 1,534 1,701
---------------------------------------------

DEFICIT, END OF PERIOD (1,979,346)(1,219,542)(1,979,346)(1,219,542)
---------------------------------------------
---------------------------------------------

NET LOSS PER SHARE
Basic and diluted $ (0.01) $ 0.00 $ (0.02) $ (0.02)

WEIGHTED AVERAGE COMMON SHARES
Basic 14,138,914 9,556,706 14,057,466 9,321,335
Diluted 15,604,414 10,123,706 15,522,996 9,888,335



See accompanying notes to the financial statements


ARROW ENERGY LTD.

Statement of Cash Flows
Three and six months ended June 30 (Unaudited)


Three Three Six Six
Months Months Months Months
2005 2004 2005 2004
$ $ $ $
---------------------------------------------

CASH FLOWS RELATED TO
THE FOLLOWING ACTIVITIES:

OPERATING
Net (loss) income (167,576) 41,753 (237,888) (152,146)
Adjustments for:
Depletion and
depreciation and
accretion 458,021 101,317 870,633 193,868
Stock compensation
expense 26,405 - 26,405
Future income taxes (34,093) (228,315) (43,073) (252,588)
---------------------------------------------
282,757 (85,245) 616,077 (210,866)
Changes in non-cash
working capital 44,776 (90,398) (39,318) (89,109)
---------------------------------------------

327,533 (175,643) 576,759 (299,975)
---------------------------------------------

FINANCING
Cash acquired on
acquisition of Red
Chip Inc. - 276,000 - 276,000
Proceeds from issuance
of share capital - - 500,175 -
Share issue costs - - (34,345) -
Options exercised - 12,000 - 12,000
Warrants exercised - 312,500 - 312,500
---------------------------------------------
- 600,500 465,830 600,500
---------------------------------------------

INVESTING
Additions to capital
assets (375,159)(1,163,780)(1,280,681)(2,176,123)
Changes in non-cash
working capital (127,126) 922,919 (548,821) (136,406)
---------------------------------------------

(502,285) (240,861)(1,829,502)(2,312,529)
---------------------------------------------

NET (DECREASE) INCREASE
IN CASH (174,752) 183,996 (786,913)(2,012,004)

CASH, BEGINNING OF PERIOD 633,178 817,093 1,245,339 3,013,093
---------------------------------------------

CASH, END OF PERIOD 458,426 1,001,089 458,426 1,001,089
---------------------------------------------
---------------------------------------------

See accompanying notes to the financial statements


ARROW ENERGY LTD.
Notes to the Financial Statements
For the three and six month period ended June 30, 2005 and 2004
(Unaudited)


1. NATURE OF OPERATIONS

Arrow Energy Ltd. (the "Company" or "Arrow") is incorporated under the laws of Alberta and listed on the TSX Venture Exchange (symbol "AOF").

On May 3, 2004, Arrow amalgamated with Red Chip Inc. ("Red Chip") and a wholly owned subsidiary of Red Chip. The transaction has been accounted for as an acquisition of the net assets of Red Chip with Arrow deemed the acquirer for accounting purposes. Comparative amounts are those of Arrow.

The Company is engaged primarily in the exploration for and production of petroleum and natural gas reserves in Western Canada.

2. ACCOUNTING POLICIES

The unaudited interim consolidated financial statements follow the same accounting policies as the most recent annual audited financial statements. The interim consolidated financial statement note disclosures do not include all of those disclosures required by Canadian generally accepted accounting principles ("GAAP") applicable for annual financial statements. Accordingly, these interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's 2004 Annual Report.



3. CAPITAL ASSETS
-------------------------------------------
June 30, 2005
-------------------------------------------
Accumulated
Depletion and Net
Cost Depreciation Book Value
-------------------------------------------
Petroleum and natural gas
properties and equipment $11,890,914 $ 1,902,302 $ 9,988,612
Office equipment and
furniture 69,872 24,017 45,855
-------------------------------------------
$11,960,786 $ 1,926,319 $10,034,467
-------------------------------------------
-------------------------------------------

-------------------------------------------
December 31, 2004
-------------------------------------------
Accumulated
Depletion and Net
Cost Depreciation Book Value
-------------------------------------------

Petroleum and natural gas
properties and equipment $10,612,150 $ 1,046,331 $ 9,565,819
Office equipment and
furniture 67,959 16,521 51,438
-------------------------------------------
$10,680,109 $ 1,062,852 $ 9,617,257
-------------------------------------------
-------------------------------------------


Petroleum and natural gas properties and equipment costs as at June 30, 2005 include costs of $1,353,538 (June 30, 2004 - $1,141,000) relating to undeveloped land, which have been excluded from the amounts subject to depletion. General and administrative costs capitalized for the three months ended June 30, 2005 were $71,146 (June 30, 2004 - $248,242) and for the six months ended $140,212 (June 30, 2004 - $248,252).

4. ASSET RETIREMENT OBLIGATIONS

The total future asset retirement obligations were estimated by management based on the Company's net ownership interest in all wells and facilities, estimated costs to reclaim and abandon the wells and facilities, and the estimated timing of the costs to be incurred in future periods. The Company has estimated the net present value of its total asset retirement obligations to be $186,287 as at June 30, 2005 (December 31, 2004 - $179,123) based on a total future liability of $365,622 (December 31, 2004 - $365,622). These payments are expected to be made over the next 3 to 30 years with the majority of costs incurred between 2010 and 2025. The Company's credit adjusted risk free rate of 8.0% and an inflation rate of 1.5% were used to calculate the present value of the asset retirement obligations.

The following table reconciles the Company's total asset retirement obligations:



Six Months Ended Year Ended
June 30 2005 December 31, 2004
--------------------------------------

Balance, beginning of period $ 179,123 $ 32,858
Increase in obligations - 129,743
Accretion expense 7,164 16,522
--------------------------------------

Balance, end of period $ 186,287 $ 179,123
--------------------------------------
--------------------------------------

5. SHARE CAPITAL

Number of
Shares $
--------------------------------------

Balance, December 31, 2004 13,612,414 10,412,449

Flow through share issue 526,500 500,175
Share issue costs, net of tax (22,713)
Taxes on flow-through share
renouncement (971,453)
--------------------------------------

Balance, June 30, 2005 14,138,914 9,918,458
--------------------------------------
--------------------------------------


a) Pursuant to a flow-through share agreement dated July 16, 2004, Arrow issued 2,000,000 common shares at a price of $1.25 per share and agreed to renounce resource expenditures of $2,500,000 by December 31, 2004. These expenses have been incurred and renounced. In conjunction with this offering, the Company issued 608,500 common shares at a price of $1.05 per share.

Pursuant to the flow-through share agreement dated December 23, 2004, Arrow issued 429,950 common shares at a price of $0.95 per share and agreed to renounce resource expenditures of $408,553 by December 31, 2004. In conjunction with this offering, the Company also issued 555,500 common shares at a price of $0.90 per share. Each common share carries a warrant for a total issuance of 555,500 warrants to purchase a common share at $1.15. Management determined that no value was attributable to these warrants. At June 30, 2005, Arrow has an obligation to incur approximately $354,000 in eligible expenses before December 31, 2005.

Pursuant to the flow-through share agreement dated January 28, 2005, Arrow issued 526,500 common shares at a price of $0.95 per share and agreed to renounce resource expenditures of $500,175 by December 31, 2005. As of June 30, 2005, none of the expenditures had been incurred.

Included in share capital are 950,401 shares that are held in escrow. These remaining shares will be released in equal instalments every six months from December 18, 2005 and ending June 18, 2007.



b) Options

Weighted
Number of average
Options exercise price
--------------------------------------
Balance, December 31, 2004 1,027,000 $ 0.81
Expired (177,000) 0.81
--------------------------------------

Balance, June 30, 2005 850,000 $ 0.81
--------------------------------------
--------------------------------------


----------------------------------------------------------
Weighted Average options outstanding
----------------------------------------------------------
Weighted
average
Options Options months to
Exercise price outstanding Exercisable expiry
----------------------------------------------------------
$ 0.60 159,000 159,000 21.5
$ 0.75 116,000 116,000 30.5
$ 0.80 147,500 147,500 35.31
$ 0.90 427,500 359,688 51.5
----------------------------------------
850,000 782,188 40.21
----------------------------------------------------------
----------------------------------------------------------

c) Warrants

Weighted
Number of Average
Warrants Exercise Price
--------------------------------------
Issued under amalgamation with
Red Chip Inc 60,000 0.80
Issued in conjunction with
the December 23, 2004 common
share offering 555,500 1.15
--------------------------------------
Balance, June 30, 2005 615,500 $ 1.12
--------------------------------------
--------------------------------------


6. LOAN AGREEMENTS

a) Bank Loan

In February 2005, the Company's credit facility was increased to a $1,000,000 revolving term credit facility from a Canadian Chartered Bank. The facility bears interest at the Bank's prime lending rate plus 75 basis points, payable monthly. The loan is a revolving facility until May 31, 2006 at which time the credit facility may be converted to a term facility, at the Bank's option. At June 30, 2005, the Company had no amounts outstanding on its credit facility.

Collateral pledged for the facility consists of a first floating charge demand debenture in the amount of $10,000,000 over all assets of the Company.

b) Shareholder Purchase Loans

In May 2002, the Company entered into loan agreements with two executives of the Company to provide loans in the amount of $75,000. The loans are secured by 100,000 common shares of the Company, bear interest at prime and were originally due May 31, 2004. The Board of Directors agreed to extend the due date of the loans to December 31, 2005. The loans have been treated as a reduction of share capital for accounting purposes. In addition, interest in the amount of $9,991 (2004 - $8,457) has been accrued on these loans as at June 30, 2005.

7. COMMITMENTS AND CONTINGINCIES

A limited number of short-term operating lease commitments are in place for the use of office premises and equipment. Arrow's maximum commitment under the remaining term of such leases is approximately $50,000 for 2005 and $34,000 for 2006.

The Company has agreed to renounce resource expenditures of $408,553 by December 31, 2004 and incur eligible expenditures of $354,000 the end of December 31, 2005. In addition, the Company has agreed to renounce resource expenditures of $500,175 by December 31, 2005 and incur eligible expenditures of this amount by the end of 2006 for an aggregate commitment to incur eligible expenses of $854,175.

The Company has no commodity price contracts.

The Company is involved in certain claims associated with the normal course of operations. Management believes that settlements, if any, would not have a material impact on the Company's financial statements.

8. SUBSEQUENT EVENTS

Effective July 28, 2005, the Company's board of directors authorized management to undertake the examination of possible corporate restructuring alternatives to increase shareholder value. No decision on any particular alternative has been reached at this time and there can be no assurance that the board of directors will determine to undertake any transaction identified and presented to it by management. The Company has engaged Canaccord Capital Corporation as adviser.



Arrow Energy Ltd.
General and Administrative Expenses SCHEDULE
Three and six months ended June 30, 2005 and 2004
(Unaudited)

Three Three Six Six
months months months months
ended ended ended ended
June 30 June 30 June 30 June 30
2005 2004 2005 2004
--------------------------------------------
Audit and accounting 17,300 6,904 25,692 9,804
Business meals & promotion 7,645 9,468 16,908 17,066
Business taxes 1,526 8,087 3,053 8,087
Consulting
Computer 4,169 7,659 8,094 10,305
Accounting 9,877 11,985 10,990 28,193
General 3,115 7,867 17,515 7,867
Land 30,402 28,558 59,011 55,810
Engineering services (3,902) 20,478 12,656 52,810
Insurance 8,258 11,133 16,778 15,146
Legal 30,500 7,477 30,578 10,737
Miscellaneous 16,673 2,017 31,413 11,508
Office rent & parking 25,315 13,813 55,304 40,607
Office supplies & postage 4,850 2,777 8,122 6,719
Salaries, wages and benefits 99,140 89,136 225,273 195,434
Stock exchange fees 984 - 4,284 -
Share options 26,405 - 26,405 -
Telephone & communications 4,612 3,954 9,125 5,553
Overhead Recovery (12,916) - (43,794) -
--------------------------------------------

$ 273,952 $ 231,313 $ 517,406 $ 475,646
--------------------------------------------
--------------------------------------------


The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

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