Birchcliff Energy Ltd.
TSX : BIR

Birchcliff Energy Ltd.

November 14, 2005 06:00 ET

Birchcliff Energy Announces Increases in Production Guidance for 2005 and 2006, Expanded 2005 Capital Expenditure Program and Excellent 3rd Quarter Performance

CALGARY, ALBERTA--(CCNMatthews - Nov. 14, 2005) -

This press release is not for distribution to United States Newswire Services or for dissemination in the United States.

Birchcliff Energy Ltd. ("Birchcliff") (TSX:BIR) is pleased to announce:

HIGHLIGHTS

Increased Production Guidance

- increasing production guidance for the 4th quarter 2005 to Average 5,000 boe per day, as compared to previous production guidance of a 2005 year end exit rate of 5,000 boe per day.

- increasing production guidance to exit the 1st quarter 2006 at 6,000 boe per day, as compared to previous production guidance of a 2006 year end exit rate of 5,500-6,000 boe per day.

- October 2005 production estimated to be at least 4,800 boe per day (80% natural gas, 20% light oil).

Continued Successful Drilling Results

- As of November 7, 2005 Birchcliff has drilled and cased 100% of its 19 gross (11.1 net) wells drilled during 2005. Of the 11.1 net wells, 7.5 net wells are exploratory and position Birchcliff with numerous follow up locations.

- Birchcliff is increasing the number of wells it expects to drill in 2005 to 36 gross (24 net) from 34 gross (22 net).

Expanded 2005 Capital Expenditure Program

- 2005 Capital Expenditure Program has been increased to $58.2 million from $34 million.

- Birchcliff expects to expend $37.8 million of capital during the 4th quarter.

- Capital program funded out of cash flow and debt facilities. The estimated 2005 year end debt of $74 million is less than one year estimated forward cash flow.

Increasing Net Undeveloped Land Position

- Birchcliff's current undeveloped land position has increased to 160,000 gross acres (115,000 net) all of which is in the Peace River Arch area of Alberta, on a net basis a greater than 50% increase from June 1, 2005.

3rd Quarter Results

- 3rd quarter production averaged 4,626 boe per day, a 6% increase from our first production month of June 2005 of 4,341 boe per day. October 2005 production is estimated to be at least 4,800 boe per day.

- 3rd quarter cash flow of $15.303 million or 27 cents per share.

- 3rd quarter operating costs of $8.08 per boe vs $10.04 per boe in the month of June 2005, a 20% reduction.

- 3rd quarter operating netbacks of $39.99 per boe and cash flow netbacks of $35.95 per boe.

- 3rd quarter debt of $53.7 million, notwithstanding capital expenditures of $14.8 million during the 3rd quarter, which is less than the June 30, 2005 debt of $54.2 million.



FINANCIAL AND OPERATIONAL HIGHLIGHTS


Three months Nine months
ended ended
September 30, Month of September 30,
2005 (1) June, 2005 2005 (1)
------------------------------------------------------------------------

OPERATING
Daily Average Production
Light Oil - barrels 730 753 329
Natural Gas - thousands
of cubic feet 22,243 20,681 9,818
NGLs - barrels 189 141 81
Total - barrels of oil
equivalent (6:1) 4,626 4,341 2,046 (2)
------------------------------------------------------------------------
Average Sales Price ($ Canadian)
Light Oil - per barrel 74.22 67.05 72.42
Natural Gas - per thousand
cubic feet 9.91 7.71 9.38
NGLs - per barrel 69.55 63.29 67.45
Total - per barrel of oil
equivalent (6:1) 62.20 50.42 59.34
------------------------------------------------------------------------
Undeveloped Land
Gross (acres) 154,172 140,623 154,174
Net (acres) 109,410 96,181 109,410
------------------------------------------------------------------------
------------------------------------------------------------------------

NETBACK AND COST
($ per barrel of oil
equivalent at 6:1)
Petroleum & natural gas
revenue 63.06 51.24 60.19
Royalties, net of ARTC (13.42) (10.92) (12.81)
Operating expense (8.08) (10.04) (8.55)
Transportation and
marketing expense (1.57) (1.15) (1.47)
------------------------------------------------------------------------
Netback 39.99 29.13 37.36
General & administrative
expense (2.71) (2.75) (4.88)
Interest expense (1.16) (1.29) (1.19)
Other income 0.01 1.94 1.25
Taxes (0.18) (0.21) (0.20)
------------------------------------------------------------------------
Cash Flow netback 35.95 26.82 32.34
Depletion and depreciation (19.18) (21.08) (19.86)
Accretion (0.22) (0.24) (0.22)
Stock option compensation
expense (1.57) (1.18) (2.46)
Future income tax expense (4.80) (2.88) (4.33)
------------------------------------------------------------------------
Net Earnings 10.18 1.44 5.47
------------------------------------------------------------------------
------------------------------------------------------------------------

FINANCIAL
Petroleum & Natural Gas
Revenue ($000) 26,843 6,673 33,615
------------------------------------------------------------------------
Cash Flow from Operations ($) 15,302 3,493 18,069
Per share - basic ($) 0.27 0.06 0.51
Per share - diluted ($) 0.26 0.06 0.49
------------------------------------------------------------------------
Net Earnings ($) 4,336 186 3,063
Per share - basic ($) 0.08 NIL 0.09
Per share - diluted ($) 0.07 NIL 0.08
------------------------------------------------------------------------
Common Shares Outstanding
End of Period 56,365,347 56,365,347 56,365,347
Weighted Average for
Period - Basic 56,365,347 56,236,315 35,245,299
Weighted Average for
Period - Diluted 58,842,965 57,547,487 37,130,724
------------------------------------------------------------------------
Capital Expenditures ($000) 14,807 N/A 268,140
Working Capital
(Deficiency) ($000) (5,803) 911 (5,803)
Revolving Credit
Facility ($000) 47,945 55,155 47,945
Total Debt ($000) 53,748 54,244 53,748
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) Comparatives for the period from incorporation on July 6, 2004 to
September 30, 2004 have not been provided as they do not provide a
meaningful comparison. During this time period, the company was in
a start-up phase and did not have petroleum and natural gas
production.
(2) This average is based on four months of production during the nine
month period.


MANAGEMENT'S DISCUSSION AND ANALYSIS

in respect of the three month and nine month periods ended September 30, 2005 (the "Reporting Periods") as compared to the period from incorporation on July 6, 2004 to September 30, 2004 ("Comparable Prior Period")

The following discussion and analysis is management's assessment of the historical financial and operating results of Birchcliff Energy Ltd. (the "Corporation" or "Birchcliff") and should be read in conjunction with the unaudited financial statements of the Corporation for the Reporting Periods and the audited financial statements for the period from incorporation on July 6, 2004 to December 31, 2004 together with the notes thereto, all of which has been prepared in accordance with Canadian Generally Accepted Accounting principles. Readers should be aware that during the Comparable Prior Period, the Company did not have any petroleum and natural gas production. The date of this Management's Discussion and Analysis ("MD&A") is November 10, 2005.

Additional information relating to the Corporation is available on SEDAR at www.sedar.com. On July 21, 2005 Birchcliff was listed for trading on the Toronto Stock Exchange under the symbol "BIR" and was de-listed from the TSX Venture Exchange.

FORWARD LOOKING STATEMENTS

This disclosure includes forward-looking statements and assumptions respecting the Corporation's strategies, future operations, expected financial results, financing sources, commodity prices, costs of production and quantum of petroleum 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 Corporation may not be able to control. The reader is therefore cautioned not to place undue reliance on such forward-looking statements.

The Corporation disclaims any intention or obligation to update or revise these forward-looking statements, as a result of new information, future events or otherwise.

NON-GAAP MEASURES

Included in this MD&A for the Reporting Periods are references to terms commonly used in the petroleum and natural gas industry, such as cash flow or cash generated from operations, cash flow per share, operating netback and cash flow netback.

Cash flow, as discussed in this MD&A for the Reporting Periods, appears as a separate caption on the Corporation's statements of cash flows as "cash generated by operations" and is reconciled to net earnings or loss. In the Corporation's financial disclosure documents, operating netback denotes petroleum and natural gas revenue less royalties (net of ARTC), less operating expenses and less transportation and marketing expenses. Cash flow netback as used herein denotes net earnings plus future income tax expense, depletion, depreciation and accretion expense and stock-based compensation expense.

These terms are not defined by Generally Accepted Accounting Principles and consequently, they are referred to as non-GAAP measures. The reader should be cautioned that these amounts may not be directly comparable to measures for other companies where similar terminology is used.

BOE CONVERSIONS

Barrel of oil equivalent ("BOE") amounts may be misleading, particularly if used in isolation. A BOE conversion ratio has been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel and is based on an energy equivalent conversion method primarily applicable at the burner tip and does not necessarily represent an economic value equivalency at the wellhead.

OVERALL PERFORMANCE

The Corporation completed a merger with Scout Capital Corp. ("Scout") pursuant to a Plan of Arrangement on January 18, 2005, which provided the Corporation with a public listing on the TSX Venture Exchange (the "Scout Arrangement").

Throughout the Reporting Periods, the Corporation focused its operational teams on developing two core areas by defining them geographically and then determining opportunities within those areas and on acquisitions both within our two internally defined core areas as well as within our broader external focus areas. Through this process, the Corporation identified numerous opportunities during the 1st Quarter and on March 29, 2005, Birchcliff entered into a purchase and sale agreement to acquire certain properties in the Peace River Arch Area of Alberta (the "Acquisition") for an estimated purchase price of approximately $240 million, net of estimated closing adjustments. Concurrently, the Corporation negotiated a merger by way of a Plan of Arrangement with Veracel Inc. ("Veracel") that was completed in conjunction with the Acquisition (the "Veracel Arrangement") on May 31, 2005.

Since the Veracel Arrangement and the Acquisition were completed on May 31, 2005, Birchcliff's operation of the acquired assets began on June 1, 2005 and essentially only four months of operating data is included in this quarterly report. During the 3rd Quarter, Birchcliff implemented the operating strategies it developed before the Acquisition, one being to focus on its 100% owned properties for recompletions and workovers and secondly to begin an aggressive land acquisition strategy. Operations with partners began after August 1, 2005 which was the binding date of the conveyances pursuant to the Acquisition.

On the drilling front, Birchcliff has contracted two drilling rigs, one for a two year period and the other for a one year period so that it will be in a position to pursue its potential drilling opportunities. Birchcliff spudded its first well in mid-August and currently has both rigs operating.

The Corporation is constantly reviewing potential property acquisitions, joint venture opportunities and corporate acquisitions with the intention of completing such a transaction if acceptable terms can be negotiated. As a result, the Corporation is frequently involved in negotiations with other parties in respect of property and corporate acquisition opportunities. Management is confident that in the current environment, the Corporation is capable of raising sufficient equity and/or debt financing to fund one or more of these transactions should it be necessary.

MAJOR TRANSACTIONS AFFECTING FINANCIAL RESULTS

The financial results of the Corporation have been significantly affected by a number of transactions that were closed during the nine months ending September 30, 2005 and up to the date of this MD&A. These transactions are summarized below:

1. On January 18, 2005, 4,842,100 common shares of the Corporation were issued to management, directors and associates at a price of $3.00 per common share for gross proceeds of $14,526,300 and 383,800 common shares of the Corporation were issued pursuant to pre-existing subscription agreements to employees and consultants (not management or directors) at a price of $1.50 per common share for which for gross proceeds of $575,700 were received. In addition the Corporation issued 13,966,000 common shares upon the exercise of the 13,966,000 subscription receipts previously issued at $4.00 per subscription receipt.

2. On January 18, 2005, the Scout Arrangement was completed and the amalgamated corporation continued under the name Birchcliff Energy Ltd. Under the Scout Arrangement, all of the outstanding common shares of Birchcliff's predecessor were exchanged for 19,191,901 common shares of the Corporation and all of the outstanding shares of Scout were exchanged for 1,056,436 common shares of the Corporation which resulted in 20,248,337 total common shares outstanding of the Corporation as at January 18, 2005.

3. On March 29, 2005, the Corporation entered into a purchase and sale agreement relating to the Acquisition. The effective date of this acquisition was January 1, 2005.

4. On March 29, 2005, Birchcliff established $219 million of credit facilities with a Canadian chartered bank for purposes of financing, in part, the Acquisition. These facilities included (i) a $55 million revolving credit facility which was subsequently increased to $70 million on May 31, 2005 and which is subject to the lender's review semi-annually commencing October 31, 2005 and (ii) a bridge credit facility comprising the balance which was only available to fund the Acquisition and which was cancelled by Birchcliff on May 31, 2005.

5. On May 5, 2005, the Corporation acquired a gas processing facility together with working interests in 21 sections of land near Grande Prairie, Alberta for $2.7 million net of estimated purchase price adjustments. The effective date of this acquisition was January 1, 2005. This acquisition is herein referred to as the "Minor Acquisition".

6. On May 31, 2005, the Corporation merged under the Veracel Arrangement with Veracel to form a new corporation ("Amalco") named Birchcliff Energy Ltd. and concurrently Amalco completed the Acquisition.

7. Prior to the Veracel Arrangement, Veracel entered into an equity financing agreement pursuant to which GMP Securities Inc., Sprott Securities Inc. and Scotia Capital Inc. (the "Underwriters") raised gross proceeds of $114 million on a "bought deal" basis and an additional $32 million of gross proceeds pursuant to a "greenshoe" option. Under this financing arrangement, Veracel issued to accredited investors 34 million subscription receipts at a price of $4.00 each on May 4, 2005 and entered into commitment agreements in respect of the subsequent issuance by Amalco to accredited investors of 2,000,000 flow-through Amalco common shares at a price of $5.00 per share. Some of Birchcliff's management and directors participated in this subscription receipt offering and invested approximately $4.9 million at $4.00 per subscription receipt. The flow-through share issue was completed on June 2, 2005 raising net proceeds of $9,473,920. On May 31, 2005 the 34 million subscription receipts were exchanged into 34 million Class B common shares of Veracel. Investment dealer commissions, legal, accounting and other costs for the subscription receipt/common share issue were $6,578,000 thus raising net proceeds of $129,422,000.

8. Pursuant to the Veracel Arrangement, Birchcliff issued 117,010 common shares at a deemed price of $4.00 per share in exchange for 7,842,453 common shares of Veracel, 34,000,000 common shares at a deemed price of $4.00 per share in exchange for the outstanding Class B common shares of Veracel and 17,287,432 Series 1 Preferred Shares in exchange for 9,988,008 common shares of Veracel and 7,299,424 Class A Preference Shares of Veracel. These Series 1 Preferred Shares were all redeemed and cancelled shortly after the Veracel Arrangement was completed at a redemption price of $0.059 per share.

9. On November 1, 2005, the Corporation increased its revolving credit facility limit, with a major Canadian chartered bank, from $70 million to $80 million on the same terms as the original facility, as part of its semi-annual review.

LIQUIDITY AND BANK DEBT

As a result of its Acquisition and subsequent aggressive capital program, the Corporation had a working capital deficit of $5.8 million at September 30, 2005, as compared to only $206,000 on September 30, 2004. The largest component of Birchcliff's current assets (70%) is the cash to be received from its marketers in respect of September, 2005 production which was subsequently received in October, 2005. In contrast, the current liabilities consist of trade payables (47%), accrued capital, royalties and operating costs (45%) and other minor amounts. Management expects this working capital deficit to continue into the foreseeable future as it continues its aggressive capital programs in the Peace River Arch area.

The Corporation's bank debt or revolving credit facility of $70 million was drawn to $47.9 million at September 30, 2005. The Corporation treats this revolving credit facility as long-term debt because a provision exists in the agreement that, should the lender decide to not renew the revolving credit facility at the end of its one year period (May 31, 2006), the Corporation has the option to cause the outstanding loan to become repayable on a date that is two years from the date the revolving credit facility terminates. Currently, Birchcliff's lender has given no indication that it will not renew the revolving credit facility. The Corporation increased the revolving credit facility limit from $70 million to $80 million on November 1, 2005.

As at September 30, 2005, the Corporation did not have any outstanding promissory notes payable. On December 31, 2004, the Corporation owed $350,000 to its only common shareholder and sole director and $350,000 to an independent businessman evidenced by the issuance of promissory notes. These promissory notes were payable on demand and bore interest at a rate of 5% per annum and were secured by all the property of the Corporation. The promissory notes and all accrued interest were repaid in the 1st Quarter and the security was discharged.

Overall, the Corporation did not have any liquidity issues with respect to the operations of its petroleum and natural gas business in the Reporting Periods nor does it anticipate a liquidity issue in the foreseeable future.

The Corporation intends to finance its oil and natural gas business primarily through cash generated from operations, proceeds from bank debt and equity financings to the extent required. Management expects to be able to continue to raise additional equity and debt financing sufficient to meet both its short-term and long-term growth requirements in the current environment. Birchcliff is now at such a size that it anticipates it will not require additional equity except in significant acquisition situations. In the current price environment and based on the expected capital program for 2005, the Corporation anticipates it will fund its activities with cash flow and bank debt for the foreseeable future.

After taking into account the Acquisition, the major risk factors affecting the Corporation's liquidity are a potential decline in commodity prices for natural gas, as the Acquisition is 80% weighted to natural gas; the risk of natural production declines for these assets being greater than the Corporation anticipates; and the risk that future production increases from these assets will be less than anticipated.

The success of the Corporation's business is highly dependent on its ability to acquire and/or discover new reserves in a cost efficient manner. Substantially, all of the Corporation's cash flow will be derived from the sale of the petroleum and natural gas reserves it accumulates and develops. In order to remain financially viable, the Corporation must be able to replace reserves on a per unit basis for less than its cash flow on a per unit basis over time. The reserves and costs used in this determination are estimated each year based on numerous assumptions and these estimates and costs may vary materially from the actual reserves produced or from the costs required to produce those reserves. In order to mitigate this risk, the Corporation employs a competent and experienced team of petroleum and natural gas professionals and closely monitors the capital expenditures made for the purposes of increasing its petroleum and natural gas reserves.

Cash Generated by Operations

The Corporation recorded revenue, royalties and expenses relating to petroleum and natural gas production from the Minor Acquisition from May 5, 2005 onwards (i.e., 5 months in the Reporting Periods) and from the Acquisition from June 1, 2005 onwards (i.e., 4 months in the Reporting Periods). Cash generated by the Corporation was $15.3 million for the three month Reporting Period and $18.1 million for the nine month Reporting Period. The Corporation did not have positive cash flow in the Comparable Prior Period as it did not have any petroleum or natural gas production during that period. The Corporation expects its cash flow to increase in future months due to the strong commodity price environment and due to expected volume increases in the coming months.

OUTSTANDING SHARE DATA

The common shares of Birchcliff began trading on the TSX Exchange on July 21, 2005 under the symbol "BIR" and were at the same time de-listed from the TSX Venture Exchange where they were trading under the same symbol prior to such time. The following table summarizes the common shares issued from December 31, 2004 to September 30, 2005, which are the only class of shares outstanding:



------------------------------------------------------------------------
Common Shares
------------------------------------------------------------------------
Balance at December 31, 2004 1
Exercise of Options and Warrants -
Private Placements 5,225,900
Issue of Common Shares for Subscription Receipts 13,966,000
Issue of Common Shares for Common Shares of Scout 1,056,436
------------------------------------------------------------------------
Balance at March 31, 2005 20,248,337
Exercise of Options and Warrants -
Issue of Common Shares for Veracel Subscription
Receipts and/or Class B common shares 34,000,000
Issue of Common Shares for Common Shares of Veracel 117,010
Issue of Flow-Through Common Shares 2,000,000
------------------------------------------------------------------------
Balance at June 30, 2005 56,365,347
Issue of Common Shares and Exercise of Options
and Warrants -
------------------------------------------------------------------------
Balance at September 30, 2005 56,365,347
------------------------------------------------------------------------
------------------------------------------------------------------------


Pursuant to the Veracel Arrangement, the Corporation issued 17,287,432 Series 1 Preferred Shares in exchange for 9,988,008 common shares of Veracel and 7,299,424 Class A Preference Shares of Veracel. These Series 1 Preferred Shares were all redeemed at a redemption price of $0.059 per share shortly after the Veracel Arrangement was completed.

RESULTS OF OPERATIONS

Petroleum and Natural Gas Revenue

Petroleum and natural gas production and revenues have been recorded from the Minor Acquisition from May 5, 2005 onward and from the Acquisition from June 1, 2005 onward. These revenues totaled $33.6 million for the nine month Reporting Period and $26.8 million for the three month Reporting Period. The following table details Birchcliff's petroleum and natural gas revenue, production and sales prices by category for the three month and nine month Reporting Periods:



Three months ended September 30, 2005
------------------------------------------------------------------------
Total Average
Revenue Daily Average
(All in Canadian $) ($000's) Production % ($/unit)
------------------------------------------------------------------------
Natural Gas (mcf) 20,279 22,243 80 9.91
------------------------------------------------------------------------
Light oil (bbls) 4,988 730 16 74.22
------------------------------------------------------------------------
Natural gas liquids (bbls) 1,208 189 4 69.55
------------------------------------------------------------------------
Total petroleum and natural
gas sales (boe) 26,475 4,626 100 62.20
------------------------------------------------------------------------
Royalty revenue 368 0.86
------------------------------------------------------------------------
Total petroleum and natural
gas revenue 26,843 63.06
------------------------------------------------------------------------
------------------------------------------------------------------------


Nine Months Ended September 30, 2005
------------------------------------------------------------------------
Total Average(1)
Revenue Daily Average
(All in Canadian $) ($000's) Production % ($/unit)
------------------------------------------------------------------------
Natural Gas (mcf) 25,152 9,818 80 9.38
------------------------------------------------------------------------
Light oil (bbls) 6,503 329 16 72.42
------------------------------------------------------------------------
Natural gas liquids (bbls) 1,485 81 4 67.45
------------------------------------------------------------------------
Total petroleum and natural
gas sales (boe) 33,140 2,046 100 59.34
------------------------------------------------------------------------
Royalty revenue 475 0.85
------------------------------------------------------------------------
Total petroleum and natural
gas revenue 33,615 60.19
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) These averages are based on four months of production during the
nine month period.


Commodity Prices

The price the Corporation receives for its production depends on a number of factors, including AECO Canadian dollar spot market prices for natural gas, U.S. dollar oil prices, the U.S./Canadian dollar exchange rate, and transportation and product quality differentials. Birchcliff regularly considers managing the risk associated with fluctuating spot market prices for natural gas and U.S. dollar oil prices and the U.S./Canadian dollar exchange rate. Birchcliff currently has no fixed commodity price contracts or other hedge type contracts and no plans to enter into such contracts.

Royalties and ARTC

Royalties paid in the three month Reporting Period were $5.7 million or an average of 21.6% of sales and in the nine month Reporting Period was $7.2 million or 21.6% of sales. Of the total amount of royalties paid in the three and nine month Reporting Period, 95% in both periods were Crown royalties and the remaining 5% consisted mainly of gross overriding royalties as the Corporation has insignificant freehold royalties. Birchcliff was not eligible for ARTC during both Reporting Periods since both of its properties were acquired from above-limit corporations and there were no Birchcliff drilled wells brought on production in the three month or nine month Reporting Periods. As Birchcliff brings on production from its recent drilling success in Alberta, the royalties paid on those wells will be eligible for the ARTC program. Most of Birchcliff's drilling program for 2005 is on Crown lands and it is expected that Birchcliff will eventually maximize its claim, if not in 2005 then definitely during 2006, which will somewhat reduce the overall royalty rate. Birchcliff expects its royalty rate to remain relatively constant in the near future. Birchcliff is mainly a gas producer and as such any capital it spends for gathering and processing is eligible for gas cost allowance which reduces the amount of crown royalties paid. Birchcliff expects that over the long term its properties will obtain increased gas cost allowance credits as a result of its proposed increased capital spending on the properties as compared to the historical capital expenditures of the vendor on the properties.

Interest and Other Revenue

Included in this amount for the three month Reporting Period was interest income of $2,000 and for the nine month Reporting Period was interest income of $697,000, substantially all of which was from the cash balances prior to the Acquisition on May 31, 2005, the in trust receipts resulting from the Scout Arrangement and the Veracel equity issue accumulating interest before the combination with Birchcliff. Since completion of the Acquisition on May 31, 2005, the Corporation has been a net borrower and expects to continue to lever its capital investment and therefore it does not expect to record material interest income in future periods.

Operating Expense

Operating expenses were $3.4 million ($8.08 per boe) for the three month Reporting Period and $4.8 million ($8.55 per boe) for the nine month Reporting Period. There are no comparable figures in the Comparable Prior Period. Operating costs are mitigated by the effect of incidental third party revenues Birchcliff receives for processing and transporting production from other companies, road use fees and other minor recoveries. Birchcliff recognizes that optimizing production expenses is critical to effective exploitation of reserves and it is committed to optimizing its operating costs on a per unit basis as it develops economies of scale and begins to implement effective cost reduction programs. The Corporation will continue to lower its operating costs on a per boe basis as it begins to utilize spare capacity at its natural gas facilities, but this will be somewhat mitigated by rising processing fees at third party plants.

Transportation and Marketing Expenses

Transportation and marketing costs were $671,000 ($1.57 per boe) for the three month Reporting Period and $820,000 ($1.47 per boe) for the nine month Reporting Period. These costs consist primarily of transportation costs. There are no comparable figures in the Comparable Prior Period. The Corporation expects these costs to remain relatively consistent over the remainder of the year and into 2006.

General and Administrative Expense

Net general and administrative costs in the three month Reporting Period were $1.2 million as compared to the Comparable Prior Period of $79,000. In the Comparable Prior Period, there was only one month of G&A and it was Birchcliff's first month of operations with minimal staff. Gross general and administrative costs in the nine month Reporting Period was $3.5 million and the table below illustrates that 67% of this amount is comprised of salaries, benefits and consultants required to administer the petroleum and natural gas business. The components of G&A are as follows:



------------------------------------------------------------------------
General and Three Months Nine Months
Administrative Expense Ended Ended
($000's) September 30, 2005 September 30, 2005
------------------------------------------------------------------------
Salaries, benefits
and consultants 954 61% 2,328 67%
Other 614 39% 1,133 33%
-----------------------------------------
G & A expense, gross 1,568 100% 3,461 100%
Overhead recoveries (231) (15%) (284) (8%)
Capitalized overhead (185) (12%) (454) (13%)
-----------------------------------------
G & A expense, net 1,152 73% 2,723 79%
------------------------------------------------------------------------
G & A expense, net per boe $ 2.71 $ 4.88
------------------------------------------------------------------------
------------------------------------------------------------------------


The most relevant period for go forward G&A is the three month Reporting Period as it has three full months of operations along with the related G&A, where as the nine month Reporting Period has four months of operations and nine months of G&A, with five of those nine months without the operational recoveries. Birchcliff anticipates its G&A will remain constant on a per boe basis as it continues to grow. Subsequent to September 30, 2005, the Corporation has already added 3 full-time staff and continues to seek out quality individuals in a competitive environment.

Interest Expense

Interest expense during the three month Reporting Period was $493,000 ($1.16 per boe) and during the nine month Reporting Period was $662,000 ($1.19 per boe). In the Comparable Prior Period, the interest expense was $863. The Corporation expects interest expense to increase on a monthly basis over time as the capital program continues and the amount drawn on the revolving credit facility increases, but it should remain fairly consistent on a per boe basis.

Depletion, Depreciation and Accretion Expense

Depletion and depreciation expense was $8.2 million ($19.18 per boe) for the three month Reporting Period and was $11.1 million ($19.86 per boe) for the nine month Reporting Period. In the Comparable Prior Period, the depreciation was $7,800 and there was no depletion expense. In the Comparable Prior Period, the Corporation had only a small amount of office furniture and computer equipment and consequently, depreciation expense was immaterial.

The depletion and depreciation expense is primarily a function of both the proved reserve additions and the cost of petroleum and natural gas properties in the full cost pool attributable to those proved reserves. The amount excluded from the full cost pool in the calculation of depletion and depreciation expense in respect of the costs of unproved properties acquired in the Acquisition was $70 million in the prior quarter and related to the opportunities in the probable reserve category and the unbooked potential drilling, recompletion and workover opportunities that were acquired in the Acquisition. During the three month Reporting Period, this amount was reduced to $64.8 million due to the utilization of some of these opportunities. The Corporation intends that over time it will, for depletion calculation purposes, reduce the cost amount excluded from the full cost pool in respect of unproved properties acquired in the Acquisition as the particular unproved properties are drilled, or developed or have their value impaired by new information or circumstances.

Accretion expense was $93,000 and $124,000 for the three and nine month Reporting Periods, respectively. There was no accretion expense in the Comparable Prior Period. The Corporation does not expect accretion expense to be significant in the foreseeable future.

Stock-Based Compensation

Stock-based compensation expense was $668,000 ($1.57 per boe) for the three month Reporting Period and $1.4 million ($2.46 per boe) for the nine month Reporting Period. There was no stock-based compensation expense in the Comparable Prior Period. The expense relates to 1,665,000 stock options issued prior to December 31, 2004, to 1,063,500 stock options issued during the 2nd Quarter of 2005, and to 116,000 stock options issued during the 3rd Quarter of 2005. It also relates to 4,049,665 performance and retention warrants issued on January 14, 2005. The Corporation expects to continue to remunerate and provide incentives to employees by way of stock options, so this amount will likely increase over time.

Stock-based compensation expense increased from the prior quarter ended June 30, 2005 because the Corporation has increased its estimate of the probability that the performance and retention warrants will become exercisable to 75% from 50% and to a minor extent because of the new stock options issued to new employees. Due to the change in Birchcliff's vesting estimate, the Corporation was required to record in the current period the prior cumulative effect of that change in estimate which amounts to approximately $133,000. Should the Corporation determine during any future reporting period the probability is greater or less than 75%, this will either increase or decrease the expense since all adjustments of this nature are done on a prospective basis taking into account the prior cumulative effect.

Taxes

The Corporation has recorded $78,000 ($0.18 per boe) of Large Corporations Tax in the three month Reporting Period and $113,000 ($0.20 per boe) in the nine month Reporting Period. These amounts should be relatively consistent on a per boe basis.

The Corporation has recorded a future income tax expense of $2.0 million ($4.80 per boe) for the three month reporting period and $2.4 million ($4.33 per boe) for the nine month Reporting Period. The Corporation will be recording future income tax expense in future periods, as it expects the tax basis of the assets will be utilized by the Corporation to remain non-taxable in the current high price environment at a rate greater than the book rate of depletion and depreciation. The Corporation's effective tax rate was approximately 32% during the three month Reporting Period.

Birchcliff has recorded a significant future tax benefit relating to tax pools generated from share issue costs, the Veracel Plan of Arrangement and tax pools relating to the purchase price of the Acquisition. The future tax benefits will be realized by the Corporation during future years based on the level of taxable income generated by the Corporation.

Net Earnings

The Corporation has recorded revenues, royalties and expenses from the Minor Acquisition from May 5, 2005 onwards and from the Acquisition from June 1, 2005 onwards. As a result, the Corporation recorded net income of $4.3 million ($10.18 per boe) for the three month Reporting Period and a net income of $3.1 million ($5.47 per boe) for the nine month Reporting Period. The net income is lower in the nine month Reporting Period than the three month Reporting Period because the nine month Reporting Period reflects only four months of revenue from the Acquisition and nine months of G&A and stock compensation costs, whereas in the three month Reporting Period there are three months of revenue and only three months of costs. The Corporation expects that a strong commodity price regime will continue and therefore the biggest factor in determining the level of net income or loss will be depletion of its petroleum and natural gas properties. Should the Corporation be successful in adding proved reserves at a cost below the current depletion rate, then over time the depletion rate will continue to fall and the Corporation will continue to record income. Should the Corporation be unsuccessful in adding reserves for less than the depletion rate, then depletion will increase which will reduce income and potentially create a net loss. The Corporation expects that it will be successful in adding sufficient reserves to have net income for the remainder of 2005 and into 2006 given the current commodity price environment.

Petroleum and Natural Gas Properties Impairment Review or "Ceiling Test"

The Corporation follows the full cost method of accounting which requires periodic review of the capitalized costs to ensure that it does not exceed the recoverable value of the petroleum and natural gas properties and that it does not exceed the fair value of the assets.

Birchcliff performed an impairment (ceiling) test review at September 30, 2005 on its petroleum and natural gas assets, the largest being the recent Acquisition completed on May 31, 2005. The petroleum and natural gas future prices used in the review are based on September 30, 2005 commodity price forecasts of the Corporation's independent reserve evaluators. The benchmark prices used in the ceiling test review can be found in the notes to the financial statements for the period ending September 30, 2005 attached as part of this quarterly financial report. Based on this review, there is no impairment of the petroleum and natural gas assets.

CAPITAL EXPENDITURES AND CAPITAL RESOURCES

Capital expenditures amounted to $14.8 million during the three month Reporting Period and $268.1 million during the nine month Reporting Period. In the Comparable Prior Period, only $216,000 of capital expenditures were incurred on administrative assets. The expenditures related to acquisitions accounted for 91.2% during the nine month Reporting Period and only 3% during the three month Reporting period. The primary reason for this was the Acquisition was completed on May 31, 2005.



The following table sets forth a summary of the capital expenditures
incurred for the Reporting Periods:

Capital Expenditures
Three Months Nine Months
------------------------------------------------------------------------
2005 2005
Ended September 30 ($000's) $ $
------------------------------------------------------------------------
Acquisitions 452 244,493
Land 1,673 4,379
Exploration - drilling and completions 3,004 3,566
Exploration - seismic 1,203 2,320
Exploration - other 167 413
Development - drilling and completions 4,893 5,990
Development - other 63 461
Well equipment and facilities 3,080 3,429
Capitalized general and administrative
expenses 185 454
Corporate acquisitions
- oil and natural gas related - -
------------------------------------------------------------------------
Total finding and on-stream costs 14,720 265,505
Corporate acquisitions
- non oil and natural gas related - 2,155
Administrative assets 87 480
------------------------------------------------------------------------
Total Capital Expenditures 14,807 268,140
------------------------------------------------------------------------
------------------------------------------------------------------------

The following table sets forth a summary of the Corporation's capital
resources for the Reporting Periods:

Capital Resources
Three Months Nine Months
------------------------------------------------------------------------
2005 2005
Ended September 30 ($000's) $ $
------------------------------------------------------------------------
Cash generated by operations 15,302 18,069
Changes in working capital from operations (570) (3,031)
Loans payable - (708)
Equity issues, net of issue costs - 154,982
Increase in revolving credit facility (7,209) 47,945
Changes in working capital from investing 7,277 8,915
------------------------------------------------------------------------
Total capital resources 14,800 226,173
------------------------------------------------------------------------
------------------------------------------------------------------------


SELECTED QUARTERLY INFORMATION

------------------------------------------------------------------------
Quarter Ended
($000's, except
share and September June March December September
per share 30 30 31 31 30
amounts) 2005 2005 2005 2004 2004
------------------------------------------------------------------------
Petroleum and
natural gas
production
(boe/d) 4,626 1,460(1) - - -

Total petroleum
and natural
gas revenue 26,843 6,772 - - -
Total royalties (5,711) (1,441) - - -
Total interest
and other revenue 2 365 329 66 -
Total revenues 21,134 5,696 329 66 -

Net income (loss) 4,336 (601) (672) (631) (87)
Per share basic 0.08 (0.02) (0.04) (631) (87)
Per share diluted 0.07 (0.02) (0.04) (631) (87)

Cash generated by
(used in)
operations 15,302 3,109 (342) (558) (79)
Per share basic 0.27 $ 0.10 (0.02) (558) (79)
Per share diluted 0.26 $ 0.09 (0.02) (558) (79)

Book value of
total assets 276,961 266,655 57,658 42,983 337
Loans - - - (708) (300)
Revolving credit
facility (47,945) (55,155) - - -
Total (debt)
/ working capital (53,748) (54,244) 29,232 41,343 (205)
Shareholder's
equity
(deficit) 204,198 199,193 56,923 41,694 (87)

Common shares
outstanding
- end of period
Basic 56,365,347 56,365,347 20,248,337 1 1
Diluted 63,434,512 63,143,512 25,963,002 1,665,001 1
Weighted
average
common
shares
outstanding
Basic 56,365,347 32,507,978 16,423,651 1 1
Diluted 58,842,965 34,012,050 17,862,366 1 1
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) This average is based on one month of production during the three
month period.


Discussion of Quarterly Results

During the three month Reporting Period, total revenues and cash flow increased from the prior quarter as a result of there being three months of revenue from the Acquisition versus only one month during the previous quarter ended June 30, 2005.

OUTLOOK

As at September 30, 2005, the Corporation has achieved what it initially set out to do by securing itself a major asset with high working interests, multi-zone potential, significant infrastructure and a large undeveloped land base. Birchcliff commenced a significant capital expenditure program during the 3rd Quarter and it continues to gain positive momentum with two drilling rigs at work. Accordingly, in the President's Message, the Corporation has increased its production targets for 2005 and 2006 and increased its capital expenditure program for the remainder of 2005. Birchcliff's team of oil and natural gas technical professionals is in place and working diligently to manage the capital program and identify further upside in the core areas.

Birchcliff will continue to aggressively execute its strategy in the Peace River Arch area of Alberta, including purchasing Alberta Crown undeveloped land, rapidly developing and exploiting current production opportunities and continuing to grow through the drill bit. Birchcliff is well positioned financially and operationally to be a significant oil and natural gas producer with all of its focus in the Peace River Arch area.



BIRCHCLIFF ENERGY LTD.
Balance Sheets (Note 1)
(Unaudited) ($000's)

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

ASSETS
CURRENT

Cash and cash equivalents 64 68
Cash and cash equivalents held
in trust (Note 4) - 41,963
Accounts receivable 11,636 601
Prepaid and other 1,316 -
---------------------------
13,016 42,632

Future income tax benefit (Note 6) 16,302 -

Petroleum and natural gas properties
and equipment (Note 5) 247,643 351
---------------------------
276,961 42,983
---------------------------
---------------------------


LIABILITIES

CURRENT

Accounts payable and accrued liabilities 18,819 581
Loans payable (Note 8) - 708

---------------------------
18,819 1,289
---------------------------


Revolving credit facility (Note 7) 47,945 -

Asset retirement obligations (Note 9) 5,999 -


SHAREHOLDERS' EQUITY

Share capital (Note 10) 200,524 -
Subscriptions and subscription
receipts (Note 11) - 42,420
---------------------------
200,524 42,420
Contributed surplus 1,436 63
Retained earnings (deficit) 2,238 (789)
---------------------------
204,198 41,694
---------------------------
276,961 42,983
---------------------------
---------------------------

See accompanying notes to the financial statements.

APPROVED BY THE BOARD

"Vern Siemens"
Werner Siemens, Director

"A. Jeffery Tonken"
A. Jeffery Tonken, Director


BIRCHCLIFF ENERGY LTD.
Statements of Net Income (Loss) and Retained Earnings (Deficit) (Note 1)
(Unaudited) ($000's)
------------------------------------------------------------------------
Three Period from Nine Period from
months Incorporation months Incorporation
ended on July 6, 2004 ended on July 6, 2004
September to September September to September
30 2005 30 2004 30 2005 30 2004
--------------------------------------------------------
(Note 1) (Note 1)

REVENUE
Petroleum and
natural gas 26,843 - 33,615 -
Royalties (5,711) - (7,152) -
Interest and
other 2 - 697 -
--------------------------------------------------------
21,134 - 27,160 -
--------------------------------------------------------

EXPENSES
Production 3,438 - 4,773 -
Transportation 671 - 820 -
General and
administrative 1,152 79 2,723 79
Stock-based
compensation
(Note 12) 668 - 1,372 -
Depletion,
depreciation
and accretion
(Note 5) 8,254 8 11,215 8
Interest 493 - 662 -
--------------------------------------------------------
14,676 87 21,565 87
--------------------------------------------------------
INCOME (LOSS)
BEFORE TAXES 6,458 (87) 5,595 (87)

TAXES
Capital taxes 78 - 113 -
Future income
taxes 2,044 - 2,419 -
--------------------------------------------------------
2,122 - 2,532 -
--------------------------------------------------------
NET INCOME (LOSS) 4,336 (87) 3,063 (87)

DEFICIT,
BEGINNING OF
PERIOD (2,098) - (789) -

PLAN OF
ARRANGEMENT
COSTS (Note 2) - - (36) -
--------------------------------------------------------

RETAINED EARNINGS
(DEFICIT) , END
OF PERIOD 2,238 (87) 2,238 (87)
--------------------------------------------------------
--------------------------------------------------------


Net income (loss)
per common share
basic 0.08 (87,390) 0.09 (87,390)
diluted 0.07 (87,390) 0.08 (87,390)
Weighted average
common shares
basic 56,365,347 1 35,245,299 1
diluted 58,842,965 1 37,130,724 1

See accompanying notes to the financial statements.


BIRCHCLIFF ENERGY LTD.
Statement of Cash Flows (Note 1)
(Unaudited) ($000's)

Three Period from Nine Period from
months Incorporation months Incorporation
ended on July 6, 2004 ended on July 6, 2004
September to September September to September
30 2005 30 2004 30 2005 30 2004
--------------------------------------------------------
(Note 1) (Note 1)

CASH FLOWS RELATED
TO THE FOLLOWING
ACTIVITIES:

OPERATING
Net income (loss) 4,336 (87) 3,063 (87)
Adjustments for
items not
affecting cash:
Depletion,
depreciation
and accretion 8,254 8 11,215 8
Stock-based
compensation 668 - 1,372 -
Future income
tax 2,044 - 2,419 -
--------------------------------------------------------
Cash generated
by operations 15,302 (79) 18,069 (79)
Changes in
non-cash
working
capital
(Note 14) (570) 40 (3,031) 40
--------------------------------------------------------
14,732 (39) 15,038 (39)
--------------------------------------------------------

FINANCING
Increase
(decrease)
in revolving
credit facility
(Note 7) (7,209) - 47,946 -
Increase
(decrease) in
loans payable
(Note 8) - 300 (708) 300
Issuance of
share capital,
net of issue
costs (Note 10) - - 154,982 -
--------------------------------------------------------
(7,209) 300 202,220 300
--------------------------------------------------------

INVESTING
Scout
arrangement
costs (Note 2) - - (36) -
Purchase of
petroleum
and natural
gas properties
and equipment
(Note 3) (452) (126) (246,612) (126)
Development
of petroleum
and natural
gas properties
and equipment (14,355) - (21,492) -
Changes in
non-cash
investing
working capital
(Note 14) 7,277 75 8,915 75
--------------------------------------------------------
(7,530) (51) (259,225) (51)
--------------------------------------------------------
NET INCREASE
IN CASH AND
CASH EQUIVALENTS (7) 210 (41,967) 210

CASH AND CASH
EQUIVALENTS,
BEGINNING OF
PERIOD 71 - 42,031 -
--------------------------------------------------------
--------------------------------------------------------

CASH AND CASH
EQUIVALENTS,
END OF PERIOD 64 210 64 210
--------------------------------------------------------
--------------------------------------------------------

Cash interest paid 493 - 662 -
Cash taxes paid 154 - 154 -

See accompanying notes to the financial statements


1. BASIS OF PRESENTATION

Birchcliff Energy Ltd. ("Birchcliff" or the "Corporation") was a private company, incorporated under the Business Corporations Act (Alberta) on July 6, 2004 as 1116463 Alberta Ltd. It changed its name from 1116463 Alberta Ltd. to Birchcliff Energy Ltd. on September 10, 2004. The Corporation is engaged in the exploration for and the development, production and acquisition of, petroleum and natural gas reserves in Western Canada. Birchcliff's financial year end is December 31.

On January 18, 2005, the Corporation completed a merger arrangement ("Scout Arrangement") involving the Corporation and Scout Capital Corp. ("Scout"), a publicly traded corporation. The newly amalgamated entity, Birchcliff Energy Ltd., became a publicly traded corporation on the TSX Venture Exchange on January 20, 2005. This transaction was accounted for using reverse takeover accounting principles.

On May 31, 2005, the Corporation completed a merger arrangement ("Veracel Arrangement") involving the Corporation and Veracel Inc. ("Veracel"), a privately held corporation that sought to reorganize and enter the oil and gas business. As Birchcliff is treated as the deemed acquirer, the comparative financial statements are those of Birchcliff, which presents all of the historical financial results relating to the oil and natural gas business in which the Corporation is continuing. Concurrent with the Veracel Arrangement, Birchcliff completed the purchase of certain properties in the South West Peace River Arch area of Alberta (the "Acquisition"). The Acquisition and the Veracel Arrangement were completed together so as to create a business combination to be operated by the amalgamated corporation resulting from the Veracel Arrangement.

The interim financial statements of Birchcliff Energy Ltd. have been prepared by management in accordance with accounting principles generally accepted in Canada. The interim financial statements have been prepared following the same accounting policies and methods of computation as the financial statements for the period ended December 31, 2004. The disclosure which follows does not include all disclosures required for the annual financial statements. These interim financial statements should be read in conjunction with the financial statements and notes thereto for the period ended December 31, 2004.

2. SCOUT ARRANGEMENT

Pursuant to an arrangement agreement dated November 8, 2004, as amended on December 1, 2004, the Corporation implemented a Plan of Arrangement with Scout that was completed on January 18, 2005. The Corporation has accounted for this transaction as a reverse takeover of Scout by Birchcliff. Costs incurred to September 30, 2005 of $36,000 relating to the transaction have been charged directly to the deficit in 2005 ($70,000 in 2004).

The acquisition has been accounted for by the purchase method. Details of the acquisition are as follows:



---------------------------------------------------------------------
---------------------------------------------------------------------
Net assets acquired: $000's
---------------------------------------------------------------------
Cash and short-term investments 3,411
Marketable securities, accounts receivable and other 18
Current liabilities, including Scout transaction costs (260)
---------------------------------------------------------------------
3,169
---------------------------------------------------------------------
---------------------------------------------------------------------

---------------------------------------------------------------------
---------------------------------------------------------------------
Consideration: $000's
---------------------------------------------------------------------
Common shares of the Corporation (1,056,436) 3,169
---------------------------------------------------------------------
---------------------------------------------------------------------


3. VERACEL ARRANGEMENT AND ACQUISITIONS OF PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT

Veracel Arrangement and South West Peace River Arch Acquisition

On March 29, 2005, the Corporation signed a purchase and sale agreement relating to the purchase of certain properties in the South West Peace River Arch area of Alberta (the "Acquisition"), effective January 1, 2005, for $255 million before closing adjustments and related costs. The Acquisition closed on May 31, 2005, immediately after the completion of the Veracel Arrangement. Birchcliff has recorded operating results from June 1, 2005 forward for the Acquisition in these interim financial statements.

Pursuant to an arrangement agreement, the Corporation implemented a Plan of Arrangement with Veracel which was completed on May 31, 2005. Veracel was in the process of re-organizing itself. All comparative figures are those of the Corporation.

The following table details the purchase price allocation for the Veracel Arrangement and the Acquisition:



---------------------------------------------------------------------
---------------------------------------------------------------------
Net assets acquired: $000's
---------------------------------------------------------------------
Petroleum and natural gas properties and equipment 234,077
Asset retirement costs (5,837)
Future tax benefit 15,599
---------------------------------------------------------------------
243,839
---------------------------------------------------------------------
---------------------------------------------------------------------

---------------------------------------------------------------------
---------------------------------------------------------------------
Consideration: $000's
---------------------------------------------------------------------
Purchase price, net of adjustments 239,635
Costs related to the Veracel Arrangement 2,119
Costs related to the Acquisition 2,085
---------------------------------------------------------------------
243,839
---------------------------------------------------------------------
---------------------------------------------------------------------


In relation to the Acquisition, the Corporation has made its best estimate as to the net assets acquired and the consideration given. The final purchase price adjustment has not yet been determined by the Corporation and the vendor, and all costs have not yet been finalized. Therefore, the above amount may be subject to adjustment.

Bezanson Property Acquisition

On April 1, 2005, the Corporation signed a purchase and sale agreement relating to the purchase of certain working interests in a gas processing facility and 21 sections of land (the "Minor Acquisition") for $2.75 million before closing adjustments. The Minor Acquisition closed on May 5, 2005. Birchcliff has recorded operating results from May 1, 2005 forward for the Minor Acquisition in these interim financial statements. The following table details the purchase price allocation for the Acquisition:



---------------------------------------------------------------------
---------------------------------------------------------------------
Net assets acquired: $000's
---------------------------------------------------------------------
Petroleum and natural gas properties and equipment 2,642
Asset retirement costs (27)
---------------------------------------------------------------------
2,615
---------------------------------------------------------------------
---------------------------------------------------------------------

---------------------------------------------------------------------
---------------------------------------------------------------------
Consideration: $000's
---------------------------------------------------------------------
Purchase price, net of adjustments 2,605
Costs related to the Minor Acquisition 10
---------------------------------------------------------------------
2,615
---------------------------------------------------------------------
---------------------------------------------------------------------


4. CASH AND CASH EQUIVALENTS HELD IN TRUST

As at December 31, 2004, $41,963,000 was held in trust by an escrow agent, including interest earned during that period. The amount held in trust related to the issuance of 13,966,000 subscription receipts at $3.00 per receipt on December 9, 2004. On January 18, 2005, the funds held in trust were released as a result of the successful completion of the Scout Arrangement.

5. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT



---------------------------------------------------------------------
Accumulated
Depletion
and Net Book
Cost Depreciation Value
$000's $000's $000's
---------------------------------------------------------------------

Petroleum and natural gas
properties and equipment 258,112 (11,004) 247,108
Office and other equipment 639 (104) 535
---------------------------------------------------------------------
258,751 (11,108) 247,643
---------------------------------------------------------------------
---------------------------------------------------------------------


As at September 30, 2005, the cost of petroleum and natural gas properties includes $64.8 million relating to unproved properties as a result of the Acquisition and $4.3 million relating to undeveloped land which have been excluded from costs subject to depletion and depreciation.

Birchcliff has capitalized general and administrative costs of $454,000 in the nine month period ended September 30, 2005 and $186,000 in the three month period ended September 30, 2005 relating to exploration and development activities.

The Corporation performed an impairment (ceiling) test review at September 30, 2005 to assess the recoverable value of the petroleum and natural gas properties and equipment and to assess that it does not exceed its fair value. The petroleum and natural gas future prices are based on September 30, 2005 commodity price forecasts of the Corporation's independent reserve evaluators. The following table summarizes the benchmark prices used in the ceiling test calculation:



---------------------------------------------------------------------
Edmonton
Light
Foreign Crude
WTI Oil Exchange Oil AECO Gas
Year ($US/bbl) Rate ($Cdn/bbl) ($Cdn/mcf)
---------------------------------------------------------------------

2005 $65.00 0.85 $75.60 $12.00
2006 $65.00 0.82 $78.40 $11.00
2007 $64.25 0.82 $77.50 $10.00
2008 $62.45 0.82 $75.30 $8.90
2009 $61.55 0.82 $74.20 $9.20
2010 $59.55 0.82 $71.80 $9.35
2011 $55.25 0.82 $66.50 $9.60
2012 $56.35 0.82 $67.85 $9.80
2013 $57.45 0.82 $69.20 $10.00
2014 $58.60 0.82 $70.60 $10.20
2015 $59.80 0.82 $72.05 $10.45
Escalate thereafter 2% 0% 2% 2%
---------------------------------------------------------------------
---------------------------------------------------------------------


Based on these assumptions, management's assessment is that there is no impairment of petroleum and natural gas properties and equipment as at September 30, 2005.

6. FUTURE INCOME TAX BENEFIT

The Corporation has recorded a $16,302,000 future income tax benefit in respect of share issue costs, the Acquisition and the Veracel Plan of Arrangement. Included in the provision for future income taxes for the nine months ended September 30, 2005 is a future income tax expense of $2,419,000 (2004 - NIL). (Note 3)

7. REVOLVING CREDIT FACILITY

The Corporation entered into a credit agreement dated May 31, 2005 with a Canadian chartered bank (the "Lender"), to provide a revolving credit facility with an authorized amount of up to $70 million. The credit facility allows for prime rate loans, US base rate loans, bankers' acceptances, letters of credit and LIBOR loans. The credit facility bears interest at varying rates depending on the instrument utilized and the debt to EBITDA ratio, where EBITDA equals net earnings after income taxes (but excluding extraordinary items), plus interest expense, income taxes and non-cash items deducted in determining net earnings. For instance, when the debt to EBITDA ratio is less than 1.5 any prime based loans the applicable interest rate will be equal to prime. The credit facility is revolving and will continue to revolve until the conversion date of May 30, 2006. Not more than 90 days and not less than 60 days prior to the conversion date, Birchcliff may request an extension of the conversion date with such extension not exceeding 364 days. If the Lender does not grant an extension of the conversion date then the credit facility will convert to a non-revolving two year term loan from the conversion date which will then have a maturity date set at two years from the conversion date.

All obligations under the credit facility shall become due and payable and be paid in their entirety on the maturity date. The credit facility is subject to the Lender's mid-year redetermination of the borrowing base as of October 31 of each year. Upon any change in or redetermination of the borrowing base limit which results in a borrowing base shortfall, the Corporation shall eliminate the borrowing base shortfall amount. The facility is secured by a general security agreement encompassing all of the Corporation's assets.

As at September 30, 2005, Birchcliff had drawn $47,945,000 on the credit facility.

8. LOANS PAYABLE

On January 18, 2005, the Corporation repaid the loans payable to its only shareholder and an independent businessman. These loans totalled $700,000 plus accrued interest of $9,260 to the date of repayment. Upon payment of the loans and accrued interest, the security was discharged.

9. ASSET RETIREMENT OBLIGATIONS

The Corporation's asset retirement obligations result from net ownership interests in petroleum and natural gas properties including well sites, gathering systems and processing facilities. Birchcliff estimates the total undiscounted amount of cash flows required to settle its asset retirement obligation to be approximately $19,349,000 which will be incurred between 2006 and 2024. A credit-adjusted risk-free interest rate of 8% and an inflation rate of 2% were used to calculate the fair value of the asset retirement obligation.

A reconciliation of the asset retirement obligations is provided below:



---------------------------------------------------------------------
---------------------------------------------------------------------
Amount
($000's)
---------------------------------------------------------------------
---------------------------------------------------------------------
Balance, December 31, 2004 -
Liabilities incurred 21
Accretion expense -
---------------------------------------------------------------------
Balance March 31, 2005 21
Liabilities incurred 5,853
Accretion expense 32
---------------------------------------------------------------------
Balance June 30, 2005 5,906
Liabilities incurred -
Accretion expense 93
---------------------------------------------------------------------
Balance September 30, 2005 5,999
---------------------------------------------------------------------
---------------------------------------------------------------------


10. SHARE CAPITAL

(a) Authorized

Unlimited number of voting common shares

Unlimited number of non-voting first preferred shares

The preferred shares may be issued in one or more series and the directors are authorized to fix the number of shares in each series and to determine the designation, rights, privileges, restrictions and conditions attached to the shares of each series.

A series of 25,129,885 Series 1 Preferred Shares were designated by the Directors of the Corporation on May 30, 2005 for issuance pursuant to the Veracel Arrangement. On May 31, 2005, 17,287,432 Series 1 Preferred Shares were issued under the Veracel Arrangement in exchange for 9,988,008 common shares of Veracel and 7,299,424 Class A Preferred Shares of Veracel. All of the Series 1 Preferred Shares that were issued have been redeemed for cash.

(b) Issued



--------------------------
Number of
Common Amount
Shares $
--------------------------

Balance, December 31, 2004 1 3
Issued (Note (c)(i)) 383,800 575,700
Issued, net of costs (Note (c)
(ii through iv)) 19,864,537 57,462,453
--------------------------
Balance, March 31, 2005 20,248,337 58,038,156
Issued (Note (d)(i)) 117,010 468,040
Issued, net of costs (Note (d)(ii)) 34,000,000 129,422,300
Issued, net of costs (Note (e)) 2,000,000 9,473,920
Future income tax effect of share
issue costs - 3,121,635
--------------------------
Balance, June 30, 2005 56,365,347 200,524,051
Issued - -
--------------------------
Balance, September 30, 2005 56,365,347 200,524,051
--------------------------
--------------------------


(c) On January 18, 2005, as a result of the exchange of shares pursuant to the successful completion of the Scout Arrangement, the following shares were issued:

(i) 383,800 common shares of the newly amalgamated Birchcliff were issued to employees and consultants (not management), for which gross proceeds of $575,700 were collected on January 18, 2005, as a result of subscription agreements entered into in November 2004. These shares are held by a trustee and are subject to an option granted to Birchcliff to repurchase the shares if the holder ceases to be employed by Birchcliff (or any successor thereto) prior to January 1, 2008 at a purchase price per share equal to the lesser of $1.50 and the weighted average trading price of Birchcliff shares on a recognized stock exchange during the five trading days immediately prior to the date of which such holder ceases to be employed by Birchcliff or any successor thereto;

(ii) 13,966,000 subscription receipts issued by Birchcliff, as a private corporation, were exchanged for 13,966,000 common shares of the newly amalgamated Birchcliff for net proceeds of $39,766,877;

(iii) 4,842,100 common shares of the newly amalgamated Birchcliff were issued to management, directors and associates at a price of $3.00 per common share for net proceeds of $14,526,300;

(iv) 1,056,436 common shares of the newly amalgamated Birchcliff were issued to shareholders of Scout for net consideration of $3,169,276.

(d) On May 31, 2005, as a result of the successful completion of the Veracel Arrangement, the following shares were issued:

(i) 117,010 common shares of the newly amalgamated Birchcliff, at a price of $4.00 per common shares, were issued to Veracel shareholders who elected to receive shares rather than cash;

(ii) 34,000,000 common shares of the newly amalgamated Birchcliff were issued in exchange for 34,000,000 subscription receipts and/or Veracel class B common shares, previously issued by Veracel for net proceeds of $129,422,300;

(iii) 17,287,432 of Series 1 Preferred Shares of the newly amalgamated Birchcliff were issued in exchange for 9,988,008 common shares of Veracel and 7,299,424 Class A Preferred Shares of Veracel. All of the Series 1 Preferred Shares that were issued have been redeemed for cash.

(e) On June 2, 2005, Birchcliff issued 2,000,000 flow-through shares in exchange for flow-through share commitments made by Veracel prior to completion of the Veracel Arrangement, for net proceeds of $9,474,000.

11. SUBSCRIPTIONS AND SUBSCRIPTION RECEIPTS

As at September 30, 2005, all subscriptions and subscription receipts issued in the prior period had been exchanged for common shares of the Corporation.



(a) Issued

----------------------------
Number of
Subscription Amount
Receipts $
----------------------------

Balance December 31, 2004 14,349,800 42,420,075
Subscriptions and subscription
receipts exchanged for common shares (14,349,800) (42,420,075)
----------------------------

Balance September 30, 2005 - -
----------------------------
----------------------------


12. STOCK-BASED COMPENSATION

Stock Options

Options granted under the plan vest at the rate of one-third on each anniversary date of the stock option grant. All stock options granted are for a five year term. The Corporation has authorized for issuance options in respect of 5,636,535 common shares. At September 30, 2005, there remained available for issuance options in respect of 2,792,035 common shares.

A summary of the changes during the three and nine month periods ended September 30, 2005 and Birchcliff's outstanding stock options as at September 30, 2005 is presented below:



---------------------------
Weighted
Average
Exercise
Price
Number $
---------------------------

Outstanding, December 31, 2004 1,665,000 $3.00
Issued - -
---------------------------
Outstanding, March 31, 2005 1,665,000 $3.00
Issued 1,063,500 $3.79
---------------------------
Outstanding, June 30, 2005 2,728,500 $3.31
Issued 116,000 $4.67
---------------------------

Outstanding, September 30, 2005 2,844,500 $3.36
---------------------------
---------------------------


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

Outstanding
at Exercisable at
September Date of Exercise September 30,
Date of Grant 30, 2005 Expiry Price $ 2005
---------------------------------------------------------------------

December 3, 2004 1,665,000 December 3, 3.00 -
2009
April 20 to 1,063,500 April 20 to 3.50 to -
June 22/05 June 22/10 4.09
July 4 to 116,000 July 4 to 4.06 to -
Sept 7/05 Sept 7/10 5.45

---------------------------------------------------------------------
2,844,500 -
---------------------------------------------------------------------
---------------------------------------------------------------------


Performance and Retention Warrants

At September 30, 2005, there were outstanding 4,049,665 performance and retention warrants with an exercise price of $3.00, all of which were initially issued on January 14, 2005. The performance and retention warrants become exercisable when the Corporation trades on the TSX at or above $6.00 for a period of 20 consecutive days or there is a liquidity event at or above $6.00. In calculating the compensation expense relating to the performance and retention warrants issued in the current nine month period, the Corporation has incorporated an estimated probability of vesting of 75%. The Corporation reviews this estimate each quarter to determine if there should be a change in the estimate. Any changes in the estimate are treated prospectively. In the current quarter, the probability of vesting was increased from 50% to 75% and accordingly all cumulative adjustments relating to the prior periods have been recorded in the current period costs as follows:



Prior Period Effect $ 133,433
Current Period Effect $ 220,524
---------------
Total Recorded in the Current Period $ 353,957
---------------
---------------



A summary of the changes during the three and nine month periods ended
September 30, 2005 and Birchcliff's outstanding performance and
retention warrants as at September 30, 2005 is presented below:



------------------------
Weighted
Average
Exercise
Price
Number $
------------------------

Outstanding, December 31, 2004 - -
Issued 4,049,665 $3.00
------------------------
Outstanding, March 31, 2005 4,049,665 $3.00
Issued - -
------------------------
Outstanding, June 30, 2005 4,049,665 $3.00
Issued - -
------------------------
Outstanding, September 30, 2005 4,049,665 $3.00
------------------------
------------------------


---------------------------------------------------------------------
Number Number
Outstanding Exercisable
at September Date of Exercise at September
Date of Grant 30, 2005 Expiry Price $ 30, 2005
---------------------------------------------------------------------

January 14, 2005 4,049,665 January 31, 3.00 -
2010
---------------------------------------------------------------------
---------------------------------------------------------------------


Assumptions

During the three month period ended September 30, 2005, using the fair value method, the weighted average fair value of the stock options issued during the three month period was $1.42 per common share.

The fair value of each stock option and performance and retention warrant was determined on the date of the grant using the Black-Scholes pricing model. The weighted average assumptions used in calculating the fair values of all stock options issued are set forth below:



---------------
2005
---------------

Risk-free interest rate 4.0%
Expected maturity (years) 5.0
Expected volatility 50%
Dividend per share $0.00


13. COMMITMENTS

In the second quarter of 2005, the Corporation committed to renounce $10 million of exploration expenditures pursuant to a flow-through common share issue completed on June 2, 2005. Birchcliff has until December 31, 2006 to incur these exploration expenditures. The Corporation is subject to Part XII.6 tax on any amounts not incurred by December 31, 2005, based on the prescribed rate and the balance not yet incurred at the end of each month subsequent to January 31, 2006. To September 30, 2005, Birchcliff has incurred $3,898,000 of these expenditures.


14. SUPPLEMENTARY CASH FLOW INFORMATION

The following table details the components of non-cash working capital:



---------------------------------------------------
Period from Period from
Incorporation Incorporation
3 months on July 6, 9 months on July 6,
ended 2004 to ended 2004 to
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
---------------------------------------------------
$000's $000's $000's $000's
---------------------------------------------------

Provided by
(used in)
Accounts
receivable (4,434) (9) (11,036) (9)
Prepaid and other (1,276) - (1,316) -
Accounts payable
and accrued
liabilities 12,417 124 18,236 124
---------------------------------------------------
6,707 115 5,884 115
---------------------------------------------------
---------------------------------------------------

Operating (570) 40 (3,031) 40
---------------------------------------------------
---------------------------------------------------
Investing 7,277 75 8,915 75
---------------------------------------------------
---------------------------------------------------


15. SUBSEQUENT EVENTS

On November 1, 2005, the corporation signed an amending agreement with a Canadian chartered bank to amend its authorized lending amount from $70 million to $80 million under its current revolving credit facility. All other terms remain unchanged.

The term barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. Per barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil ("6:1"). A boe conversion ratio of 6:1 is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Birchcliff is a publicly traded company that trades on the TSX Exchange under the symbol "BIR".

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

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