Birchcliff Energy Ltd.
TSX : BIR

Birchcliff Energy Ltd.

November 14, 2006 02:10 ET

Birchcliff Energy Ltd. Announces Third Quarter Results and Strategic 21 Section Pouce Coupe Farm-In

CALGARY, ALBERTA--(CCNMatthews - Nov. 14, 2006) -

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 a large, strategic farm-in and its financial and operating results for the third quarter of 2006. The full text of the Financial Statements for the three month period and for the nine month period ended September 30, 2006 and the related Management's Discussion and Analysis are set forth below and are available on SEDAR at www.sedar.com.

Strategic Pouce Coupe Farm-in

Birchcliff is pleased to announce that it has signed a large, strategic 21 section farm-in with a major oil and gas company which gives us access to three contiguous blocks in the Pouce Coupe area, which are either contiguous with or proximal to Birchcliff's existing lands and are prospective for a southern extension of Birchcliff's Montney/Doig resource play in the Pouce Coupe region.

Under this farm-in, Birchcliff has the right to earn an interest in up to 21 sections of 100% working interest lands. The commitment is to drill, case and complete three test wells before March 31, 2007 with each test well earning a 70% working interest in two sections. Each further "option well" drilled, cased and completed will similarly earn a 70% interest in two sections of the farm-in lands.

Birchcliff continues to be highly geophysically focused and the farm-in lands have 3-D seismic coverage which significantly reduces the risk of the various play trends.

Although these lands have multi-zone potential, importantly they provide the opportunity to further expand the Montney/Doig resource play.

$30.1 Million Equity Financing

On October 31, 2006 Birchcliff signed a bought deal financing for $16,029,000 of Flow-through shares and $14,080,000 of common shares.

Third Quarter Highlights

- Achieved significant progress in developing and expanding the Pouce Coupe Montney/Doig resource play.

- Production averaged 5,571 boe per day during the third quarter. Current production is approximately 5,700 boe per day with approximately 1,000 - 1,500 boe per day behind pipe or being curtailed by a third party operated gas plant.

- Third quarter revenues were $22.5 million, cash flow was $10.7 million or $0.18 per share (basic), and an earnings loss of $1.3 million or ($0.02) per share.

- Total capital expenditures in the second quarter were $25.3 million. This amount included expenditures of $14.8 million on drilling and completions, $8.9 million on well equipment and facilities and $1.0 million on land.

- Successful 17 well (13.6 net) drilling program resulting in 8 (7.5 net) gas wells, 7 (4.1 net) oil wells, 1 (1.0 net) water injector and 1 (1.0 net) dry hole.

- Added 9,760 gross acres of land bringing its undeveloped land holdings at September 30, 2006 to 217,299 acres (173,200 net).

- Initiated sale process for Royalty Barrels. Non-binding bids were received November 7, 2006. Birchcliff is currently reviewing those non-binding bids.


Dear Shareholder:

On behalf of the management team at Birchcliff, I am pleased to provide you with our third quarter results for 2006. Birchcliff continued to expand its opportunity base and we remain excited about our internally generated exploration and development opportunities.

Subsequent to the third quarter, we entered into a significant farm-in transaction and an equity issue which are described below. These transactions together with our existing asset base and capital structure provide more drilling opportunities while maintaining financial flexibility.

In early November we negotiated a large strategic 21 section farm-in in our Pouce Coupe area with a major oil and gas company. These farm-in lands comprise three blocks of land, which are either contiguous with or proximal to Birchcliff's existing lands. The farm-in lands are prospective for the southern extension of Birchcliff's Montney/Doig resource play at Pouce Coupe and include other multi-zone opportunities as described below under Regional Activities.

Birchcliff has the right to earn a 70% working interest in up to 21 sections of 100% working interest lands. Birchcliff has agreed to drill, case and complete three test wells before March 31, 2007 with each test well earning a 70% working interest in two sections. Each further "option well" drilled, cased and completed will similarly earn a 70% working interest in two sections of the farm-in lands.

Birchcliff continues to be highly geophysically focused and the farm-in lands have 3-D seismic coverage which significantly reduces the risk of the various play trends.

Our near term plans are primarily focused on our Montney/Doig resource play notwithstanding the multi-zone potential of the farm-in lands. Currently, Birchcliff controls in excess of 20 net sections of land on this resource play and this farm-in gives us access to another 21 sections that are prospective for the Montney/Doig play.

On October 31, 2006, we entered into a bought deal equity financing for gross proceeds of $30.1 million. This financing is expected to close on November 22, 2006 and will result in the issuance of 2,740,000 flow-through shares and 3,200,000 common shares. The net proceeds of $28.4 million will be used to reduce our debt and provide additional financial flexibility.

2006 Third Quarter Results

Production

Production averaged 5,571boe per day for the third quarter of 2006. This is a 20% increase from the third quarter 2005 and 17% increase from the second quarter 2006. Facility restrictions and landowner issues contributed to delays in production additions during the third quarter and these factors continue to affect our production. In addition, production was affected by the turnaround of our operated Rycroft gas plant which was scheduled during the third quarter to avoid the high costs of the busy summer turnaround season.

Cash Flow and Earnings

Cash-flow was $10.7 million or $0.18 per share for the third quarter 2006, and $35 million or $0.60 per share for the nine months ended September 30, 2006. Notwithstanding production has increased 20% from the comparable quarter of 2005, cash flow has decreased 30% from the third quarter of 2005 primarily as a result of substantially reduced natural gas prices.

Birchcliff had an earnings loss of $1.3 million or $0.02 per share for the third quarter of 2006, (a $5.7 million decrease from the third quarter of 2005) and earnings of $1.2 million or $0.02 per share for the nine months ended September 30, 2006.

Capital Expenditures and Drilling

During the third quarter capital spending aggregated $25.3 million as compared to $14.8 million for the same quarter last year. Capital spending for the nine months ending September 30, 2006 was $89.6 million.

Birchcliff was very active during the third quarter including the drilling of 17 (13.6 net) wells. This program was successful, resulting in 8 (7.5 net) gas wells, 7 (4.1 net) oil wells, 1 (1.0 net) water injector and 1 (1.0 net) dry hole. We operated up to four drilling rigs during the third quarter.

During the nine months ended September 30, 2006, Birchcliff drilled 39 (34.52 net) wells, 24 (22.42 net) gas wells, 10 (7.10 net) oil wells, 1 (1.00 net) water injector and 4 (4.00 net) dry holes.

We currently have one rig drilling and we expect to drill 6 gross (4.5net) wells during the fourth quarter.

Indebtedness and Equity Issue

Total indebtedness at September 30, 2006, including working capital deficiency was $115.1 million. At that date Birchcliff was drawn to $100.1 million on its credit facilities. As a result of our recently announced $31.1 million bought deal equity offering which is scheduled to close on November 22, 2006, Birchcliff expects to reduce the amount outstanding on its credit facilities by $28.4 million. As a result, the total indebtedness at September 30, 2006 on a pro forma basis after giving effect to this equity financing will be $86.7 million. On a similar pro forma basis the amount drawn under our credit facilities at September 30, 2006 will be $71.7 million.

I am also pleased to inform you that our credit facilities have recently been reviewed and confirmed at $120 million.

Land

Birchcliff has continued to grow its land position in the Peace River Arch. At the end of the third quarter Birchcliff owned 217,299 gross (173,200 net) undeveloped acres.

Operating Costs and G&A

As a result of the inflationary environment we have faced, our operating costs on a unit basis increased marginally to $8.93 per boe for the third quarter as compared to $8.08 per boe for the same quarter a year ago. For the nine months ending September 30, 2006 our operating costs on a unit basis were $8.41 per boe. We continue to focus on operating cost reductions, but it is a very difficult goal to achieve in the heated economy in which we operate. I expect that we will have relatively stable unit operating costs going forward.

In the third quarter general and administrative costs were $2.12 per boe, a 22% decrease from $2.71 per boe in the comparable period for 2005. For the first nine months of 2006, general and administrative costs were $2.74 per boe.

Fourth Quarter Activities

Current Production

Birchcliff's current production is approximately 5,700 boe per day. We estimate that we have between 1,000 to 1,500 boe per day of additional production capacity that we expect to bring on as soon as reasonably possible. This additional production includes 350 - 500 boe per day of production from producing wells that are currently curtailed due to capacity issues at a third party operated gas plant in the Progress area. We also have 13 (9.41 net) wells at various stages of completion, re-completion, equipping and tie-in that are expected to add between 650 and 1,000 boe per day of production before year end. We continue to target a production rate of 6,500 boe per day to exit 2006, assuming the alleviation of the production curtailments referred to above.

Royalties Sale

As previously announced Birchcliff listed certain of its overriding royalty rights for sale through an auction process. Non-binding bids were received on November 7, 2006 and those bids are now being evaluated.

Regional Activities

Pouce Coupe Region

A significant highlight of the third quarter is our continued success in our efforts to explore, exploit and develop our Montney/Doig resource projects in the Pouce Coupe area. We drilled, cased and subsequently completed 5 (5 net) wells targeting the Montney/Doig in the third quarter in this area. Four of these wells met or exceeded expectations.

Over the last 19 months since acquiring our asset base in the Pouce Coupe region, Birchcliff has drilled and cased 15 (13.0 net) wells targeting the Montney/Doig resource play in the Pouce Coupe region. All but two wells have met or exceeded expectations. 11 of the 15 wells have been drilled in the West Pouce Coupe area which has now been established as a development project.

The Montney/Doig play is characterized as a thick geological sequence that is gas saturated throughout and is high pressured. One of the positive aspects of this play is the large amount of original gas in place. On this play trend operators are using various development strategies to exploit their reserves and maximize recovery factors. Operators are exploiting the reserves using 2, 4 (typically) or up to 8 wells per section. Recently some operators are drilling horizontal wells to increase productivity and increase recovery of their reserves. Birchcliff has already applied for holding applications to enable it to down space part of its Pouce Coupe West project to 4 wells per section. Further downspacing will be considered after sufficient production history is available for study. As more information becomes available we will also evaluate the full cycle economics and technical merits of drilling horizontal wells on our lands.

Recently, Birchcliff drilled and tied in 3 wells (2 net) at the south end of its Pouce Coupe Montney/Doig resource play. These wells confirm the southern extension of our resource play and with these positive results we have been aggressively pursuing acquisition and farm-in opportunities within the southern extension play trend area.

As discussed above, we have recently signed a large strategic farm-in which will give us access to 21 sections of 100% working interest lands in Pouce Coupe that are prospective to further extend Birchcliff's Montney/Doig resource play. In addition to the Montney/Doig resource play, the farm-in lands are prospective for Halfway, Boundary Lake, and Bluesky reservoirs. Birchcliff has significant technical and operational experience in these additional plays in the surrounding area.

We view this farm-in agreement as another significant step in creating long term value in the greater Pouce Coupe region.

Rycroft Region

In the Rycroft region, the new pool discovery well drilled in the first quarter continues to produce at approximately 600 boe per day and another well targeting the Belloy zone discovered in that wellbore was tied in and brought on production in the third quarter. Our technical staff has identified a number of additional exploration targets in this region as a result of the information obtained from these two successful wells.

Progress Region

At Progress 4 wells were drilled to initiate the expansion of the waterflood project at our Doe Creek oil pool.

Outlook

In light of the current market conditions and our sensitivity to natural gas prices, we are currently planning a capital expenditure program for 2007 that matches our cash flow plus an additional $16 million representing our recent flow through share exploration commitments.

We will closely monitor the continually changing landscape. When commodity prices rise for a sustained period of time, we can quickly respond and increase our capital expenditure program. We are not in danger of losing our opportunities with land expiries. Further, substantially all of our lands have year round access, which means we can increase higher activity levels as our cash flow rises.

We believe that over time the simple fact that there continues to be less supply and more demand for natural gas will result in improved natural gas prices. The significant cut by industry in capital expenditures directed towards natural gas drilling in late 2006 and into 2007 should result in a reduction of natural gas deliverability and thereby result in gas prices moving upwards through the upcoming winter and into 2007.

The recently proposed legislative changes to the taxation of Income Trusts have significantly changed the oil and gas landscape. We think that investors will continue to reward companies that have high quality asset bases, internally generated opportunities and technically strong staff. I believe that Birchcliff has these attributes.

Conclusion

As a result of the equity issue we have a strong balance sheet and financial flexibility. We intend to protect our balance sheet, look for acquisition opportunities while continuing to add to the depth of our long term drilling opportunities, including the development of our long life resource plays.

We remain bullish on the longer term outlook for natural gas and the value of our Peace River Arch assets. Our goal remains that of building a natural gas focused company in the Peace River Arch that will provide superior returns to our shareholders.

On behalf of the Board of Directors and our Management Team,

A. Jeffery Tonken, President and Chief Executive Officer




FINANCIAL AND OPERATIONAL HIGHLIGHTS

Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005(1)
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OPERATING
Daily Average
Production
Light Oil -
barrels 779 730 764 329
Natural Gas -
thousands of
cubic feet 26,996 22,243 25,368 9,818
NGLs - barrels 293 189 210 81
Total - barrels
of oil equivalent
(6:1) 5,571 4,626 5,202 2,046
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Average Sales Price ($
Canadian)
Light Oil - per
barrel 74.88 74.22 70.45 72.42
Natural Gas -
per thousand
cubic feet 5.91 9.91 6.82 9.38
NGLs - per
barrel 76.06 69.55 72.85 67.45
Total - per
barrel of oil
equivalent (6:1) 43.11 62.20 46.53 59.34
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Undeveloped Land
Gross (acres) 217,299 154,172 217,299 154,172
Net (acres) 173,200 109,410 173,200 109,410
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NETBACK AND COST
($ per barrel of
oil equivalent at
6:1)
Petroleum &
natural gas
revenue 43.98 63.06 47.90 60.19
Royalties, net of
ARTC (7.95) (13.42) (8.28) (12.81)
Operating expense (8.94) (8.08) (8.41) (8.55)
Transportation
and marketing
expense (1.64) (1.57) (1.65) (1.47)
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Netback 25.45 39.99 29.56 37.36
General &
administrative
expense (2.12) (2.71) (2.74) (4.88)
Stock-based
compensation
expense - - (0.10) -
Interest expense (2.53) (1.16) (2.05) (1.19)
Other income - 0.01 - 1.25
Taxes - (0.18) - (0.20)
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Cash Flow Netback 20.80 35.95 24.67 32.35
Depletion and
depreciation (22.14) (19.18) (20.97) (19.86)
Accretion (0.37) (0.22) (0.41) (0.22)
Stock-based
compensation
expense (1.29) (1.57) (1.39) (2.46)
Future income tax
expense 0.38 (4.80) (1.05) (4.33)
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Net Earnings (2.62) 10.18 0.85 5.48
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FINANCIAL
Petroleum &
Natural Gas
Revenue ($000) 22,546 26,843 68,019 33,615
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Cash Flow from
Operations ($000) 10,666 15,302 35,030 18,069
Per share
- basic ($) 0.18 0.27 0.60 0.51
Per share
- diluted ($) 0.18 0.26 0.57 0.49
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Net Earnings
(Loss) ($000) (1,342) 4,336 1,200 3,063
Per share
- basic ($) (0.02) 0.08 0.02 0.09
Per share
- diluted ($) (0.02) 0.07 0.02 0.08
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Common Shares
Outstanding
End of Period
- Basic 58,174,413 56,365,347 58,174,413 56,365,347
End of Period
- Diluted 66,383,746 63,259,512 66,383,746 63,259,512
Weighted Average
for Period
- Basic 58,173,508 56,365,347 58,168,296 35,245,299
Weighted Average
for Period
- Diluted 60,681,252 58,842,965 61,397,054 37,130,724
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Capital
Expenditures
($000) 25,273 14,807 89,576 268,140
Working Capital
(Deficiency)
($000) (14,973) (5,802) (14,973) (5,802)
Revolving Credit
Facility ($000) (100,127) (47,945) (100,127) (47,945)
Total Debt ($000) (115,100) (53,747) (115,100) (53,747)
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(1) The nine month Comparable Prior Period only includes four months of
significant production due to the Acquisition being completed on
May 31, 2005.


MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") in respect of the three and nine month periods ended September 30, 2006 (the "Reporting Periods") as compared to the three and nine month periods ended September 30, 2005 (the "Comparable Prior Periods") is dated November 13, 2006.

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 as at and for the year ended December 31, 2005 together with the notes thereto, all of which has been prepared in accordance with Canadian Generally Accepted Accounting Principles.

Additional information relating to the Corporation is available on SEDAR at www.sedar.com. Birchcliff is listed for trading on the Toronto Stock Exchange under the symbol "BIR".

All dollar amounts are stated in Canadian dollars unless otherwise stated.

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 non-cash 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

Through the first three quarters of 2006, the Corporation has continued to remain focused on the strategy of generating internal projects on and around Birchcliff's significant undeveloped land base. Total capital expenditures for the nine months ended September 30, 2006 were $89.6 million, with $48.0 million (54%) spent on drilling and completions; $24.5 million (27%) spent on equipment and facilities; $11.6 million (13%) spent on land acquisitions; $3.9 million (4%) spent on seismic and other exploration; and $1.6 million (2%) on minor acquisitions. In order to ensure growth the Corporation must add reserves for less than its cash flow netback which was $24.67 per BOE for the nine month Reporting Period. The Corporation is currently in the process of evaluating its reserves for the 2006 reporting year.

Production volumes increased by 17% from 4,760 BOE/d in Q2 2006 to 5,571 BOE/d in Q3 2006. As compared to Q3 2005 of 4,626 BOE/d, this was a 20% increase. The scheduled turnaround of Birchcliff's primary non-operated facility was started and completed in the second quarter and Birchcliff expected the associated production to be back on stream for all of the third quarter. However, that facility experienced significant downtime in the third quarter due to non-routine maintenance issues. The resulting capacity constraints continue to adversely affect production rates. Birchcliff estimates that production from wells that were producing into this third party operated plant is presently being curtailed by between 350 to 500 BOE/d.

Birchcliff is highly sensitive to the price of natural gas because it does not have any commodity hedges in place and 81% of its production is natural gas. The average price received in Q3 2006 was $5.91/mcf compared to Q2 2006 of $6.48/mcf which is a 9% decrease. However compared to Q3 2005 of $9.91/mcf this is a 40% decrease. Management remains bullish about future natural gas prices and believes Birchcliff is poised to take advantage of a rising natural gas price environment.

Total debt grew by 15% or $14.8 million, increasing to $115.1 million at September 30, 2006 compared to $100.3 million at June 30, 2006 and $53.7 million at September 30, 2005. This increase was due mainly to capital spending of $25.3 million during the three month Reporting Period, which exceeded Birchcliff's cash flow of $10.7 million during the same period. The Corporation's credit facilities limit is $120 million excluding the working capital deficit. As at September 30, 2006, Birchcliff had drawn $100.1 million on the credit facilities. The Corporation recently announced a $30.1 million equity issue which is scheduled to close on November 22, 2006. Birchcliff expects on closing to receive approximately $28.4 million of net proceeds which will significantly reduce its total indebtedness (including working capital deficiency) to approximately $86.7 million at September 30, 2006 on a pro forma basis. On a similar pro forma basis at September 30, 2006 the amount outstanding under its credit facilities will be reduced to $71.7 million which leaves Birchcliff with $47.8 million of undrawn credit capacity after accounting for outstanding letters of credit held by natural gas transporters.

The Corporation is always 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, Birchcliff is continuously 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

On May 31, 2005 the Corporation completed the acquisition of significant properties in the Peace River Arch of Alberta for a purchase price of approximately $243 million (the "Acquisition").

The Corporation's credit facility was amended and syndicated during the second quarter of 2006 into a syndicated extendible revolving term credit facility with an authorized limit of $105 million and an extendible revolving working capital facility with an authorized limit of $15 million. The mid-year review was completed during October 2006 and the credit facilities amounts have remained unchanged at a combined $120 million. The $120 million of credit facilities are provided by a syndicate of two Canadian chartered banks.

Subsequent to September 30, 2006 the Corporation entered into an underwriting agreement effective October 31, 2006 to issue 3,200,000 common shares at $4.40 per share and 2,740,000 flow-through common shares at $5.85 per share. A preliminary prospectus was filed on November 3, 2006 with an expected closing date of November 22, 2006. The Corporation expects to raise net proceeds of $28.4 million from this equity offering.

LIQUIDITY AND BANK DEBT

As a result of its capital program burdened with increased service costs and lower natural gas prices, the Corporation had a working capital deficit of just under $15.0 million at September 30, 2006, as compared to a working capital deficit of $5.8 million at September 30, 2005. At September 30, 2006 the largest component of Birchcliff's current assets (55%) is the cash to be received from its marketers in respect of September 2006 production which was subsequently received in October 2006. In contrast, the current liabilities consist of trade payables (47%); accrued capital and operating costs (30%); and royalties and other minor amounts. Management expects this working capital deficit to continue into the foreseeable future as Birchcliff continues its capital program in the Peace River Arch area.

The Corporation's bank debt or revolving credit facilities which have an aggregate limit of $120 million were drawn to $100.1 million at September 30, 2006 as compared to $47.9 million for the Comparable Period. The increase is mainly attributed to the result of the capital expenditure program being greater than the Corporation's cash flow and the difference being funded through Birchcliff's available credit facilities. At September 30, 2006 the interest rate applicable to the working capital facility was 6% and slightly less for the syndicated facility as banker's acceptances, which have a lower effective rate of interest, are used in the syndicated facility.

Overall, the Corporation did not have any liquidity issues with respect to the operations of its petroleum and natural gas business in the Reporting Period 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 or to increase its capital spending. The Corporation is currently reviewing the potential sale of its royalty income production as an alternative financing source to provide the Company with more financial flexibility.

The major risk factors affecting the Corporation's liquidity are a further decline in commodity prices for natural gas since Birchcliff was 81% weighted to natural gas during the nine month Reporting Period; the risk of natural production declines being greater than the Corporation anticipates; and the risk that future production increases 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 over time at a lesser cost on a per unit basis than its cash flow on a per unit basis. 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

Cash generated by the Corporation was $10.7 million for the three month Reporting Period and $35 million for the nine month Reporting Period. In the nine month Comparable Prior Period, Birchcliff had only four months of significant petroleum and natural gas production, revenue and cash flow which occurred after the Acquisition closed on May 31, 2005. For the three month Comparable Prior Period, the Corporation generated cash flow of $15.3 million; for the nine month Comparable Prior Period, the Corporation generated cash flow of $18.1 million.

Future cash flow will mainly be dependent on production levels and natural gas prices.

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, 2006 which are the only class of shares outstanding:



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Common Shares
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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
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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
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Balance at June 30, 2005 56,365,347
Issue of Common Shares and Exercise of Options and Warrants -
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Balance at September 30, 2005 56,365,347
Issue of Common Shares upon Exercise of Warrants 300,000
Issue of Flow-Through Common Shares 1,482,400
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Balance at December 31, 2005 58,147,747
Issue of Common Shares upon Exercise of Options 20,000
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Balance at March 31, 2006 58,167,747
Issue of Common Shares upon Exercise of Options -
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Balance at June 30, 2006 58,167,747
Issue of Common Shares upon Exercise of Options 6,666
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Balance at September 30, 2006 58,174,413
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RESULTS OF OPERATIONS

Petroleum and Natural Gas Revenue

Petroleum and natural gas revenues totalled $22.5 million for the three month Reporting Period and $68.0 million for the nine month Reporting Period as compared to $26.8 million and $33.6 million in the respective Comparable Prior Periods. In the three month Reporting period this is a drop in revenue of 16%, even though production was up 20%, because of the significant natural gas price decline of approximately 40%. In the nine month Comparable Period there are only four months of significant production, revenue and cash flow as compared to the nine month Reporting Period, therefore the revenue and production comparison is not meaningful. The following table details Birchcliff's petroleum and natural gas revenue, production and sales prices by category for each of the Reporting Periods and Comparable Prior Periods:





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Three months ended September 30,
2006
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Total Average
Revenue Daily Average
($000's) Production % ($/unit)
---------------------------------------------------------------------------
Natural Gas (mcf) 14,681 26,996 81 5.91
---------------------------------------------------------------------------
Light oil (bbls) 5,366 779 14 74.88
---------------------------------------------------------------------------
Natural gas liquids (bbls) 2,050 293 5 76.06
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total petroleum and natural
gas sales (BOE) 22,098 5,571 100 43.11
---------------------------------------------------------------------------
Royalty revenue 448 0.87
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total petroleum and natural
gas revenue 22,546 43.98
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Three months ended September 30,
2005
---------------------------------------------------------------------------
Total Average
Revenue Daily Average
($000's) Production % ($/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,
2006
---------------------------------------------------------------------------
Total Average
Revenue Daily Average
($000's) Production % ($/unit)
---------------------------------------------------------------------------
Natural Gas (mcf) 47,211 25,368 81 6.82
---------------------------------------------------------------------------
Light oil (bbls) 14,686 764 15 70.45
---------------------------------------------------------------------------
Natural gas liquids (bbls) 4,181 210 4 72.85
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total petroleum and natural
gas sales (BOE) 66,079 5,202 100 46.53
---------------------------------------------------------------------------
Royalty revenue 1,940 1.37
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total petroleum and natural
gas revenue 68,019 47.90
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Nine months ended September 30,
2005(1)
---------------------------------------------------------------------------
Total Average
Revenue Daily Average
($000's) Production % ($/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) The nine month Comparablf significant production, revenue and cash flow
due to the Acquisition being completed


Commodity Prices

Birchcliff sells virtually all of its natural gas production at the AECO daily spot price. Birchcliff receives premium pricing for its natural gas due to the high heat content of its natural gas. Birchcliff received an average of $5.91/mcf for its natural gas sales in the three month Reporting Period as compared to an average price of $9.91/mcf in the three month Comparable Prior Period which is a 40% decline in price. The AECO daily spot price averaged $5.65/mmbtu in the three month Reporting Period as compared to $9.37/mmbtu in the three month Comparable Prior Period which is a 40% drop as well. The differential from the well head to AECO daily spot was $0.26/mcf in the three month Reporting Period as compared to $0.54/mcf in the three month Comparable Prior Period. A comparison of the prices in the nine month Reporting Period and the nine month Comparable Prior Period is not meaningful because the Comparable Prior Period had only four months of production.

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 current plans to enter into such contracts.

Royalties and ARTC

Oil and natural gas royalties, net of ARTC totaled $4.1 million ($7.95 per BOE) during the three month Reporting Period as compared to $5.7 million ($13.42 per BOE) in the Comparable Prior Period and $11.8 million ($8.28 per BOE) during the nine month Reporting Period as compared to $7.2 million ($12.81 per BOE) in the Comparable Prior Period with only 4 months of production. The overall effective royalty rates in the three and nine month Reporting Periods were 18% as compared to 21% in the respective Comparable Prior Periods of the Corporation's total petroleum and natural gas sales.

The proportion of Crown royalties to total royalties in the Reporting Periods was consistent with the Comparable Prior Periods and remains at approximately 95% of total royalties paid. This is expected to remain consistent as most of Birchcliff's new drilling is on Crown land.

In November 2005, Birchcliff became eligible for ARTC when the first two wells it drilled were brought on production. Birchcliff is now maximizing its ARTC claim, however due to the size of the Corporation the amount is no longer significant. Effective January 1, 2007 the ARTC program will be discontinued which will result in the loss of a $500,000 tax credit applied against Crown royalties paid from that point forward.

Operating Costs

Operating costs were $4.6 million ($8.93 per BOE) for the three month Reporting Period and $11.9 million ($8.41 per BOE) for the nine month Reporting Period as compared to $3.4 million ($8.08 per BOE) and $4.8 million ($8.55 per BOE) for the Comparable Prior Periods for which only three and four months of operations, respectively, were included. Operating costs on a unit of volume basis have remained reasonably consistent even though service costs dramatically increased during the Reporting Periods. The following table compares operating costs for the Reporting Periods and the Comparable Prior Periods:



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

Operating Costs Three Months Ended Three Months Ended
($000's) September 30, 2006 September 30, 2005
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total ($000's) $/BOE Total ($000's) $/BOE
---------------------------------------------------------------------------
Field operating costs 4,272 8.33 3,135 7.37
Expensed workovers 310 0.60 303 0.71
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total operating costs 4,582 8.93 3,438 8.08
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

Operating Costs Nine Months Ended Nine Months Ended
($000's) September 30, 2006 September 30, 2005(1)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total ($000's) $/BOE Total ($000's) $/BOE
---------------------------------------------------------------------------
Field operating costs 10,952 7.71 4,470 8.00
Expensed workovers 995 0.70 303 0.54
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total operating costs 11,947 8.41 4,773 8.54
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) The Comparable Prior Period only includes four months of significant
production due to the Acquisition being completed on May 31, 2005


Operating costs are mitigated by the impact of third party revenues Birchcliff receives for processing, treating and transporting other companies' production, water disposal fees, road use fees and other minor recoveries. One of Birchcliff's strategic objectives is to maximize the use of its underutilized facilities in order to bring unit production costs down.

Birchcliff continues to implement strategies aimed at lowering its operating costs on a per BOE basis, but these decreases are being offset by rising processing fees at third party plants and general increases in costs of necessary services.

Transportation and Marketing Expenses

Transportation and marketing expenses were $843,000 ($1.64 per BOE) for the three month Reporting Period and $2.3 million ($1.65 per BOE) for the nine month Reporting Period. In the Comparable Prior Periods (during which only three and four months respectively of significant production was marketed and transported), the costs were $671,000 ($1.57 per BOE) and $820,000 ($1.47 per BOE) respectively. These costs consist primarily of transportation costs. Although the aggregate amount of these costs will increase with increased production volumes, Birchcliff does not expect these costs to increase significantly on a per BOE basis.

General and Administrative Expense

Net general and administrative costs in the three and nine month Reporting Periods were $1.1 million ($2.12 per BOE) and $3.9 million ($2.74 per BOE) respectively as compared to the three month Comparable Prior Period of $1.2 million ($2.71 per BOE) and the nine month Comparable Prior Period of $2.7 million ($4.88 per BOE). Cost per BOE has decreased by 22% when comparing the three month Reporting Period to the Comparable Prior Period due to increased production with minor personnel additions. The components of G&A are as follows:



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

General and Administrative
Expense Three Months Ended Three Months Ended
($000's) September 30, 2006 September 30, 2005
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Salaries, benefits and
consultants 1,356 71% 954 61%
Other 541 29% 614 39%
---------------------------------------------------------------------------
G & A expense, gross 1,897 100% 1,568 100%
Overhead recoveries (553) (29%) (231) (15%)
Capitalized overhead (259) (14%) (185) (12%)
---------------------------------------------------------------------------
G & A expense, net 1,085 57% 1,152 73%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
G & A expense, net per BOE 2.12 $ 2.71
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

General and Administrative Nine Months Ended Nine Months Ended
Expense September 30, September 30,
($000's) 2006 2005(1)
---------------------------------------------------------------------------
Salaries, benefits and
consultants 3,928 65% 2,328 67%
Other 2,105 35% 1,133 33%
---------------------------------------------------------------------------
G & A expense, gross 6,033 100% 3,461 100%
Overhead recoveries (1,447) (24%) (284) (8%)
Capitalized overhead (700) (12%) (454) (13%)
---------------------------------------------------------------------------
G & A expense, net 3,886 64% 2,723 79%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
G & A expense, net per BOE 2.74 $ 4.88
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) The nine month Comparable Prior Period only includes four months of
significant production due to the Acquisition being completed on May
31, 2005.


The Corporation expects that as it increases production its G&A cost per BOE will be reduced because it is currently staffed for further growth. However, the market for qualified staff continues to be competitive and therefore staffing costs are likely to continue to rise which will somewhat mitigate the G&A per BOE reduction.

Interest Expense

Interest expense for the three month Reporting Period was $1.3 million ($2.53 per BOE) and for the nine month Reporting Period was $2.9 million ($2.05 per BOE). In the three month Comparable Prior Period it was $493,000 ($1.16 per BOE) and for the nine month Comparable Prior Period, interest expense was $662,000 ($1.19 per BOE). The increase in aggregate interest expense and interest expense per BOE result directly from the Corporation maintaining a higher debt level for the Reporting Periods because the Corporation's capital program significantly exceeded its cash flow during the Reporting Periods. The Corporation's average bank debt was approximately $96.9 million for the three month Reporting Period as compared to $49.9 million for the Comparable Prior Period based on a simple average of the month end amounts.

Depletion, Depreciation and Accretion Expense ("DD&A")

Depletion, depreciation and accretion ("DD&A") expenses in the three and nine month Reporting Periods were $11.5 million ($22.51 per BOE) and $30.4 million ($21.38 per BOE) respectively as compared to the three month Comparable Prior Period of $8.3 million ($19.40 per BOE) and the nine month Comparable Prior Period of $11.1 million ($20.08 per BOE). The DD&A on a per BOE basis is 16% higher in the three month Reporting Period and 6% higher in the nine month Reporting Period than in the three and nine month Comparable Prior Periods mainly due to the increased cost of services which are resulting in higher finding costs which ultimately are reflected in DD&A over time. The components of DD&A are as follows:



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

DD&A Expense Three Months Ended Three Months Ended
($000's) September 30, 2006 September 30, 2005
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total ($000's) $/BOE Total ($000's) $/BOE
---------------------------------------------------------------------------
Depletion & depreciation 11,347 22.14 8,200 19.18
Accretion 191 0.37 93 0.22
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total DD&A 11,538 22.51 8,293 19.40
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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

DD&A Expense Nine Months Ended Nine Months Ended
($000's) September 30, 2006 September 30, 2005(1)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total ($000's) $/BOE Total ($000's) $/BOE
---------------------------------------------------------------------------
Depletion & depreciation 29,777 20.97 11,100 19.86
Accretion 585 0.41 124 0.22
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total DD&A 30,362 21.38 11,224 20.08
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) The nine month Comparable Prior Period only includes four months of
significant production due to the Acquisition being completed on May
31, 2005


Depletion and depreciation expense is a function of the proved reserve additions and the cost of petroleum and natural gas properties in the full cost pool attributable to those proved reserves. At September 30, 2006, Birchcliff has excluded from its full cost pool $54.9 million (September 30, 2005 - $69.1 million) of costs for undeveloped land acquired by Birchcliff and for unproved properties acquired from the Acquisition relating to opportunities in the probable reserve category and the potential drilling, recompletion and workover opportunities which have not yet been assigned any reserves. The Corporation intends that over time it will, for depletion calculation purposes, continue to reduce the cost amount excluded from the full cost pool in respect of unproved properties as those unproved properties are drilled, developed, or have their value impaired by new information or circumstances.

Petroleum and Natural Gas Properties Impairment Test

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

Birchcliff performed an impairment (ceiling) test review at September 30, 2006 on its petroleum and natural gas assets. Based on this review, Birchcliff determined there was no impairment of its petroleum and natural gas assets.

Taxes

During the nine month Reporting Period, the May 2, 2006 federal budget was passed and the Large Corporation Tax ("LCT") was repealed effective January 1, 2006. Consequently, the Corporation has no current tax expense for the nine month period. In the nine month Comparable Prior Period, $78,000 of LCT was recorded.

Birchcliff recorded a future income tax recovery of $193,000 ($0.38 per BOE) during the three month Reporting Period and a future income tax expense of just under $1.5 million ($1.05 per BOE) during the nine month Reporting Period, as compared to $2.0 million ($4.80 per BOE) during the three month Comparable Prior Period and $2.4 million ($4.33 per BOE) during the nine month Comparable Prior Period. The recovery in the three month Reporting Period is due to a combination of increased DD&A and lower natural gas prices. The increased DD&A results in an increasing book claim while from a tax perspective the claims are smaller due to lower net income mainly as a result of lower prices. This combination has resulted in an increase to Birchcliff's future tax asset in the three month Reporting period.

Stock-Based Compensation

Birchcliff accounts for its stock-based compensation programs, including performance warrants and stock options, using the fair value method. Under this method, the Corporation records compensation expense related to the stock-based compensation programs in the income statement over the vesting period.

The Corporation recorded $663,000 ($1.29 per BOE) of stock-based compensation expense relating to stock options in the three month Reporting Period and $2.1 million ($1.49 per BOE) during the nine month Reporting Period, as compared to $668,000 ($1.57 per BOE) during the three month Comparable Prior Period and $1.4 million ($2.46 per BOE) during the nine month Comparable Prior Period, which included both stock options and performance warrants. Although there is no compensation expense relating to the warrants included in the amounts for the Reporting Periods, the total expense has increased due to the increase in the number of options issued subsequent to the Comparable Reporting Period. This amount is expected to remain relatively consistent going forward on an absolute value basis since the performance warrants fully vested during the fourth quarter of 2005 and only stock options are now affecting the expense amount and will only be affected by significant new option issues.

During the three month Reporting Period, Birchcliff issued 6,666 shares due to exercise of vested stock options in respect of 6,666 common shares, and stock options in respect of 78,168 common shares were forfeited. In the nine month Reporting Period, vested stock options in respect of 54,998 common shares were cancelled, stock options in respect of 26,666 common shares were exercised and stock options in respect of 78,168 common shares were forfeited. The cancellation of vested stock options resulted in a cash-paid stock-based compensation expense of $NIL and $137,000 in the three and nine month Reporting Period respectively. The cash-paid expense is included in total stock-based compensation expense.

CAPITAL EXPENDITURES AND CAPITAL RESOURCES

Capital expenditures amounted to $25.3 million during the three month Reporting Period and $89.6 million in the nine month Reporting Period. In the three and nine month Comparable Prior Periods, $14.8 million and $268.1 million of capital expenditures were incurred. The majority of the expenditures in the nine month Comparable Prior Period were attributable to the Acquisition which closed on May 31, 2005. Birchcliff did not have significant oil and gas operations in the Comparable Prior Period until June 2005.

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



Capital Expenditures

---------------------------------------------------------------------------
Three Months Ended September 30 ($000's) 2006 2005
---------------------------------------------------------------------------
Acquisitions 140 452
Land 998 1,673
Exploration - drilling and completions(1) 13,020 3,004
Exploration - seismic (12) 1,203
Exploration - other 62 167
Development - drilling and completions 1,819 4,893
Development - other 28 63
Well equipment and facilities 8,947 3,080
Capitalized general and administrative expenses 259 185
---------------------------------------------------------------------------
Total finding and on-stream costs 25,261 14,720
Corporate acquisitions - non oil and natural gas
related - -
Administrative assets 12 87
---------------------------------------------------------------------------
Total Capital Expenditures 25,273 14,807
---------------------------------------------------------------------------
(1) The exploration categorization is based on internal criteria, mainly
utilizing information from the well license and does not necessarily
coincide with the Canadian Exploration Expense tax classification.


---------------------------------------------------------------------------
Nine Months Ended September 30 ($000's) 2006 2005
---------------------------------------------------------------------------
Acquisitions 1,629 244,493
Land 11,629 4,379
Exploration - drilling and completions(1) 24,749 3,566
Exploration - seismic 2,560 2,320
Exploration - other 493 413
Development - drilling and completions 23,223 5,990
Development - other 34 461
Well equipment and facilities 24,506 3,429
Capitalized general and administrative expenses 700 454
---------------------------------------------------------------------------
Total finding and on-stream costs 89,523 265,505
Corporate acquisitions - non oil and natural gas
related - 2,155
Administrative assets 53 480
---------------------------------------------------------------------------
Total Capital Expenditures 89,576 268,140
---------------------------------------------------------------------------
(1) The exploration categorization is based on internal criteria, mainly
utilizing information from the well license and does not necessarily
coincide with the Canadian Exploration Expense tax classification.

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

Capital Resources

---------------------------------------------------------------------------
Three Months Ended September 30 ($000's) 2006 2005
---------------------------------------------------------------------------
Cash generated by (used in) operations 10,667 15,302
Changes in working capital from operations (4,473) (570)
Loans payable - -
Equity issues, net of issue costs 26 -
Increase in revolving credit facility 14,828 -
Deposit on petroleum and natural gas properties - (7,209)
Changes in working capital from investing 4,425 7,277
---------------------------------------------------------------------------
Total capital resources 25,473 14,800
---------------------------------------------------------------------------


---------------------------------------------------------------------------
Nine Months Ended September 30 ($000's) 2006 2005
---------------------------------------------------------------------------
Cash generated by (used in) operations 35,030 18,069
Changes in working capital from operations 590 (3,031)
Loans payable - (708)
Equity issues, net of issue costs (11) 154,982
Increase in revolving credit facility 63,513 47,945
Changes in working capital from investing (9,346) 8,915
---------------------------------------------------------------------------
Total capital resources 89,776 226,173
---------------------------------------------------------------------------


SELECTED QUARTERLY INFORMATION

---------------------------------------------------------------------------
Quarter Ended
($000's, except
share and per September 30, June 30, March 31, December 31,
share amounts) 2006 2006 2006 2005
---------------------------------------------------------------------------

Petroleum and
natural gas
production
(BOE per day) 5,571 4,760 5,271 5,009
Petroleum and
natural gas
commodity price
($ per BOE) $ 43.11 $ 45.42 $ 51.24 $ 72.65
Natural gas
commodity price
at wellhead
($ per mcf) $ 5.91 $ 6.48 $ 8.09 $ 12.23
Total petroleum
and natural gas
revenue 22,546 20,515 24,958 34,175
Total royalties,
net of ARTC (4,072) (2,820) (4,871) (8,269)
Total interest
and other revenue - - 3 1
Total revenues, net 18,474 17,695 20,090 25,907

Net income (1,343) 961 1,581 126
Per share basic (0.02) 0.02 0.03 -
Per share diluted (0.02) 0.02 0.03 -

Cash generated by
operations 10,667 11,068 13,296 18,112
Per share basic 0.18 0.19 0.23 0.32
Per share diluted 0.18 0.18 0.22 0.30

Book value of total
assets 359,073 345,092 329,632 311,364
Loans - - - -
Revolving credit
facility (100,127) (85,299) (66,601) (36,614)
Total indebtedness (115,100) (100,321) (86,708) (60,344)
Shareholder's
equity (deficit) 219,066 219,719 218,124 223,894

Common shares
outstanding
- end of period
Basic 58,174,413 58,167,747 58,167,747 58,147,747
Diluted 66,383,746 66,277,414 66,292,746 65,091,912
Weighted average
common shares
outstanding
Basic 58,173,508 58,167,747 58,163,525 56,614,330
Diluted 60,681,252 61,499,413 61,827,830 59,964,046
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Quarter Ended
($000's, except
share and per September 30, June 30, March 31, December 31,
share amounts) 2005 2005 2005 2004
---------------------------------------------------------------------------

Petroleum and
natural gas
production
(BOE per day) 4,626 1,460(1) - -
Petroleum and
natural gas
commodity price
($ per BOE) $ 62.20 $ 50.16 - -
Natural gas
commodity price
at wellhead
($ per mcf) $ 9.91 $ 7.69
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)
Per share basic 0.08 (0.02) (0.04) (631)
Per share diluted 0.07 (0.02) (0.04) (631)

Cash generated by
(used in)
operations 15,303 3,109 (342) (558)
Per share basic 0.27 $ 0.10 (0.02) (558)
Per share diluted 0.26 $ 0.09 (0.02) (558)

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

Common shares
outstanding -
end of period
Basic 56,365,347 56,365,347 20,248,337 1
Diluted 63,259,512 63,143,512 25,963,002 1,665,001
Weighted average
common shares
outstanding
Basic 56,365,347 32,507,978 16,423,651 1
Diluted 58,842,965 34,012,050 17,862,366 1
---------------------------------------------------------------------------
(1) Average is based on production for June 2005 only, which is the period
during which Birchcliff recorded petroleum and natural gas production
and associated revenues and expenses following the acquisition of
properties in the SWPRA area of Alberta.


Discussion of Quarterly Results

Over the last four quarters, since September 30, 2005, the Corporation has issued equity for net proceeds of $13.8 million and increased its total debt by $61.4 million, which totals an additional $75.2 million of incremental spending above its cash flow during that one year period due to significantly decreased natural gas prices and significantly increased service costs. During this same one year period, cash flows have decreased from a high of $18.3 million in Q4 2005 with a natural gas price of $12.23/mcf at the wellhead to $10.7 million in Q3 2006 with a natural gas price of $5.91 at the wellhead. This equates to a $7.6 million or 42% reduction in cash flow for one quarter even though average production increased by 11%. As Birchcliff's quarterly results clearly demonstrate, the quarters with the highest natural gas price have the highest cash flow regardless of oil price.

The high cost of services we have seen over the past year coupled with decreasing natural gas prices results in the high cost for production additions that Birchcliff experienced over the last four quarters. In order to add value on a sustainable basis by developing Birchcliff's Doig/Montney resource play, either natural gas prices need to increase or the cost of services must decrease. Should the cost of services remain high and natural gas prices remain low, the Corporation will need to defer development of this resource play and focus on higher deliverability and less capital intensive opportunities in its asset base.

OUTLOOK

Birchcliff expects its fourth quarter to be similar in most respects to its third quarter, with a somewhat higher realized natural gas price. Fourth quarter results will be affected by the presently continuing curtailment of a portion of Birchcliff's production due to third party gas plant capacity issues. The timing of resolution of these curtailments is not yet determinable.

The Corporation has recently filed a preliminary prospectus to issue equity in order to raise net proceeds of approximately $28.4 million which will be used to reduce total debt outstanding.

The Corporation is aware of how lower natural gas prices and higher service costs are affecting the economics of its capital spending program and is closely monitoring the situation. Management believes that due to the high quality and concentration of its asset base, it can provide a meaningful capital program and will tailor that program to both the natural gas price environment and the service cost environment.

In light of the recent announcement by the Federal Minister of Finance regarding the taxation of royalty trusts, the Corporation is reviewing its acquisition strategy to see what benefits have arisen due to the lower stock market valuations being given to the oil and gas royalty trusts since the announcement. The Corporation is currently reviewing the situation and does not feel there is any detrimental impact to the running of its own business. Birchcliff will continue to monitor the situation to determine if it can take advantage of any positive opportunities that result from this taxation change.



INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)


BIRCHCLIFF ENERGY LTD.
Balance Sheets
(Unaudited) ($000's)
---------------------------------------------------------------------------
September 30, December 31,
2006 2005
----------------------------------

ASSETS
CURRENT
Cash and cash equivalents 65 64
Accounts receivable 10,458 16,385
Prepaid and other 3,275 1,426
----------------------------------
13,798 17,875

Future income tax asset 5,249 14,735

Petroleum and natural gas
properties and equipment(Note 4) 340,026 278,754
----------------------------------
359,073 311,364
----------------------------------
----------------------------------

LIABILITIES
CURRENT
Accounts payable and
accrued liabilities 28,771 41,605
----------------------------------
28,771 41,605
----------------------------------

Revolving credit facility(Note 5) 100,127 36,614
Asset retirement obligations(Note 6) 11,109 9,251


SHAREHOLDERS' EQUITY
Share capital(Note 7) 207,056 214,951


Contributed surplus(Note 8) 8,446 6,579
Retained earnings 3,564 2,364
----------------------------------
219,066 223,894
----------------------------------
359,073 311,364
----------------------------------
----------------------------------


See accompanying notes to the financial statements.

APPROVED BY THE BOARD

Larry A. Shaw, Director

A. Jeffery Tonken, Director


BIRCHCLIFF ENERGY LTD.
Statement of Net Income (Loss) and Retained Earnings (Deficit)
(Unaudited) ($000's)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
------------------------------------------------

REVENUE
Petroleum and
natural gas 22,546 26,843 68,019 33,615
Royalties (4,073) (5,711) (11,764) (7,152)
Interest and other - 2 3 697
------------------------------------------------
18,473 21,134 56,258 27,160
------------------------------------------------

EXPENSES
Production 4,581 3,438 11,947 4,773
Transportation 842 671 2,343 820
General and
administrative 1,085 1,152 3,886 2,723
Stock-based
compensation 663 668 2,110 1,372
Depletion, depreciation
and accretion 11,538 8,254 30,361 11,215
Interest 1,299 493 2,915 662
------------------------------------------------
20,008 14,676 53,562 21,565
------------------------------------------------
INCOME (LOSS) BEFORE TAXES (1,535) 6,458 2,696 5,595


TAXES
Capital taxes - 78 - 113
Future income
taxes (recovery) (193) 2,044 1,496 2,419
------------------------------------------------
(193) 2,122 1,496 2,532
------------------------------------------------
NET INCOME (LOSS) (1,342) 4,336 1,200 3,063

RETAINED EARNINGS (DEFICIT),
BEGINNING OF PERIOD 4,906 (2,098) 2,364 (789)

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

RETAINED EARNINGS, END
OF PERIOD 3,564 2,238 3,564 2,238
------------------------------------------------
------------------------------------------------


Net income (loss) per
common share
basic ($0.02) $0.08 $0.02 $0.09
diluted ($0.02) $0.07 $0.02 $0.08
Weighted average common
shares
basic 58,173,508 56,365,347 58,168,296 35,245,299
diluted 60,681,252 58,842,965 61,397,054 37,130,724

See accompanying notes to the financial statements.


BIRCHCLIFF ENERGY LTD.
Statement of Cash Flows
(Unaudited) ($000's)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
------------------------------------------------

CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:

OPERATING
Net income (loss) (1,342) 4,336 1,200 3,063
Adjustments for items
not affecting cash:
Depletion, depreciation
and accretion 11,538 8,254 30,361 11,215
Stock-based
compensation(Note 8) 663 668 1,973 1,372
Future income
tax (recovery) (193) 2,044 1,496 2,419
------------------------------------------------
10,666 15,302 35,030 18,069

Changes in non-cash
working capital(Note 10) (4,473) (570) 590 (3,031)
Asset retirement
expenditures incurred (198) - (198) -
------------------------------------------------
5,995 14,732 35,422 15,038
------------------------------------------------


FINANCING
Increase in revolving
credit facility 14,828 (7,209) 63,513 47,946
Decrease in loans
payable - - - (708)
Issuance of share capital,
net of issue costs(Note 7) 26 - (11) 154,982
------------------------------------------------
14,854 (7,209) 63,502 202,220
------------------------------------------------


INVESTING
Scout arrangement
costs(Note 2) - - - (36)
Purchase of petroleum
and natural gas
properties and equipment (140) (452) (1,629) (246,612)
Development of petroleum
and natural gas
properties and
equipment (25,134) (14,355) (87,948) (21,492)
Changes in non-cash
investing working
capital(Note 10) 4,425 7,277 (9,346) 8,915
------------------------------------------------
(20,849) (7,530) (98,923) (259,225)
------------------------------------------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS - (7) 1 (41,967)

CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 65 71 64 42,031
------------------------------------------------

CASH AND CASH EQUIVALENTS,
END OF PERIOD 65 64 65 64
------------------------------------------------
------------------------------------------------

Cash interest paid 1,299 493 2,915 662
Cash taxes paid - 154 60 154

See accompanying notes to the financial statements.


BIRCHCLIFF ENERGY LTD.
Notes to the Financial Statements
For the Three and Nine Months Ended September 30, 2006
(Unaudited)


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.

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. Concurrent with the Veracel Arrangement, Birchcliff completed the purchase of certain properties in the South West Peace River Arch area of Alberta (the "Acquisition"). On July 21, 2005, Birchcliff commenced trading on the Toronto Stock Exchange and was de-listed from the TSX Venture Exchange.

The interim financial statements of Birchcliff Energy Ltd. have been prepared by management in accordance with accounting principles generally accepted in Canada and are unaudited. The interim financial statements have been prepared following the same accounting policies and methods of computation as the audited financial statements for the period ended December 31, 2005. The disclosure which follows does not include all disclosures required for the annual financial statements. These unaudited interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the period ended December 31, 2005.

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 December 31, 2005 of $36,000 relating to the transaction were charged directly to the deficit in 2005.

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

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 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. Pursuant to an arrangement agreement, the Corporation implemented a Plan of Arrangement with Veracel which was completed on May 31, 2005.

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 233,921
Asset retirement costs (8,357)
Future tax benefit 17,248
---------------------------------------------------------------------------
242,812
---------------------------------------------------------------------------
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---------------------------------------------------------------------------
---------------------------------------------------------------------------
Consideration: $ 000's
---------------------------------------------------------------------------
Purchase price, net of adjustments, paid in cash 238,564
Costs related to the Veracel Arrangement 2,119
Costs related to the Acquisition 2,129
---------------------------------------------------------------------------
242,812
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The Corporation has made its best estimate as to the net assets acquired and the consideration given. The final purchase price adjustment has been determined by the Corporation and the vendor but not all costs have yet been finalized, such as annual through-put adjustments. The Corporation has made its best estimate for these costs, but the above amount remains subject to adjustment for those costs should they be material.



4. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT

September 30, 2006
---------------------------------------------------------------------------
Accumulated
Depletion and Net
Cost Depreciation Book Value
$ 000's $ 000's $ 000's
---------------------------------------------------------------------------

Petroleum and natural gas
properties and equipment 388,752 (49,389) 339,363
Office and other equipment 1,020 (357) 663
---------------------------------------------------------------------------
389,772 (49,746) 340,026
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---------------------------------------------------------------------------

December 31, 2005
---------------------------------------------------------------------------
Accumulated
Depletion and Net
Cost Depreciation Book Value
$ 000's $ 000's $ 000's
---------------------------------------------------------------------------

Petroleum and natural gas
properties and equipment 297,756 (19,804) 277,952
Office and other equipment 967 (165) 802
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298,723 (19,969) 278,754
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As at September 30, 2006, the cost of petroleum and natural gas properties includes $54.9 million (as at December 31, 2005 - $64.4 million) relating to unproved properties which have been excluded from costs subject to depletion and depreciation. Most of these costs relate to unproved properties acquired in the Acquisition.

Birchcliff capitalized general and administrative costs of $700,000 in the nine month period ended September 30, 2006 (nine months ended September 30, 2005 - $454,000) and $259,000 in the three month period ended September 30, 2006 (three months ended September 30, 2005 - $186,000) related to exploration and development activities.

The Corporation performed an impairment (ceiling) test review at September 30, 2006 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. Management's assessment is that there is no impairment of petroleum and natural gas properties and equipment as at September 30, 2006.

5. REVOLVING CREDIT FACILITY

The Corporation has available to it an extendible revolving term credit facility with an authorized limit of $105 million and an extendible revolving working capital facility with an authorized limit of $15 million. The $120 million of credit facilities are provided by a syndicate of two Canadian chartered banks (the "Syndicate"). As at September 30, 2006, Birchcliff had drawn $100.1 million on the credit facilities. At September 30, 2006 the rate applicable to the working capital facility was 6%.

The credit facilities allow for prime rate loans, US base rate loans, bankers' acceptances, letters of credit and LIBOR loans. The credit facilities bear interest at varying rates depending on the instrument utilized and the debt to EBITDA ratio, where EBITDA equals net earnings after income taxes, plus interest expense, income taxes and non-cash items deducted in determining net earnings.

The revolving term facility has a conversion date of May 24, 2007 and a maturity date which is two years after the conversion date. Birchcliff may request an extension of the conversion date with such an extension not exceeding 364 days, in order to maintain the revolving term facility. If the Syndicate does not grant an extension of the conversion date, then upon the expiry of the conversion date, the revolving term facility will convert to a term loan whereby all principal and interest will be required to be repaid at the maturity date.

The revolving working capital facility has a conversion date of May 24, 2007 and a maturity date which is two years after the conversion date. Birchcliff may request an extension of the conversion date with such an extension not exceeding 364 days, in order to maintain the revolving working capital facility. If the Syndicate does not grant an extension of the conversion date, then upon 4 months after the expiry of the conversion date, the revolving working capital facility will convert to a term loan whereby all principal and interest will be required to be repaid at the maturity date.

The credit facilities are subject to the Syndicate's redetermination of the borrowing base twice a year as of October 31 and the conversion date. (Note 11) Upon any change in or redetermination of the borrowing base limit which results in a borrowing base shortfall, Birchcliff must eliminate the borrowing base shortfall amount. The facility is secured by a fixed and floating charge debenture, an instrument of pledge, and a general security agreement encompassing all of the Corporation's assets.

6. 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 obligations as at September 30, 2006 to be approximately $31.3 million to be incurred between 2006 and 2056. 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:

---------------------------------------------------------------------------
---------------------------------------------------------------------------
($000's) 2006 2005
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Balance, January 1 9,251 -

Change in estimates 497 -

Actual expenditures incurred (198)

Obligations incurred 975 5,874

Accretion expense 584 125
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Balance, September 30 11,109 5,999
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7. 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 Amount
Common Shares $
-----------------------------
Incorporation on July 6, 2004 1 3

-----------------------------
Balance, December 31, 2004 1 3

Issued (Note (c)(i)) 383,800 575,700
Issued, net of costs (Note (c)(ii through iv)) 19,864,536 57,462,253
Issued (Note (d)(i)) 117,010 468,040
Issued, net of costs (Note (d)(ii)) 34,000,000 129,422,500
Issued, net of costs (Note (e)) 2,000,000 9,473,920
Issued upon exercise of warrants (Note (f)) 300,000 1,332,000
Issued, net of costs (Note (g)) 1,482,400 12,876,768
Tax effect of share issue costs (Note (h)) - 3,340,160

-----------------------------
Balance, December 31, 2005 58,147,747 214,951,344

Issued upon exercise of stock options 20,000 88,800
Share issue costs (Note (i)) - (19,321)
Tax effect of share issue costs (Note (i)) - 6,500
Tax effect of flow-through shares (Note (e) and
(g)) - (7,997,000)
-----------------------------
Balance, March 31, 2006 58,167,747 207,030,323
- -
-----------------------------

Balance, June 30, 2006 58,167,747 207,030,323
Issued upon exercise of stock options 6,666 25,331
-----------------------------
Balance, September 30, 2006 58,174,413 207,055,654
-----------------------------
-----------------------------


(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 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 Birchcliff for net proceeds of $39,766,677;

(iii) 4,842,100 common shares of 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 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 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 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 $129,422,500;

(iii) 17,287,432 of Series 1 Preferred Shares of 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 were redeemed for cash.

(e) On June 2, 2005, Birchcliff issued 2,000,000 flow-through shares at $5.00 per common share in exchange for flow-through share commitments made by Veracel prior to completion of the Veracel Arrangement, for net proceeds of $9,473,920. As at December 31, 2005 the commitment to spend and renounce $10,000,000 of qualified 100% deductible tax pools with respect to these flow-through shares was fulfilled.

(f) On December 2, 2005, 300,000 common shares were issued in exchange for 300,000 performance warrants with an exercise price of $3.00 per common share for gross proceeds of $900,000; in addition, $432,000 of compensation costs previously recorded to contributed surplus for these performance warrants was removed from contributed surplus and added to share capital.

(g) On December 20, 2005, Birchcliff issued 1,482,400 flow-through shares at a price of $9.12 per share for net proceeds of $12,876,768. As at December 31, 2005 Birchcliff renounced $13,519,488 of qualified 100% deductible tax pools with respect to these flow-through shares. As at September 30, 2006 the Corporation had fulfilled its obligations with respect to these flow-through shares.

(h) Birchcliff recognized a future tax benefit of $3,340,160 in respect of total share issue costs of $9,823,320 incurred to December 31, 2005.

(i) Birchcliff has recognized a future tax benefit of $6,500 in respect of total share issue costs of $19,321 relating to the issuance of flow-through shares on December 20, 2005.

8. STOCK-BASED COMPENSATION

The Corporation has established a stock-based compensation plan whereby officers, employees, directors and consultants may be granted options or performance warrants to purchase one common share for each option or performance warrant granted, at a fixed price not less than the fair market value of the stock at the time of grant, subject to certain conditions being met. Stock options granted under this plan vest over a three year period 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.

In order to calculate the compensation expense, the fair value of the stock options or performance warrants is estimated using the Black-Scholes option-pricing model that takes into account, as of the grant date: exercise price, expected life, current price, expected volatility, expected dividends, and risk-free interest rates.

Stock Options

For the nine months ended September 30, 2006, the Corporation recorded just under $2.0 million (2005 - $1.4 million) of non-cash stock-based compensation expense and a corresponding increase to contributed surplus related to the issuance of stock options during the period. For the three months ended September 30, 2006, the Corporation recorded $663,000 (three months ended September 30, 2005 - $668,000) of non-cash stock-based compensation expense and a corresponding increase to contributed surplus related to the issuance of stock options during the period.

The Corporation also recorded cash stock-based compensation expense of $137,000 (nine months ended September 30, 2005 - $NIL) and paid out cash relating to the cancellation of vested stock options during the nine month period. During the three months ended September 30, 2006, the Corporation recorded cash stock-based compensation expense of $NIL (three months ended September 30, 2005 - $NIL).

Using the fair value method, the weighted average fair value of stock options granted during the nine months ended September 30, 2006 was $2.89 per option.

At September 30, 2006 the Corporation had authorized for issuance options in respect of 5,817,441 common shares. At September 30, 2006, there remained available for issuance options in respect of 1,357,773 common shares.




A summary of the changes during the nine months ended September 30, 2006
and the Corporation's outstanding stock options as at September 30, 2006 is
presented below:

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

Outstanding, December 31, 2004 1,665,000 3.00

Granted 1,529,500 4.40
Exercised - -
Cancelled - -
-------------------------------

Outstanding, December 31, 2005 3,194,500 3.67

Granted 1,217,500 7.11
Exercised (20,000) (3.00)
Cancelled (16,666) (3.00)
-------------------------------

Outstanding, March 31, 2006 4,375,334 4.63

Granted 23,000 7.05
Exercised - -
Cancelled (38,332) (3.19)
-------------------------------
-------------------------------

Outstanding, June 30, 2006 4,360,002 4.66

Granted 184,500 2.67
Exercised (6,666) 3.80
Forfeited (78,168) 5.56
Cancelled - -

-------------------------------
Outstanding, September 30, 2006 4,459,668 4.68
-------------------------------
-------------------------------

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Number Outstanding
Date of Grant at September 30, 2006 Date of Expiry
---------------------------------------------------------------------------

December 3, 2004 (1) 1,583,334 January 21, 2010
Apr 20 to Jun 22, 2005 1,036,834 Apr 20 to Jun 22, 2010
Jul 4 to Sep 7, 2005 98,500 Jul 4 to Sept 7, 2010
Oct 6 to Nov 28, 2005 350,000 Oct 6 to Nov 28, 2010
Jan 11 to Mar 6, 2006 1,183,500 Jan 11 to Mar 1, 2011
Apr 11 to Apr 25, 2006 23,000 Apr 11 to Apr 25, 2011
Aug 14 to Sep 26, 2006 184,500 Aug 14 to Sep 26, 2011
---------------------------------------------------------------------------
4,459,668
---------------------------------------------------------------------------
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Number
Exercise Exercisable at
Date of Grant Price $ September 30, 2006
---------------------------------------------------------------------------
December 3, 2004 (1) 3.00 486,668 (1)(2)
Apr 20 to Jun 22, 2005 3.50 to 4.09 318,945 (3)
Jul 4 to Sep 7, 2005 4.06 to 5.45 21,166 (4)
Oct 6 to Nov 28, 2005 5.85 to 6.46 -
Jan 11 to Mar 6, 2006 6.50 to 7.60 -(5)
Apr 11 to Apr 25, 2006 6.86 to 7.10 -
Aug 14 to Sep 26, 2006 4.00 to 5.70 -
---------------------------------------------------------------------------
834,502
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) All options granted under the stock-based compensation plan vest as to
one-third on each anniversary date of their grant except for the
initial options granted. These options vest one-third on January 1 in
each of the years 2006, 2007 and 2008.
(2) 20,000 options were exercised, 48,332 options were cancelled, and
13,334 options were forfeited in the nine months ended September 30,
2006.
(3) 6,666 options were exercised, 6,666 options were cancelled, and 13,334
options were forfeited in the nine months ended September 30, 2006.
(4) 17,500 options were forfeited in the nine months ended September 30,
2006.
(5) 34,000 options were forfeited in the nine months ended September 30,
2006.


Performance Warrants

At September 30, 2006, there were 3,749,665 performance warrants outstanding with an exercise price of $3.00. Each performance warrant entitles the holder to purchase one common share at the exercise price.

The performance conditions were fulfilled in the fourth quarter of 2005, resulting in all of the performance warrants vesting and becoming fully exercisable. As a result, the full amount of the compensation expense related to the performance warrants was recorded by the Corporation in the fourth quarter of 2005. In December 2005, 300,000 performance warrants were exercised and the compensation expense ($432,000) relating to these exercised warrants was removed from contributed surplus and credited to share capital in accordance with the Corporation's accounting policy.

Consequently, for the nine months ended September 30, 2006, the Corporation recorded $NIL (nine months ended September 30, 2005 - $621,000) compensation expense in the statement of net income (loss) relating to stock based compensation for the performance warrants. For the three months ended September 30, 2006, the Corporation recorded $NIL (three months ended September 30, 2005 - $354,000) compensation expense in the statement of net income (loss) relating to stock based compensation for the performance warrants.



A summary of the changes during the nine months ended September 30, 2006
and the Corporation's outstanding performance warrants as at September 30,
2006 is presented below:

------------------------------
Weighted Average
Exercise Price
Number $
------------------------------
Outstanding, December 31, 2004 - -

Issued 4,049,665 3.00

Exercised (300,000) 3.00
------------------------------

Outstanding, December 31, 2005 3,749,665 3.00

Issued - -

Exercised - -
------------------------------
Outstanding, September 30, 2006 3,749,665 3.00
------------------------------
------------------------------

---------------------------------------------------------------------------
Number Number
Outstanding Exercisable
at June 30, Exercise at June 30,
Date of Grant 2006 Date of Expiry Price 2006
---------------------------------------------------------------------------

January 14, 2005 3,749,665 January 31, 2010 $ 3.00 3,749,665
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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

--------------------------
2006 2005
--------------------------

Risk-free interest rate 4.0% 3.6%
Expected maturity (years) 5.0 5.0
Expected volatility 41.4% 47.3%
Dividend yield 0% 0%

Contributed Surplus Continuity
----------------------------
$ 000's $ 000's
----------------------------

Balance, December 31, 2004 63
Stock-based compensation expense
- stock options 1,116
Stock-based compensation expense
- performance warrants (1) 5,832
--------
Stock-based compensation expense
- total 2005 6,948
Exercise of performance warrants (432)
--------
Balance, December 31, 2005 6,579
Stock-based compensation expense
- stock options 623
Cancellation of stock options (24)
Exercise of stock options (29)
--------
Balance, March 31, 2006 7,149
Stock-based compensation expense
- stock options 687
Cancellation of stock options (53)
Exercise of stock options -
--------
Balance, June 30, 2006 7,783
Stock-based compensation expense
- stock options 702
Cancellation of stock options -
Forfeiture of stock options (39)
Exercise of stock options -
--------
Balance, September 30, 2006 8,446
--------
--------

(1) All of the performance warrants vested during the fourth quarter of
2005 and as such 100% of the stock-based compensation value to be
expensed was charged against income in the fourth quarter of 2005.


9. COMMITMENTS

Office Premises

The Corporation is committed under an operating lease for its current office premises which expires on September 30, 2007. It is also committed to March 29, 2011 under an operating lease for some other premises that it does not use and has sublet to an arm's length party on a basis that recovers all of its rental costs. The Corporation is committed to the following aggregate minimum lease payments (not reduced by rents receivable by the Corporation):



--------
$
--------

2006 (Oct 1 - Dec 31) 211,000
2007 682,000
2008 202,000
2009 202,000
2010 202,000
Thereafter 51,000


10. SUPPLEMENTARY CASH FLOW INFORMATION

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

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

Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
---------------------------------------------------------------------------
$ 000's $ 000's $ 000's $ 000's
---------------------------------------------------------------------------
Provided by (used in)
Accounts receivable 193 (4,434) 5,927 (11,036)
Prepaid and other 107 (1,276) (1,849) (1,316)
Accounts payable and
accrued liabilities (348) 12,417 (12,834) 18,236
---------------------------------------------------------------------------
(48) 6,707 (8,756) 5,884
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Operating (4,473) (570) 590 (3,031)
Investing 4,425 7,277 (9,346) 8,915
---------------------------------------------------------------------------
(48) 6,707 (8,756) 5,884
---------------------------------------------------------------------------


11. SUBSEQUENT EVENTS

On October 26, 2006 upon completion of the Syndicate's mid-year review, the Corporation received a letter from its bank indicating that the credit facilities will remain unchanged at $120 million.

On November 3, 2006 the Corporation entered into an agreement with a syndicate of underwriters led by GMP Securities L.P. under which the underwriters agreed to purchase for resale to the public, on a bought deal basis, 3,200,000 Common Shares at $4.40 each and to sell as agent for the Corporation, 2,740,000 Flow-Through Common Shares at $5.85 each for aggregate gross proceeds of $30,109,000 and estimated net proceeds of $28,403,000 after sales commissions and deal costs. Closing is anticipated to occur on or about November 22, 2006 and is subject to certain conditions including, but not limited to, receipt of all necessary approvals including the approval of the Toronto Stock Exchange. The Corporation is obliged to renounce $16,029,000 of Canadian Exploration Expenses in favor of the purchasers of the flow-through shares on or before December 31, 2006.

Advisory

FORWARD LOOKING STATEMENTS

Certain information set forth in this press release contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond Birchcliff's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the competition for qualified personnel and management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be incorrect and, as such, undue reliance should not be placed on forward-looking statements. Birchcliff's actual results, performance or achievement could differ materially from those expressed in or implied by these forward-looking statements, and accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits will derive therefrom. Birchcliff disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

BOE Conversions: 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 equivalent ("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.

Contact Information

  • Birchcliff Energy Ltd.
    Jeff Tonken
    President and Chief Executive Officer
    (403) 261-6401
    (403) 261-6424 (FAX)
    or
    Birchcliff Energy Ltd.
    Bruno Geremia
    Vice President and Chief Financial Officer
    (403) 261-6401
    (403) 261-6424 (FAX)
    or
    Birchcliff Energy Ltd.
    Jim Surbey
    Vice President, Corporate Development
    (403) 261-6401
    (403) 261-6424 (FAX)