C1 Energy Ltd.

C1 Energy Ltd.

March 18, 2005 08:30 ET

C1 Energy Ltd. Announces Fiscal 2004 Results


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: C1 ENERGY LTD.

TSX SYMBOL: CTT

MARCH 18, 2005 - 08:30 ET

C1 Energy Ltd. Announces Fiscal 2004 Results

CALGARY, ALBERTA--(CCNMatthews - March 18, 2005) - C1 Energy Ltd.
(TSX:CTT) of Calgary, Alberta is pleased to report its operating and
financial results for the three months and year ended December 31, 2004.
C1 commenced operations on December 29, 2003 when a portion of the
assets of Navigo Energy Inc. ("Navigo") were transferred to C1.
Accordingly, year to year comparisons may not be meaningful.

2004 Highlights

- Increased oil & gas production and reserves - Implemented the Gift
Lake waterflood project in November resulting in significant reserve
additions in 2004 with production gains beginning in 2005. Established a
new significant shallow gas development project at Chipmunk through
exploration drilling. Exit production rates increased to 750 boe/d in
2004 up from 252 boe/d in 2003 - an improvement of almost 200%.
Increased total proven plus probable reserves by 400% and replaced our
2004 production by over 1200% on a total proven plus probable basis.

- Increased net asset value - Increased our net asset value per share by
35% to $1.80 in 2004 from $1.33 last year.

- Improved year round access - Successfully established two new year
round access, multi zone gas exploration projects at Blueberry and
Sarcee. Increases year round access from 35% to 65% across C1 assets.

- Established a new core development area -Through the acquisition of
Extreme Energy we added a new core, low risk, high impact gas
development project at Whiskey Creek.

- Balanced oil to gas production ratio - Improved ratio moved from 80%
light oil and 20% gas to 50% light oil and 50% gas.

C1 reconfirms production guidance for the first quarter exit of 1200
boe/d resulting from a successful winter drilling program and will be
reviewing its 2005 exit production target of 1600 boe/d after completion
of the Q1 2005 program.



FINANCIAL AND OPERATING HIGHLIGHTS

(Audited) 3 Day
Year ended Period Ended
December 31, December 31,
2004 2003
---------------------------------------------------------------------
Financial ($000s, except share
information)
Petroleum and natural gas sales 8,718 30
Cash flow from operations (1) 3,959 (9)
Per share basic 0.19 0.00
Net income 2,991 (43)
Per share basic and diluted 0.15 0.00
Capital expenditures, net 26,093 16,130
Working capital 4,468 8,981
Total assets 52,685 26,299
Shareholders' equity 45,853 24,722
Common shares outstanding (000s) 27,609 17,754
Weighted average common shares outstanding
(000s) 20,475 17,754

---------------------------------------------------------------------
Operations
Crude oil and NGL's production
Barrels 121,466 567
Barrels per day 332 189
Average selling price ($/bbl) 51.78 43.22

Natural gas production
Thousand cubic feet 372,245 1,142
Thousand cubic feet per day 1,017 381
Average selling price ($/mcf) 6.55 4.85

Oil equivalent production
Barrels of oil equivalent 183,507 757
Barrels of oil equivalent per day (6:1) 501 252
Average selling price ($/boe) 47.51 39.67
Average operating netback ($/boe) 26.11 23.25

Wells drilled
Gross 5 -
Net 3.7 -
--------------------------------------------------------------------


(1) The Company, in part, evaluates its performance based on cash flow
from operations. Cash flow from operations is a non-GAAP measure that
represents cash generated from operating activities before changes in
non-cash working capital items during the period. Cash flow from
operations may not be comparable to similar measures used by other
companies.

Reserves

C1 announced certain of its year end 2004 reserves information on
February 16, 2005. The following tables summarize certain information
with regard to C1's oil and gas reserves as evaluated by Sproule
Associates Limited as at December 31, 2004. Additional information
required under NI 51-101 will be included in the Annual Information Form
to be filed for fiscal 2004.



Barrels of
Natural Gas Oil
Crude Oil Natural Gas(1) Liquids Equivalent

Reserve Gross Net Gross Net Gross Net Gross Net
Category mbbl mbbl mmcf mmcf mbbl mbbl mboe mboe
---------------------------------------------------------------------
Proved
Developed
Producing 603.8 479.9 2,251 1,478 72.2 42.8 1051.2 769.0
Developed
Non-
Producing 54.1 47.3 33 23 1.7 1.2 61.3 52.3
Undeveloped 0.0 0.0 2,786 1,877 40.9 23.7 505.2 336.5
---------------------------------------------------------------------
Total
Proved 657.9 527.3 5,070 3,377 114.8 67.7 1,617.8 1,157.8
Probable 420.1 328.5 3,066 2,074 92.3 54.1 1,023.4 728.3
---------------------------------------------------------------------
Total Proved
Plus
Probable 1078.0 855.8 8,136 5,452 207.1 121.8 2,641.2 1,886.1
---------------------------------------------------------------------
---------------------------------------------------------------------


(1) Includes solution gas plus non-associated and associated gas


Summary of Net Present Values of Future Net Revenue
As of December 31, 2004
Forecast Prices and Costs
---------------------------------------------------------------------
Before Income Taxes Discounted at (% / Year)

0 % 5 % 10 % 15 %
Reserve Category $000s $000s $000s $000s
---------------------------------------------------------------------
Proved
Developed Producing 18,846 16,281 14,407 12,982
Developed Non-Producing 1,085 876 721 603
Undeveloped 5,671 4,460 3,620 2,996
---------------------------------------------------------------------
Total Proved 25,602 21,617 18,747 16,582
Probable 13,174 9,860 7,796 6,321
---------------------------------------------------------------------
Total Proved Plus Probable 38,776 31,477 26,544 22,903
---------------------------------------------------------------------
---------------------------------------------------------------------


Reserves Life Index (1)
Total Proved Proved Plus Probable
---------------------------------------------------------------------
Total gross reserves (Mboe) 1,617.8 2,641.2
Exit production rate (boe/d) 750 750
Fourth quarter production (boe/d) 516 516
Annual 2004 production (boe/d) 501 501
---------------------------------------------------------------------
RLI based on annualized exit
production (years) 6.0 9.6
RLI based on annualized fourth
quarter production (years) 8.6 14.0
RLI based on annual 2004 production
(years) 8.8 14.4
---------------------------------------------------------------------
---------------------------------------------------------------------

(1) Calculated by taking total reserves divided by annualized
production

Net Asset Value
The net asset value for the Company at December 31, 2004, is
determined as follows:

000's except per
share amounts 2004 2003
---------------------------------------------------------------------
Forecast Constant Forecast Constant
Prices Prices Prices Prices
and Costs and Costs and Costs and Costs
on on on on
Reserves Reserves Reserves Reserves
---------------------------------------------------------------------
Present value of
proved plus probable
reserves (discounted
at 10% before tax)(1) $ 26,544 $ 31,711 $ 4,794 $ 5,853
Undeveloped land(2) 9,623 9,623 8,710 8,710
Lands subject to
exclusive access by C1(3) 4,450 4,450 - -
Working capital 4,468 4,468 8,981 8,981
Proceeds from exercise
of stock options 2,064 2,064 - -
---------------------------------------------------------------------
Net Asset Value $ 47,149 $ 52,316 $ 22,485 $ 23,544
---------------------------------------------------------------------

Shares outstanding
with full dilution(4) 29,014 29,014 17,757 17,757

Net asset value per share $ 1.63 $ 1.80 $ 1.27 $ 1.33
---------------------------------------------------------------------
---------------------------------------------------------------------


(1) Value obtained from independent engineering evaluation

(2) Value from independent third party evaluation dated December 31, 2004

(3) Lands on the Gift Lake Metis Settlement covered by the AMI plus
lands under the Haro JV valued at $25/acre x 178,000 net acres as
determined by management

(4) Includes 27,609,408 C1 Common Shares plus 625,000 options, 371,116
warrants and 409,000 shares on conversion of performance shares based on
an average trading price of $1.94 per share.

Note: Net asset value excludes an estimated $7.5 million of seismic
value in 2004 (2003 - $4.2 million)

Undeveloped Land

All of C1's undeveloped land was evaluated by an independent third party
as of December 31, 2004. In 2004, C1's undeveloped land inventory rose
11% to 136,000 net acres, an increase of approximately 14,000 acres from
last year. All of C1's undeveloped acreage is located in Alberta. This
does not include an additional 168,000 net acres of land on the Gift
Lake Metis Settlement to which C1 has exclusive surface access under an
agreement with the Gift Lake Metis Settlement and Gift Lake General
Council.



Undeveloped Land Holdings by Region
Average
December 31, 2004 Gross Acres Net Acres Working Interest
---------------------------------------------------------------------
Peace River Arch 109,090 93,615 86%
W5M 36,428 25,617 70%
Northern 18,880 16,859 89%
Other 640 256 40%
---------------------------------------------------------------------
Total 165,038 136,347 83%
---------------------------------------------------------------------
---------------------------------------------------------------------


Drilling Activity

Year Ended December 31, 2004
Exploration Development Total
---------------------------------------------------------------------
Gross Net Gross Net Gross Net
---------------------------------------------------------------------
Oil 2 1.2 - - 2 1.2
Gas 2 1.5 - - 2 1.5
D&A 1 1.0 - - 1 1.0
---------------------------------------------------------------------
Total 5 3.7 - - 5 3.7
---------------------------------------------------------------------



MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion is management's assessment of the operating and
financial results of C1 Energy Ltd. ("C1" or the "Company") as well as
its future opportunities and risks, and should be read in conjunction
with the audited financial statements and related notes of the Company
for the for the year ended December 31, 2004 and the three day period
from commencement of operations on December 29, 2003 and ended on
December 31, 2003. The financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
("GAAP"). The commentary is as of March 11, 2005. The reader should be
aware that historical results are not necessarily indicative of future
performance.

C1 commenced operations on December 29, 2003 when a portion of the
assets of Navigo Energy Inc. ("Navigo") were transferred to C1. As the
transfer of assets took place between related companies (at that time)
the assets were transferred to C1 for financial statement purposes at
book value. As such, comparisons year to year are not meaningful and
therefore where period to period comparisons are made in this discussion
and analysis, they are primarily between the fourth quarter of 2004 and
the third quarter of 2004, or between the fourth quarter of 2004 and the
full year ended December 31, 2004.

In conformity with Canadian Securities Administrator's National
Instrument ("NI") NI 51-101 "Standards of Disclosure for Oil and Gas
Activities", natural gas volumes have been converted to equivalent
barrels of oil ("boe") using a conversion ratio of six thousand cubic
feet ("mcf") of natural gas to one boe. This ratio is based on an energy
equivalency conversion method primarily applicable at the burner tip and
does not represent a value equivalency at the wellhead. Readers are
cautioned that boe may be misleading, particularly if used in isolation.

The MD&A contains the term "cash flow from operations" ("cash flow"),
which should not be considered an alternative to, or more meaningful
than, "cash flow from operating activities" as determined in accordance
with Canadian GAAP as an indicator of the Company's financial
performance. C1's determination of cash flow from operations may not be
comparable to that reported by other companies. The reconciliation
between net earnings and cash flow from operations can be found in the
statements of cash flows in the financial statements. The Company
evaluates its performance based on net income and cash flow from
operations. The Company considers cash flow from operations to be a key
measure as it demonstrates the Company's ability to generate the cash
necessary to repay debt and to fund future growth through capital
investment. Cash flow from operations per share is calculated using the
diluted weighted average number of shares for the period.



SUMMARY OF OPERATIONS AND FINANCIAL HIGHLIGHTS

Three Months Ending Year Ending
December 31, 2004 December 31, 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Production
Natural gas (mcf/d) 1,292 1,017
Oil and Liquids (bbls/d) 306 332
Boe/d (6:1) 516 501
---------------------------------------------------------------------

Financial
($000's except per unit amounts) $ $/boe $ $/boe
---------------------------------------------------------------------
Oil and gas production 2,301 48.47 8,718 47.51
Royalties (net of ARTC) (490) (10.32) (2,033) (11.08)
Operating expenses (525) (11.06) (1,693) (9.22)
Transportation 12 0.25 (201) (1.10)
---------------------------------------------------------------------
Operating netback 1,298 27.34 4,791 26.11
General and administrative (214) (4.51) (832) (4.54)
Current tax recovery 40 0.84 - -
---------------------------------------------------------------------
Cash flow from operations 1,124 23.67 3,959 21.57
Depletion and depreciation (652) (13.73) (4,531) (24.69)
Stock-based compensation (194) (4.09) (685) (3.73)
Future tax recovery 1,361 28.67 4,248 23.15
---------------------------------------------------------------------
Net income (loss) 1,639 34.52 2,991 16.30
---------------------------------------------------------------------
Earnings (loss) per share $ 0.08 $ 0.15
---------------------------------------------------------------------


RESULTS OF OPERATIONS

Oil and Gas Production

Three Months Ended Year Ended
($000's) December 31, 2004 December 31, 2004


--------------------------------------------------------------------
Crude oil sales 1,560 6,278
Natural gas sales 741 2,440
--------------------------------------------------------------------
Total petroleum and natural gas sales 2,301 8,718
--------------------------------------------------------------------
--------------------------------------------------------------------


The primary reason for increased revenue in the fourth quarter compared
the third quarter was due to higher production volumes combined with
higher crude oil prices. Production volumes increased primarily in the
Chipmunk area where we were able to increase production from the 06-22
well due to better than expected reservoir performance and in Seal where
we restored shut-in production and made facilities modifications that
significantly reduced battery down time.



Average Selling Prices
Three Months Ended Year Ended
December 31, 2004 December 31, 2004
---------------------------------------------------------------------
Crude oil ($/bbl) 56.52 51.78
Natural gas ($/mcf) 6.30 6.55
Total average realized price ($/boe) 48.47 47.51
---------------------------------------------------------------------
---------------------------------------------------------------------


Crude Oil Pricing

C1 received an average price of $51.78/bbl for its crude oil for the
year and $56.52 for the quarter ended December 31. Crude oil prices were
5% higher than the third quarter average price of $53.93/bbl. West Texas
Intermediate ("WTI") prices have remained strong throughout 2004,
averaging more than US $41.50/bbl. Prices have been influenced by
continued growth in oil demand, particularly from China and India as
well as from uncertainty in the Middle East. Oil and gas markets have
moved to "just in time" supply and demand which has resulted in little
surplus capacity in the system for supply and has led to new bottoms for
oil and gas prices at higher levels than in the past. Pricing is
expected to remain strong for 2005 primarily due to continued demand
growth with WTI prices expected to average US $43.00/bbl.

Natural Gas Pricing

C1 received an average price of $6.55/mcf for its natural gas production
for the year and $6.30/mcf for the quarter ended December 31. Natural
gas prices were down 4% compared to the third quarter average price of
$6.56/mcf. C1 is currently marketing 100% of its gas to a third party
based on the daily index price at AECO. Natural gas prices at AECO have
averaged over $6.50/mcf in 2004 due to strong draws from storage in
North America and the strength of crude oil prices. Due to expected
higher gas storage levels, we anticipate that there will be some
softness in natural gas prices in 2005 compared to last year, but should
still average over $6.00/mcf at AECO.

Royalties

Royalty costs net of ARTC were $0.5 million for the quarter
($10.33/boe). For the year royalty costs were $2.0 million ($11.08/boe)
and the rates are expected to be similar for 2005 as Extreme's assets
had a similar royalty burden to ours. Royalty costs per boe decreased
from the third quarter amount of $11.70/boe due to a royalty holiday
that was received on a well in the Seal area. Royalty burdens for C1 are
predominantly crown. For the year, crown royalties before ARTC averaged
21.0% and freehold and other royalties averaged 4.9% of total revenue.

Operating Expenses

Production expenses for the fourth quarter were $0.5 million
($11.06/boe) and were $1.7 million ($9.22/boe) for the year. This is
higher than the third quarter cost of $8.57/boe primarily due to
workover costs and battery repair and maintenance incurred at Seal
during November. Production costs per boe in the Gift Lake, Seal and
Milligan areas are currently high due to a low production base but costs
in the Gift Lake area should begin to decline significantly after the
first quarter of 2005 as we have obtained good production practice
status "GPP" and we will be able to increase production volumes at the
"G Pool". We also expect somewhat higher volumes in Seal as a result of
a correction in emulsion measurement, which should reduce costs in that
area on a boe basis.

Transportation Costs

Transportation costs for the year were $0.2 million ($1.10/boe). There
was a small recovery overall for the fourth quarter resulting from over
accruals in previous quarters.

General and Administrative Expenses

General and administrative expenses were $0.2 million for the quarter
($4.51boe) down from last quarter and are $0.8 million ($4.54/boe) for
the year. Administrative expenses were lower than in the third quarter
primarily due to higher capital recoveries and an increase in
capitalized general and administrative costs resulting from exploration
and production staffing additions in the fourth quarter. Administrative
costs per boe should decline as production volumes increase in 2005.

Stock-based Compensation

Stock-based compensation for the fourth quarter was $10,000 higher than
the third quarter due to additional options granted. The total
compensation of $685,000 year-to-date represents a non-cash charge
resulting from applying the fair value method on performance shares that
were issued in 2003 and stock options issued in 2004. Under this method,
compensation expense related to these programs is recorded in the
statement of operations over the vesting period.

Depletion, Depreciation and Accretion

Depletion, depreciation, and accretion amounted to $0.7 million
($13.75/boe) in the fourth quarter and $4.6 million ($24.69/boe) for the
nine-month period. The most important factor that impacted the depletion
rate in the fourth quarter relates to the recognition of significantly
higher reserves from the waterflood project at Gift Lake. We also
obtained higher reservoir assessments resulting from better production
performance in the Chipmunk area than was forecast as well as the effect
of long reserve life assets acquired in the Extreme transaction.

Ceiling Test

C1 has applied a ceiling test on the carrying costs of petroleum and
natural gas properties. The net amount at which petroleum and natural
gas properties are carried is limited to the fair value of those
properties based on the net present value of the future net revenues
(the "ceiling test"). Commodity prices used to determine the future cash
flows of C1 were taken from pricing forecasts published by C1's
independent engineers and are consistent with forecast prices. The
prices used for "light, sweet crude oil at Edmonton" are $51.25/bbl in
2005 reducing to $36.91 by 2010 and increasing at 1.5% per annum
thereafter. Natural gas prices at AECO-C are $6.97/mcf in 2005,
declining to $5.37/mcf by 2009 before increasing to $5.98/mcf by 2015 at
which time prices increase at 1.5% per annum thereafter. The ceiling
test resulted in no write-down.

Capital and Income Taxes

There were $4.2 million of future tax benefits recorded during the year.
This resulted from recognizing future tax benefits due to the
renunciation of $7.3 million of resource expenditures to flow through
shareholders as well as from recognizing the value of future tax
benefits not previously recorded due to uncertainty of utilization.


At the end of 2004, we had $38.8 million of tax pools available for
deduction against future taxable income. The tax pools available were as
follows:



December 31
($000s) 2004 2003
---------------------------------------------------------------------
Canadian oil gas property expense $ 12,672 $ 10,429
Canadian development expense 9,163 6,203
Canadian exploration expense 8,863 8,612
Foreign exploration and development
expense 228 -
Undepreciated capital cost 5,529 2,636
Non-capital losses carried forward 624 5
Share issue costs 1,714 407
---------------------------------------------------------------------
Total tax pools $ 38,793 $ 28,292
---------------------------------------------------------------------
---------------------------------------------------------------------


Cash Flow from Operations and Net Income

Cash flow from operations was $1.1 million for the quarter, a 19%
increase from the third quarter, and $3.9 million for the year.

Net income was $2.9 million for the year ($0.15/share) with income for
the quarter of $1.6 million ($0.08/share).

Capital Expenditures



Three Months Ended Year Ended
($000s) December 31, 2004 December 31, 2004
---------------------------------------------------------------------
Drilling and completions $ 806 $ 8,292
Land 667 1,310
Equipment and facilities 979 3,021
Geological and geophysical 29 1,366
Asset retirement obligations (104) (57)
Capitalized general and administrative
expenses 210 506
Property acquisitions - 605
Corporate acquisition 10,879 10,879
Other 167 171
--------------------------------------------------------------------
Total capital expenditures $ 13,633 $ 26,093
--------------------------------------------------------------------
--------------------------------------------------------------------


Capital expenditures for the year ended December 31, 2004 were $26.1
million. During the fourth quarter we incurred $2.8 million of
exploration and development expenditures. These costs were primarily
related to costs incurred in Gift Lake related to the waterflood, some
drilling costs in Blueberry subsequent to the Extreme acquisition, and
preliminary costs relating to the winter drilling program in Haro.

On December 16, 2004, C1 completed the acquisition of Extreme for $10.9
million (including costs associated with the acquisition of $0.2
million). Extreme shareholders received a total of 5,854,992 C1 common
shares and 371,116 C1 share purchase warrants with an ascribed value of
$0.1 million. Extreme was amalgamated with C1 on December 16, 2004. The
assets acquired by C1 added production of approximately 220 boe/d (77 %
natural gas). In addition, the acquisition added approximately 20,000
net acres of undeveloped land and $8.0 million in tax pools and
consolidated our working interest position in the Blueberry area. The
transaction has been accounted for as a purchase and the financial
statements of C1 include the results of the Extreme assets effective
December 17, 2004.

NI 51-101 Finding and Development Costs ("F&D") by Major Capital Type



Change in
Future
2004 Capital Development
Expenditures Capital Total Capital
---------------------------------------------------------------------
Proved Reserves
Exploration and development 14,609 2,240 17,034
Corporate acquisitions 10,879 350 11,229
Property acquisitions 605 450 1,055
---------------------------------------------------------------------
Total 26,093 3,040 29,133
---------------------------------------------------------------------
---------------------------------------------------------------------
Proved Plus Probable Reserves
Exploration and development 14,609 4,809 19,418
Corporate acquisitions 10,879 788 11,667
Property acquisitions 605 850 1,455
---------------------------------------------------------------------
Total 26,093 6,447 32,540
---------------------------------------------------------------------
---------------------------------------------------------------------

Recycle Ratios (3)
Total Proved
Total Proved plus Probable
---------------------------------------------------------------------
---------------------------------------------------------------------



Reserves Traditional NI 51-101
Additions F&D(1) ($/boe) F&D(2) ($/boe)
---------------------------------------------------------------------
Proved Reserves
Exploration and development 938 15.57 17.96
Corporate acquisitions 491 22.16 22.87
Property acquisitions 19 31.84 55.53
---------------------------------------------------------------------
Total 1,448 18.02 20.12
---------------------------------------------------------------------
---------------------------------------------------------------------
Proved Plus Probable Reserves
Exploration and development 1,354 10.79 14.34
Corporate acquisitions 851 12.78 13.78
Property acquisitions 94 6.44 14.82
---------------------------------------------------------------------
Total 2,299 11.35 14.15
---------------------------------------------------------------------
---------------------------------------------------------------------

Recycle Ratios (3)
Total Proved 1.20 1.07
Total Proved plus Probable 1.90 1.52
---------------------------------------------------------------------
---------------------------------------------------------------------

(1) Calculated excluding changes in future development capital.

(2) Calculated as outlined in NI 51-101, including the change in
future development capital from the prior year end reserve report.

(3) Year ended December 31, 2004 cash flow from operations per boe of
$21.57 divided by total finding and development costs based on 2004
capital.



LIQUIDITY AND CAPITAL RESOURCES


Capital Resources

The Company uses various sources of capital to fund its capital
program. The 2004 capital program was funded as follows:


$000s
---------------------------------------------------------------------
Cash flow from operations $ 3,910
Changes in working capital 243
Cash utilized 3,030
Increase in asset retirement obligations (57)
Equity issued (net of issuance costs) 18,967
---------------------------------------------------------------------
Total capital resources $ 26,093
---------------------------------------------------------------------
---------------------------------------------------------------------


Funding of Capital Program

The 2005 capital program is currently budgeted at $17.0 million. C1
expects the majority of the capital expenditures to be funded by cash on
hand, cash flow from operations and a small portion of bank debt.

Working Capital

C1 had working capital of $4.4 million at December 31, 2004. This
represents a decrease of $4.4 million from last quarter and a decrease
of $4.6 million from last year. The primary reasons for the decline in
working capital from the third quarter are due to the working capital
deficiency assumed on the Extreme acquisition as well as from the
increase in capital expenditures leading into the winter drilling
program.

Bank Facilities

C1 has $8.5 million of credit facilities available with a Canadian
chartered bank. The facilities are composed of a $7.0 million revolving
demand loan plus a $1.5 million non-revolving acquisition/development
demand loan. The interest rate on outstanding debt is set at the bank's
prime lending rate plus 0.5% and 1.0%, respectively. The facilities are
secured by a floating charge over all of C1's assets. No amount was
outstanding at December 31, 2004.

We anticipate utilizing a portion of our credit facilities beginning in
the first quarter of 2005 to equip and tie-in some new wells. However,
we will monitor our debt levels carefully and do not expect it to exceed
$5.0 million based on our 2005 budgeted capital expenditures of $17.0
million.

Share Capital

At December 31, 2004, C1 had 27,609,408 shares issued and outstanding
(diluted - 28,067,617). Common shares outstanding at December 31, 2003
were 17,754,416 (diluted - 17,754,416).

During May 2004, we completed one flow through common share issuance of
4,000,000 shares at a price of $2.50 per share for gross proceeds of
$10.0 million.

On December 16, 2004 C1 issued 5,584,992 common shares and 371,116 share
purchase warrants for all of the issued and outstanding shares and
warrants of Extreme. C1 shares were valued at $1.80 per share.

C1 Energy Ltd. is a publicly traded oil and gas exploration and
development company listed on the Toronto Stock Exchange under the
symbol "CTT". C1 currently has an inventory of approximately 60 drilling
locations on an undeveloped land base of approximately 136,000 net
acres. C1 has exclusive access to an additional 178,000 acres of
undeveloped land bringing the company's total undeveloped land inventory
to 314,000 acres. C1 has approximately 27.6 million common shares
outstanding.

Additional information relating to the Company can be found on SEDAR at
www.sedar.com.

Forward Looking Statements

This disclosure contains forward looking statements that involve
substantial known and unknown risks and uncertainties, certain of which
are beyond C1's control, including: the impact of general economic
conditions in Canada and the United States, industry conditions, changes
in laws and regulations including the adoption of new environmental laws
and regulations and changes in how they are interpreted and enforced,
increased competition, the lack of availability of qualified personnel
or management, fluctuations in foreign exchange or interest rates, stock
market volatility and market valuations of companies with respect to
announced transactions and the final valuations thereof, and obtaining
required approvals of regulatory authorities. C1's actual results,
performance or achievement could differ materially from those expressed
in, or implied by, these forward looking statements and, accordingly, no
assurances 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, including the amount of proceeds, that C1 will derive
there from.

Financial statements for the year ended December 31, 2004 and the period
from commencement of operations on December 29, 2003 to December 31,
2003 are attached.



C1 ENERGY LTD.


Balance Sheets
As at December 31
(dollars in thousands)
---------------------------------------------------------------------


2004 2003
---------------------------------------------------------------------

ASSETS

Current assets
Cash and cash equivalents $ 6,930 $ 9,960
Accounts receivable 3,754 32
Prepaid expenses 80 198


---------------------------------------------------------------------
10,764 10,190

Property and equipment (note 4) 34,158 16,109

Goodwill (note 3) 5,780 -

Future income tax asset (note 8) 1,983 -
---------------------------------------------------------------------
$ 52,685 $ 26,299
---------------------------------------------------------------------
---------------------------------------------------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities $ 6,296 $ 1,209


Asset retirement obligations (note 7) 536 368
---------------------------------------------------------------------
6,832 1,577
---------------------------------------------------------------------

Commitments (Note 11)

SHAREHOLDERS' EQUITY

Share capital (note 5) 42,072 27,768
Warrants (notes 3 and 5) 91 -
Contributed surplus (note 5) 699 14
Retained earnings (deficit) 2,991 (3,060)
---------------------------------------------------------------------
45,853 24,722
---------------------------------------------------------------------
$ 52,685 $ 26,299
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes to the financial statements.



C1 ENERGY LTD.

Statements of Operations and Retained Earnings
For the year ended December 31, 2004 and the
Period from Commencement of Operations on December 29, 2003 to
December 31, 2003
(dollars in thousands except per share amounts)
---------------------------------------------------------------------
Three Day
Year Ended Period Ended
December 31, 2004 December 31, 2003
---------------------------------------------------------------------

Revenue
Petroleum and natural gas sales $ 8,718 $ 30
Royalties, net of Alberta Royalty
Tax Credit (2,033) (5)
---------------------------------------------------------------------
6,685 25
---------------------------------------------------------------------


Expenses
Operating 1,693 8
Transportation 201 -
General and administrative 832 26
Stock-based compensation (note 5) 685 14
Depletion, depreciation and accretion 4,531 20
---------------------------------------------------------------------
7,942 68
---------------------------------------------------------------------

Loss before income taxes (1,257) (43)
---------------------------------------------------------------------

Income tax recoveries (note 8) (4,248) -
---------------------------------------------------------------------

Net income (loss) 2,991 (43)

Retained earnings (deficit), beginning of
period (3,060) -
Elimination of accumulated deficit
(note 5) 3,060 -
Effect of changes in accounting policies
(notes 1 and 4) - (3,017)
---------------------------------------------------------------------
Retained earnings, end of period $ 2,991 (3,060)
---------------------------------------------------------------------
---------------------------------------------------------------------

Net income per common share (note 6)
Basic $ 0.15 $ 0.00
Diluted $ 0.14 $ 0.00
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes to the financial statements.



C1 ENERGY LTD.

Statements of Cash Flows
For the year ended December 31, 2004 and the
Period from Commencement of Operations on December 29, 2003 to
December 31, 2003
(dollars in thousands)
----------------------------------------------------------------------

Three Day
Year Ended Period Ended
December 31, 2004 December 31, 2003
----------------------------------------------------------------------

Cash provided by (used in)

Operating activities
Net income (loss) $ 2,991 $ (43)
Add (deduct):
Future income tax recovery (4,248) -
Depletion, depreciation and accretion 4,531 20
Stock-based compensation 685 14
---------------------------------------------------------------------
Funds from operations 3,959 (9)

Net change in non-cash working capital
(note 10) 910 672
---------------------------------------------------------------------
4,869 663
---------------------------------------------------------------------
Investing activities
Property and equipment expenditures (15,272) (557)
Cash costs of Extreme acquisition (note 3) (1,272) -
Net change in non-cash working capital
(note 10) (716) 307
---------------------------------------------------------------------
(17,260) (250)
---------------------------------------------------------------------


Financing activities
Issuance of common shares 10,000 9,960
Share issue costs (639) (413)
---------------------------------------------------------------------
9,361 9,547
---------------------------------------------------------------------

Net increase (decrease) in cash and cash
equivalents (3,030) 9,960

Cash and cash equivalents, beginning of
period 9,960 -
---------------------------------------------------------------------

Cash and cash equivalents, end of period $ 6,930 $ 9,960
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes to the financial statements.


C1 ENERGY LTD.

Notes to the Financial Statements
For the year ended December 31, 2004 and the
Period from Commencement of Operations on December 29, 2003 to
December 31, 2003
(tabular dollar amounts in thousands except per share or unit
amounts)


1. SIGNIFICANT ACCOUNTING POLICIES

Business and basis of presentation

C1 Energy Ltd. ("C1" or the "Company") is a Calgary-based oil and
natural gas exploration and production company whose key business
activities are focused in Alberta. The Company was incorporated on
September 25, 2003 and commenced operations on December 29, 2003 when a
portion of the assets of Navigo Energy Inc. ("Navigo") were transferred
to C1 under a Plan of Arrangement (note 2). C1 is a public company and
commenced trading on the Toronto Stock Exchange on January 6, 2004 under
the symbol "CTT".

These financial statements are prepared in accordance with accounting
principles generally accepted in Canada. Management has made the
necessary estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses in the preparation of the financial
statements. Actual results could differ from those estimates.
Significant accounting policies are summarized as follows:

a) Cash and cash equivalents

Cash and cash equivalents consists of cash in the bank, less outstanding
cheques, and deposits with a maturity of less than three months at the
time of purchase.

b) Petroleum and natural gas properties

i) Full cost accounting

The Company uses the full method of oil and gas accounting whereby all
costs relating to the exploration for and development of petroleum and
natural gas reserves are capitalized. Such costs include land
acquisition, drilling of productive and non-productive wells, geological
and geophysical, production facilities, carrying costs directly related
to unproved properties and corporate expenses directly related to
acquisition, exploration and development activities. Gains or losses on
sales of properties are recognized only when crediting the proceeds to
costs would result in a change of 20 percent or more in the depletion
rate.

ii) Depletion and depreciation

Depletion of exploration and development costs and depreciation of
production equipment is provided using the unit-of-production method
based upon estimated gross proved petroleum and natural gas reserves.
For purposes of this calculation, petroleum and natural gas reserves are
converted to a common unit of measurement on the basis of six thousand
cubic feet of gas equating to one barrel of oil equivalent (boe). The
costs of significant undeveloped properties are excluded from costs
subject to depletion. Unproved properties are evaluated for impairment
on an annual basis.

iii) Ceiling test

The net amount at which petroleum and natural gas properties are carried
is limited to the fair value of those properties based on the net
present value of the estimated future net revenues (the "ceiling test").
This is a two-stage process which is to be performed at least annually.
The first stage is a recognition test which compares the undiscounted
future cash flow from proved reserves plus the cost less impairment of
unproved properties to the net book value of the petroleum and natural
gas assets to determine if the assets are impaired. An impairment loss
exists when the carrying amount of the petroleum and natural gas assets
exceeds such undiscounted cash flow. The amount of impairment, if any,
to be recorded is measured as the amount by which the carrying amount of
assets capitalized exceeds the sum of: (i) the expected net present
value of future net revenues from proved and probable reserves
discounted at a risk free interest rate and (ii) the costs (less any
impairment) of unproved properties that have been subject to a separate
test for impairment. Commodity prices used to determine future net
revenues are based on the best information available to the Company and
are consistent with forecast prices. If the net carrying costs exceed
the fair value, the impairment is recorded as additional depletion and
depreciation.

c) Goodwill

Goodwill is recorded at cost (less impairment, if any) and is not
amortized. The Company must record goodwill relating to a corporate
acquisition when the total purchase price exceeds the fair value for
accounting purposes of the net identifiable assets and liabilities of
the acquired company.

The goodwill balance is assessed for impairment annually at year-end or
as events occur that could result in an impairment. Impairment is
recognized based on the fair value of the reporting entity (the Company)
compared to the book value of the reporting entity. If the fair value of
the Company is less than the book value, impairment is measured by
allocating the fair value of the Company to the identifiable assets and
liabilities as if the Company had been acquired in a business
combination for a purchase price equal to its fair value. The excess of
the fair value of the Company over the amounts assigned to the
identifiable assets and liabilities is the fair value of the goodwill.
Any excess of the book value of goodwill over this implied fair value of
goodwill is the impairment amount. Impairment is charged to earnings in
the period in which it occurs.

d) Asset retirement obligations

The Company recognizes the fair value of the asset retirement
obligations related to its property and equipment using expected cash
flows discounted at a credit-adjusted risk-free rate, for future asset
retirement costs in the period in which they are incurred. Upon initial
recognition of a liability for future asset retirement costs, the
carrying value of the petroleum and natural gas properties is increased
by the amount of the liability. These costs are included in the carrying
value subject to depletion and depreciation and the ceiling test. The
liability accretes until the expected settlement date. Subsequent
changes to the fair value of the liability arising from revisions to the
timing or amount of the original estimate of undiscounted cash flows are
recognized as an increase or a decrease in the carrying amount of the
obligation and are capitalized as part of the carrying value of the
petroleum and natural gas properties. Retained earnings increased by
$209,000 upon adoption of the new accounting standard on December 29,
2003 as this policy differed from Navigo's accounting policy at the date
of transfer (note 2).

e) Foreign currency

Monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at year-end exchange rates.
Non-monetary items are translated at the average exchange rate during
the month they are recognized. Exchange gains or losses are included in
income in the period incurred.

f) Measurement uncertainty

The amounts recorded for depletion, depreciation and accretion are based
on estimates of reserves and future costs as well as estimates of
reserves in the case of depletion and depreciation. By their nature,
these estimates and those related to the assessment of estimated future
cash flows used to assess impairment, are subject to measurement
uncertainty and the impact on the financial statements of future periods
could be material.

g) Joint interests

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

h) Revenue recognition

Revenue associated with sales of crude oil, natural gas, and natural gas
liquids is recognized when title passes to the purchaser, normally at
the pipeline delivery point for natural gas and at the wellhead for
crude oil.

i) Flow-through shares

The Company has financed a portion of its exploration and development
activities through the issue of flow-through shares. Under the terms of
the flow-through share agreements, the tax attributes of the related
expenditures are renounced to the subscribers. Share capital is reduced
and future income tax liability is increased by the estimated cost of
the renounced tax deductions at the time the expenditures are renounced.

j) Hedging

The Company may periodically utilize certain financial instruments to
reduce exposures related to petroleum and natural gas prices and foreign
exchange fluctuations on a portion of its crude oil and natural gas
production in accordance with Company policy. Under hedge accounting,
gains and losses on these contracts, all of which must constitute
effective hedges, are recognized in revenue concurrently with the hedged
transaction. If hedge requirements are not met, the financial
instruments are recorded at fair value; any gains or losses are included
in income in the period.

k) Future income taxes

The Company follows the liability method of accounting for income taxes.
Under this method future tax assets and liabilities are determined based
on differences between the financial reporting and tax bases of assets
and liabilities and measured using the substantively enacted tax rates
and laws that will be in effect when the differences are expected to
reverse.

l) Stock-based compensation

The Company has stock-based compensation plans, which are described in
note 5. Compensation expense is recognized for these plans when stock
options or performance shares are issued to employees. Any consideration
paid by employees upon exercise of stock options is credited to share
capital. Compensation costs are recognized in the statement of
operations and included in contributed surplus.

m) Per share amounts

Net income per share is calculated using the weighted average number of
shares outstanding during the period. Diluted net income per share is
calculated using the treasury stock method to determine the dilutive
effect of stock options and other dilutive elements. The treasury method
assumes that the proceeds received from the exercise of "in the money"
stock options are used to re-purchase and cancel common shares at the
average trading price for the period.

2. PLAN OF ARRANGEMENT

On December 29, 2003, as a result of a Plan of Arrangement (the
"Arrangement") between Navigo and C1 certain oil and gas properties were
transferred to C1. In exchange, the former Navigo shareholders received
one share of C1 for every three shares they held prior to the
Arrangement. The number of shares of C1, which were issued to former
Navigo shareholders as a result of this transaction, was 12,192,698. At
the time of the transaction, C1 and Navigo were related companies
resulting in the transfer of assets and related liabilities to C1 from
Navigo at their carrying value.



----------------------------------------------------------------------
Net assets transferred:
Petroleum and natural gas properties $ 18,430
Future removal and site restoration (352)
----------------------------------------------------------------------
Consideration - shares issued at net book value $ 18,078
----------------------------------------------------------------------
----------------------------------------------------------------------


3. CORPORATE ACQUISITION

On December 16, 2004, C1 acquired Extreme Energy Corp. ("Extreme") and
Extreme shareholders received 0.22 of a common share of C1 ("C1 Common
Share") for each common share of Extreme (5,854,992 C1 common shares
valued at an ascribed value of $1.80 per common share). The total cost
to C1 to acquire the Extreme shares was $10,878,719 including
transaction costs of $248,633 and 371,116 warrants at an ascribed value
of $91,100. This transaction has been accounted for using the purchase
method with the results of Extreme being included in the statement of
operations of C1 from December 17, 2004.

The following table summarizes the allocation of the purchase price to
the estimated fair value of the assets acquired and liabilities assumed
as at the closing date.



----------------------------------------------------------------------
Bank indebtedness $ (1,023)
Accounts receivable 1,641
Prepaid expenses and deposits 38
Petroleum and natural gas properties 7,347
Goodwill 5,780
Accounts payable and accrued liabilities (2,970)
Future income tax asset 273
Asset retirement obligations (207)
----------------------------------------------------------------------
$ 10,879
----------------------------------------------------------------------
----------------------------------------------------------------------

4. PROPERTY AND EQUIPMENT

2004 2003
-----------------------------------------------------------------------
Petroleum and natural gas properties and equipment $ 42,480 $ 19,355
Accumulated depletion and depreciation (7,759) (3,246)
-----------------------------------------------------------------------
Net book value $ 34,344 $ 16,109
-----------------------------------------------------------------------
-----------------------------------------------------------------------

At December 31, 2004, $16.7 million (2003 - $10.6 million) of costs
relating to unproved properties and seismic were excluded from costs
subject to depletion.

During 2004, $506,000 (2003 - $nil) of general and administrative
expenses relating to exploration and development activities were
capitalized.

The ceiling test in 2004 was calculated using the following prices:

Light, Sweet
Crude Oil at AECO-C Exchange Rate
Edmonton Spot $US/$Cdn
-----------------------------------------------------------------------
2005 51.25 6.97 0.84
2006 48.03 6.66 0.84
2007 42.64 6.21 0.84
2008 38.31 5.73 0.84
2009 36.36 5.37 0.84
2010 onwards Prices increase at 1.5% per year Constant at 0.84
-----------------------------------------------------------------------
-----------------------------------------------------------------------


There was no impairment in 2004. An impairment of $3.2 million resulted
from the ceiling test in 2003. The charge was made to retained earnings
as a result of the adoption of the new accounting guideline as described
in note 1(b) which differed from that of Navigo at the time of the
transfer of assets (note 2).

5. SHARE CAPITAL

a) Authorized

The Company is authorized to issue an unlimited number of common shares
and 1,442,000 performance shares ("Performance Shares").

b) Issued and outstanding



Number of
Common shares shares Amount
-----------------------------------------------------------------------
Balance, December 29, 2003 - $ -
Flow-through shares issued (i) 2,066,670 3,100
Flow-through shares issued (ii) 119,048 200
Common shares issued (iii) 1,476,000 2,657
Flow-through shares issued (iii) 1,900,000 3,990
Share issue costs, net of tax (iii) (270)
Common shares issued on Plan of Arrangement (iv) 12,192,698 18,078
-----------------------------------------------------------------------
Balance at December 31, 2003 17,754,416 27,755
Flow-through shares issued (v) 4,000,000 10,000
Tax effect of renunciation of resource
expenditures on flow-through shares (vi) - (2,886)
Issued on Extreme acquisition (note 3) 5,854,992 10,637
Share issue costs, net of future tax benefit
of $251,452)(v) - (387)
Reduction in stated capital (vii) - (3,060)
-----------------------------------------------------------------------
Balance at December 31, 2004 27,609,408 $ 42,059
-----------------------------------------------------------------------
-----------------------------------------------------------------------


i) On December 23, 2003 C1 completed an initial private placement of
6,200,000 Class B Non-voting Shares, at $0.50 per share, for aggregate
proceeds of $3.1 million (2,066,670 C1 Common Shares at $1.50 per share
after giving effect to the Arrangement). The shares were issued on a
flow-through basis and the tax effect of the renouncement was recorded
in 2004, when the related expenditures were renounced.

ii) On December 23, 2003 the Company completed a private placement of
357,144 C1 Energy Non-voting Shares issued on a flow-through basis at a
price of $0.56 per share (119,048 C1 Common Shares at $1.68 per share
after giving effect to the Arrangement) to a new officer of the Company
for proceeds of $0.2 million. The tax effect of the renouncement was
recorded in 2004, when the related expenditures were renounced.

iii) On December 29, 2003, C1 completed a brokered private placement
pursuant to which the Company issued 5,700,000 C1 Energy Non-voting
Shares on a flow-through basis at a price of $0.70 per share (1,900,000
C1 Common Shares at $2.10 per share after giving effect to the
Arrangement) and 4,428,000 C1 Energy Non-Voting Shares at a price of
$0.60 per share (1,476,000 C1 Common Shares at $1.80 per share after
giving effect to the Arrangement). Aggregate proceeds were $6.2 million
after deducting share issue costs of $0.4 million ($0.3 million after
tax). The tax effect of the renouncement was recorded in 2004, when the
related expenditures were renounced.

iv) The Arrangement was completed on December 29, 2003 and 12,192,698 C1
Common Shares were issued to former holders of Common Shares of Navigo.

v) On May 18, 2004 C1 completed a private placement equity financing to
issue 4,000,000 common shares on a flow-through basis at a price of
$2.50 per share for total proceeds of $10,000,000 prior to share
issuance costs of $0.4 million (net of future tax benefit of $0.3
million). The tax effect of the renouncement was recorded in 2004, when
the related expenditures were renounced. In accordance with the terms of
the C1 and Extreme's flow-through share offerings, and pursuant to
certain provisions of the Income Tax Act (Canada), the Company committed
to renounce, for income tax purposes, exploration expenditures related
to the purchases of its flow-through shares in the aggregate of
$9,900,000 that had yet to be expended under these agreements.

vi) In accordance with the terms of the Company's various flow-through
share offerings, and pursuant to certain provisions of the Income Tax
Act (Canada), in 2004 the Company renounced, for income tax purposes,
exploration expenditures related to the purchases of its flow-through
shares in the aggregate of $7,290,000.

vii) Pursuant to a vote by the shareholders at the annual and special
general meeting on May 18, 2004, C1's accumulated deficit at December
31, 2003 was eliminated by a reduction in stated capital.




Number of
Performance shares shares Amount
----------------------------------------------------------------------
Issued on December 23, 2003 (i) 1,344,000 $ 13
----------------------------------------------------------------------
Balance at December 31, 2003 and 2004 1,344,000 $ 13
----------------------------------------------------------------------
----------------------------------------------------------------------


i) On December 23, 2003, C1 issued a total of 1,344,000 Performance
Shares at an issue price of $0.01 per share. Each Performance Share is
convertible into the percentage of a C1 Common Share equal to the
closing trading price of the C1 Common Shares on the Toronto Stock
Exchange (the "Closing Price") less $1.35, if positive, divided by the
Closing Price. Each Performance Share is convertible, at the option of
the holder, into C1 Common Shares as to 1/3 on each of the day following
the first, second and third anniversaries from the date of issuance. If
the C1 Closing Price less $1.35 is not positive on any conversion date,
C1 has the right, subject to applicable laws, to redeem the Performance
Shares that would have otherwise been converted at the redemption price
of $0.01 per share. The fair value of each Performance Share was
determined, at date of issuance, using the Black-Scholes model with the
variables described in note 5(c).



Number of
Share purchase warrants warrants Amount
------------------------------------------------------------------------
Balance at December 31, 2003 - $ -
Issued on Extreme Acquisition (i) 371,116 91
------------------------------------------------------------------------
Balance at December 31, 2004 371,116 $ 91
------------------------------------------------------------------------
------------------------------------------------------------------------


i) On the acquisition of Extreme, C1 issued 371,116 share purchase
warrants to Extreme warrant holders with an ascribed price of $91,100 on
the same pro rata terms as the Extreme common shareholders. The fair
value of each warrant was determined, at the date of issuance, using the
Black-Scholes model. The fair value of the warrants issued was estimated
to be $0.24 per share using a risk free interest rate of 4.0%,
volatility of 50%, and an average expected life of 0.6 years. This
amount is amortized over the life of the warrant and is included in
stock-based compensation expense. Additional details on the share
purchase warrants outstanding at December 31, 2004 are as follows:



Exercise Price Number of Contractual
($/share) Warrants (000's) Life (years) Expiry Date
----------------------------------------------------------------------
2.25 55,500 0.67 August 31, 2005
2.48 (i) 272,514 0.57 July 27, 2005
2.70 43,602 0.57 July 27, 2005
----------------------------------------------------------------------
2.47 371,116 0.58
----------------------------------------------------------------------
----------------------------------------------------------------------


i) Each warrant entitles the holder to purchase one Common Share of the
company at a price of $2.48 per share or one flow through common share
at a price of $2.93 per share until expiry on July 27, 2005.



Contributed surplus Amount
---------------------------------------------------------------------
Stock-based compensation $ 14
---------------------------------------------------------------------
Balance at December 31, 2003 14
Stock based compensation 685
---------------------------------------------------------------------
Balance at December 31, 2003 and 2004 $ 699
---------------------------------------------------------------------
---------------------------------------------------------------------


c) Stock-based compensation

The fair value of each Performance Share was determined, at the date of
issuance, using the Black-Scholes model. The fair value of the
Performance Shares issued was estimated to be $0.78 per share using a
risk free interest rate of 3.5%, volatility of 43%, and an expected life
of 3 years. This amount is amortized over the life of the Performance
Share and is included in stock-based compensation expense (2004 -
$609,000, 2003 - $14,000).

C1 issued 625,000 options to purchase C1 Common Shares to certain
officers and employees during the year. The options have a term of five
years and vest over three years on the basis of one-third per year at
exercise prices between $1.75 - $1.95 per share. The fair value of each
option was determined at the stock option grant date using the
Black-Scholes model. The fair value was estimated to be an average of
$0.72 per share using a risk free interest rate of 4.0%, average
volatility of 47%, and an expected life of 3 years. This value is
amortized over the life of the options and is included in stock-based
compensation expense (2004 - $76,000, 2003 - $nil).

Additional details on the Company's stock options outstanding at
December 31, 2004 are as follows:



Exercise Price Number of Contractual Options
($/share) Options (000's) Life (years) Exercisable (000s)
----------------------------------------------------------------------
1.91 175,000 4.46 years -
1.95 125,000 4.50 years -
1.75 325,000 4.88 years -
----------------------------------------------------------------------
1.83 625,000 4.64 years -
----------------------------------------------------------------------
----------------------------------------------------------------------


6. EARNINGS PER SHARE

C1 uses the treasury stock method to determine dilution resulting from
the issuance of stock options, warrants and other dilutive instruments.
The number of shares used to calculate the diluted net income per share
for the year ended December 31, 2004 included the weighted average
number of C1 Common Shares outstanding of 20,475,249 plus 856,778 shares
related to the dilutive effect of the conversion of performance shares
and stock options. There was no effect for 2003 as the Company did not
commence trading on the public markets until January, 2004. In
calculating the weighted-average number of diluted C1 Common Shares
outstanding for the year ended December 31, 2004, 374,490 share purchase
warrants were excluded because their exercise price was greater than the
average common share market price during the period the warrants were
outstanding.

7. ASSET RETIREMENT OBLIGATIONS

The following table presents the reconciliation of the beginning and
ending aggregate carrying amount of the obligation associated with the
retirement of oil and gas properties:



2004 2003
----------------------------------------------------------------------

Asset retirement obligations, beginning of period $ 368 $ -
Liabilities incurred 256 368
Accretion expense 18 -
Change in estimated future cash flows (106) -
----------------------------------------------------------------------
Asset retirement obligations, end of period $ 536 $ 368
----------------------------------------------------------------------
----------------------------------------------------------------------


At December 31, 2004, the total undiscounted asset retirement obligation
is estimated to be $4.2 million. A 2 percent inflation rate and a 9
percent discount rate assumption have been used to estimate the
obligations. Most of the obligations related to oil and natural gas
wells are expected to be settled from 2020 to 2025 and those related to
the facilities settled up to 2039 with all being funded from general
resources at the time of settlement.

8. INCOME TAXES

The components of the future income tax asset are as follows:



2004 2003
----------------------------------------------------------------------
Future income tax assets
Property and equipment $ 1,314 $ 4,792
Share issue costs 620 166
Resource allowance 49 (154)
----------------------------------------------------------------------
1,983 4,804
Future tax benefits not recognized due to
uncertainty of utilization - (4,804)
----------------------------------------------------------------------
Net future income tax asset $ 1,983 $ -
----------------------------------------------------------------------
----------------------------------------------------------------------

The provision for income taxes differs from the result that would be
obtained by applying the combined Canadian Federal and Provincial
statutory income tax rates to income before income taxes. This
difference results from the following:

2004 2003
----------------------------------------------------------------------
Loss before taxes $(1,257) $ (43)
Income tax rate 39.6% 40.7%
Expected income tax recovery (498) (18)
Increase (decrease) in taxes resulting from:
Crown royalties (net of ARTC) 467 2
Resource allowance (340) -
Stock based compensation 271 5
Share issue costs (87) -
Future tax benefits (recognized) not recognized (4,061) 11
----------------------------------------------------------------------
Income tax recovery $(4,248) $ -
----------------------------------------------------------------------
----------------------------------------------------------------------


The Company included a valuation allowance of $4,804 at December 31,
2003 due to the uncertainty at that time associated with being able to
utilize the tax benefits in the future. That uncertainty was reduced in
2004 such that the future tax benefit was recognized.

The Company has the following tax deductions available to reduce future
taxable income:



2004 2003
------------------------------------------------------------------------

Canadian oil and gas property expense $12,672 $10,429
Canadian development expense 9,163 6,203
Canadian exploration expense 8,863 8,612
Foreign exploration and development expense 228 -
Undepreciated capital cost 5,529 2,636
Non-capital losses carried forward 624 5

Share issue costs 1,714 407
------------------------------------------------------------------------
Total available tax pools $38,793 $28,292
------------------------------------------------------------------------
------------------------------------------------------------------------


9. FINANCIAL INSTRUMENTS

The carrying value of the Company's cash and cash equivalents, accounts
receivable, and accounts payable approximates their fair value due to
the short term nature of these balances.

Substantially all of the Company's accounts receivable are due from
customers in the oil and gas industry and are subject to the normal
industry credit risks. The carrying value of accounts receivable
reflects management's assessment of the associated credit risks.

The nature of the Company's operations results in exposure to
fluctuations in commodity prices, exchange rates and interest rates. The
Company, when appropriate, will utilize derivative contracts to manage
its exposure to these risks.

10. SUPPLEMENTARY CASH FLOW INFORMATION

Changes in non-cash working capital items increased (decreased) cash and
cash equivalents as follows:



2004 2003
----------------------------------------------------------------------

Accounts receivable $(3,723) $ (32)
Prepaid expenses 119 (198)
Accounts payable and accrued liabilities 5,088 1,209
Non-cash working capital deficiency acquired (1,290) -
----------------------------------------------------------------------
Change in non-cash working capital $ 194 $ 979
----------------------------------------------------------------------


Operating activities $ 910 $ 672
Investing activities (716) 307
----------------------------------------------------------------------
Change in non-cash working capital $ 194 $ 979
----------------------------------------------------------------------


There were no amounts paid during the period for interest expense or
income and capital taxes during 2003 or 2004.

11. COMMITMENTS

In October, 2004 C1 entered into a sublease agreement with a third party
for office space. The sublease continues until March, 2006. C1 pays
approximately $170,000 per annum for rent and operating costs.

C1 has committed to incur $9.9 million in qualifying expenditures
related to flow-through share arrangements by December 31, 2005.

The Company has entered into a farm-in agreement with Navigo Energy Inc.
whereby C1 will equalize in a 32 section block and five cased wells in
Haro for a 50% working interest by drilling five shallow gas wells prior
to March 31, 2005. The Company had commitments with other third parties
to drill a total of three wells during 2005 and one additional well in
both 2006 and 2007 in separate farm-in agreements.

The Company has guarantees and other commitments in the normal course of
business which would not have a material adverse effect on the Company's
liquidity, financial condition or results of operations.

In conjunction with the Plan of Arrangement, the Company entered into an
administrative services agreement with Navigo. Navigo provides general
administrative, accounting, marketing, land and information technology
services to C1. In consideration for such services, C1 paid Navigo an
administration fee based on the production of C1 divided by the combined
production of C1 and Navigo. The Company paid the administration fees to
Navigo until October, 2004 of $287,000 in 2004 ($nil - 2003). The
companies continued to provide technical and administrative services to
each other until February 2005 at which time the agreement was
terminated.

-30-

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    C1 Energy Ltd.
    Hugh Pattillo
    President & CEO
    (403) 232-1115 ext 107
    or
    C1 Energy Ltd.
    Gary Lobb
    Vice-President, Finance & CFO
    (403) 232-1115 ext 106
    www.c1energy.ca