C1 Energy Ltd.
TSX : CTT

C1 Energy Ltd.

March 16, 2007 07:00 ET

C1 Energy Ltd. Announces Fiscal 2006 Results

CALGARY, ALBERTA--(CCNMatthews - March 16, 2007) - C1 Energy Ltd. ("C1") (TSX:CTT) is pleased to release its financial and operating results for the year ended December 31, 2006.



FINANCIAL AND OPERATING HIGHLIGHTS

Year ended Year ended
December 31, December 31,
2006 2005
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Financial ($000s, except share information)
Petroleum and natural gas sales 12,928 13,326
Cash flow from operations 4,274 6,302
Per share basic 0.12 0.21
Per share diluted 0.12 0.20
Net income (loss) (1) (20,027) 2,499
Per share basic (0.59) 0.08
Per share diluted (0.59) 0.08
Capital expenditures (net of dispositions) 16,375 28,285
Working capital (deficiency) (12,584) (4,619)
Total assets 58,991 71,039
Shareholders' equity 40,961 57,744
Common shares outstanding (000s) 35,743 33,037
Weighted average common shares outstanding (000s) 34,208 30,514
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Operations
Crude oil and NGL production
Barrels 87,821 113,019
Barrels per day 241 310
Average selling price ($/bbl) 69.62 65.42

Natural gas production
Thousand cubic feet 1,047,446 696,019
Thousand cubic feet per day 2,870 1,906
Average selling price ($/mcf) 6.51 8.52

Oil equivalent production
Barrels of oil equivalent 262,395 229,022
Barrels of oil equivalent per day (6:1) 719 627
Average selling price ($/boe) 49.27 58.19
Average operating netback ($/boe) 24.65 33.78

Wells drilled
Gross 10 22
Net 4.2 14.8
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(1) Net loss for 2006 resulted primarily from a $13.6 mm ceiling test
impairment plus a $6.6 mm loss on impairment of goodwill.


OVERVIEW AND PRODUCTION UPDATE

C1 Energy Ltd. is an exploration focused junior exploration and production company operating in the province of Alberta, Canada. C1 commenced operations in December 2003 through the reorganization of Navigo Energy Inc. into NAV Energy Trust and C1 Energy Ltd. C1 was listed on the Toronto Stock Exchange in January 2004.

C1 has assembled an extensive land position measuring 133,344 net acres of high working interest lands as of December 31, 2006, with the majority of these lands located in C1's core operating areas of Gift Lake and Blueberry in the Peace River Arch region of Alberta. The core properties predominantly feature C1 as operator with high working interests and either company-owned infrastructure or stable access to centralized third party gathering and processing facilities.

C1's producing base is composed of approximately two-thirds natural gas and one-third light oil and natural gas liquids. The Corporation's core area properties in the Peace River Arch account for approximately 85% of total 2006 production, while C1's non-core properties, located in central and northern Alberta, account for approximately 15% of total production.

C1 has developed a significant inventory of drilling locations on its lands with many of these locations seismically supported utilizing C1's proprietary data base of 2D and 3D seismic as well as an extensive trade data base, in total exceeding 600 kilometres of 2D seismic and 750 square kilometres of 3D seismic at year end 2006.

The Company's estimated production through January and February 2007 has averaged approximately 530 boe/d. In January, C1 elected to shut in 25 boe/d of high operating cost production in the Chipmunk area. The Company plans to return those wells to sales production during the summer with anticipated improved economics due to lower summer operating costs and higher well production rates associated with historically observed reservoir pressure recharge.

Additionally, very recently in March, the production capability of a significant well, which had been producing 800 mcf/d (133 boe/d) net to the Company, has become unstable. The well's gas production has fallen to approximately 600 mcf/d (100 boe/d) and is now associated with significantly higher volumes of water production. Local water disposal facilities operated by the Corporation have insufficient capacity to handle the increased volumes of produced water. C1 is currently trucking those produced water volumes to third party facilities while it attempts to stabilize and assess the future viability of the well. Were C1 to shut in this well, the Company's daily production from its remaining properties would be approximately 380 boe per day. At year end 2006, this well accounted for 10% of C1's proved plus probable reserve volumes, 14% of C1's proved plus probable net present value discounted at 10%, and 25% of its production.

The Company has curtailed most of its capital spending program during the first quarter of 2007, but intends to tie in a recently drilled shallow natural gas well at its Seal property before the end of March. The well is anticipated to add an incremental 50 boe/d to the Corporation's production levels described above.

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 years ended December 31, 2006 and 2005. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The commentary is as of March 9, 2007. The reader should be aware that historical results are not necessarily indicative of future performance.

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.

Forward Looking Statements

Certain of the statements set forth under "Management's Discussion and Analysis" including statements which may contain words such as "could", "expect", "believe", "will" and similar expressions and statements relating to matters that are not historical facts, are forward-looking and are based upon the Company's current belief as to the outcome and timing of such future events. There are numerous 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.

Non-GAAP Measurements

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.

RESULTS OF OPERATIONS

Drilling Activity

During 2006, C1 participated in the drilling of 10 wells (4.2 net) resulting in 8 wells (3.0 net) cased as potential natural gas wells and 2 wells (1.2 net) abandoned as dry holes. Of the 8 wells cased for natural gas, three wells (0.8 net) were completed and placed on production during 2006, one well (0.8 net) was completed and is being tied in during the first quarter of 2007, two wells (0.4 net) were deemed uneconomic following completion operations and two wells (1.0 net) are currently standing and have not been completed.


2006
Exploration Development Total
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Gross Net Gross Net Gross Net
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Oil - - - - - -
Gas 7 2.2 1 0.8 8 3.0
D&A 2 1.2 - - 2 1.2
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Total 9 3.4 1 0.8 10 4.2
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2005
Exploration Development Total
Gross Net Gross Net Gross Net
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Oil 2 1.5 - - 2 1.5
Gas 11 6.8 6 3.5 17 10.3
D&A 1 1.0 2 2.0 3 3.0
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Total 14 9.3 8 5.5 22 14.8
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Production

During 2006 C1's production grew from an average of 627 boe/d in 2005 to 719 boe/d in 2006, an increase of 15%. Most of the production increase came from the Blueberry area where we spent the majority of our capital during 2006. No new wells came on production in Gift Lake or Chipmunk during the year. One new well drilled at Seal during the third quarter was completed during the fourth quarter and will be tied-in during the first quarter of 2007.



2006 2005
Oil Gas NGLs Total Oil Gas NGLs Total
(bbl/d) (mcf/d) (bbl/d) (boe/d) (bbl/d) (mcf/d) (bbl/d) (boe/d)
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Blueberry 11 2,324 19 417 7 688 5 127
Gift/Chipmunk 109 169 - 137 161 753 - 287
Seal 61 6 - 62 88 6 - 89
Sousa 33 9 - 35 28 10 - 30
Sarcee - 142 9 33 - 222 15 52
Other 1 198 1 35 2 223 3 42
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Total 215 2,848 29 719 286 1,902 23 627
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Oil and Gas Sales

($000's) 2006 2005
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Crude oil and NGL sales 6,114 7,393
Natural gas sales 6,814 5,933
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Total petroleum and natural gas sales 12,928 13,326
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Oil and gas revenue decreased 3% to $12.9 million in 2006 from $13.3 million in 2005. The decrease is attributed to a 15% increase in average daily production offset by a 15% decrease in average commodity prices received. The increase in overall production resulted from higher natural gas volumes which more than offset the decline in oil volumes compared to last year. Natural gas production increases occurred mainly in Blueberry.



Average Selling Prices

2006 2005
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Crude oil and NGL's ($/bbl) 69.62 65.42
Natural gas ($/mcf) 6.51 8.52
Total average realized price ($/boe) 49.27 58.19
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Crude Oil Pricing

C1 received an average price of $69.62/bbl for its crude oil and NGL's for the year compared to $65.42/bbl in 2005, an increase of 6%. West Texas Intermediate ("WTI") prices have remained strong throughout 2006, averaging US $66.25/bbl compared to US $56.69 last year, an increase of approximately 17%. This was partially offset by an approximate $0.04 increase in the average US/CDN dollar exchange rate and a 6% narrowing of the basis differential during the year. This resulted in the average Edmonton par price increasing 6% to $73.71 in 2006 compared to $69.79 last year.

Natural Gas Pricing

C1 received an average price of $6.51/mcf for its natural gas production for the year compared to $8.52/mcf in 2005, a decrease of 24%. 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 approximately $6.51/mcf in 2006 compared to $8.78/mcf in 2005 due to high storage levels during the year. The relative improvement in gas price at the wellhead compared to AECO has resulted from improved heating content of our gas from new production in Blueberry compared to last year where a higher proportion of gas production came from Chipmunk.

Royalties

Royalties net of ARTC for the year were $2.2 million ($8.37/boe) compared to $2.4 million ($10.36/boe) in 2005. Royalties per boe decreased from last year due to an increase in production from wells eligible for ARTC. For the year, crown royalties before ARTC averaged 16.7% and freehold and other royalties averaged 3.9% of total revenue compared to 14.9% and 5.4%, respectively, in 2005. The change was due to more production coming from the Blueberry area versus last year when a higher proportion of revenue came from Gift Lake/Chipmunk where there are higher gross overriding royalties associated with the production.

Operating Expenses

Operating expenses for 2006 were $4.1 million ($15.76/boe) compared to $3.0 million ($12.97/boe) last year. The increase in costs related primarily to higher average production volumes and higher industry-wide costs for services. Costs per boe of production increased in 2006 due to the high proportion of fixed costs at our Seal, Gift Lake and Chipmunk properties that increased costs per boe as production volumes fell. Certain high operating cost wells in the Chipmunk area were shut-in in early 2007 with plans to open back up in the summer when operating costs are lower.

Transportation Costs

Transportation costs for the year were $0.1 million ($0.50/boe) compared to $0.3 million ($1.20/boe) due to a change in production mix.



General and Administrative Expenses

2006 2005
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($000's except per unit amounts) $ $/boe $ $/boe
Gross G&A 2,909 11.08 2,941 12.84
Capitalized overhead (1,232) (4.70) (1,109) (4.84)
Overhead recoveries (198) (0.75) (448) (1.96)
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1,479 5.63 1,384 6.04
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General and administrative expenses ("G&A") were $1.5 million ($5.63/boe) in 2006 compared to $1.4 million ($6.04/boe) last year. Lower professional fees and corporate costs were offset by higher office rent in 2006 compared to last year. Overhead recoveries were also less in 2006 due to a reduced capital expenditure program compared to 2005.

Interest

Interest expense was $0.7 million ($2.72/boe) for the year compared to $15,000 ($0.06/boe) last year mainly due to higher bank debt outstanding over 2006 compared to last year. Interest was also higher due to costs relating to the timing of expenditures on C1's 2005 flow-through obligation.

Stock-based Compensation

Stock-based compensation for the year was $0.3 million ($1.26/boe) compared to last years costs of $0.7 million ($2.96/boe). Stock-based compensation represents a non-cash charge resulting from applying the fair value method on performance shares and stock options issued. Under this method, compensation expense related to these programs is recorded in the statement of operations over their respective vesting periods. The decrease in cost resulted primarily from the vesting of the majority of Performance Shares and options at the end of last year.

Depletion, Depreciation and Accretion

Depletion, depreciation, and accretion ("DD&A") amounted to $19.8 million ($75.52/boe) for the year compared to $4.0 million ($17.61/boe) for 2005. The high DD&A rate occurred primarily due to impairment recognized on the application of the ceiling test on the carrying value of our petroleum and natural gas properties as discussed below.

Ceiling Test

C1 applies a ceiling test periodically 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. Commodity prices used to determine the future cash flows of C1 were taken from pricing forecasts published by C1's independent engineers. The ceiling test in 2006 was calculated using the following prices:



Light, Sweet Crude Oil at AECO-C Spot Exchange Rate
Edmonton ($Cdn/bbl) ($Cdn/mcf) $US/$Cdn
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2007 74.10 7.72 0.87
2008 77.62 8.59 0.87
2009 70.25 7.74 0.87
2010 65.56 7.55 0.87
2011 61.90 7.72 0.87
2012 63.15 7.85 0.87
2013 onwards 2.0% escalation thereafter Constant at 0.87
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There was $13.6 million of impairment to the carrying costs of our petroleum and natural gas properties in 2006 (2005 - $nil).

Impairment Loss on Goodwill

The carrying value of goodwill was tested for impairment at the end of the year. Due to the reduction in reserves, reserve value and net asset value which impacted C1's market capitalizaton, it was determined that goodwill has been impaired and a $6.6 million loss ($25.04/boe) was recognized in 2006 (2005 - $nil).

Capital and Income Taxes

There were $2.4 million (2005 - $0.6 million) of future tax benefits recorded during the year primarily due to the reduction in the carrying costs of petroleum and natural gas properties resulting from application of the ceiling test. A future tax asset was not accrued due to the uncertainty of utilization at the end of 2006.

At the end of 2006, C1 had approximately $60.5 million of tax pools available for deduction against future taxable income compared to $51.3 million in 2005. The tax pools available were as follows:



($000s) 2006 2005
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Canadian oil gas property expense $ 13,334 $ 12,891
Canadian development expense 8,113 8,699
Canadian exploration expense 17,813 15,444
Foreign exploration and development expense 185 205
Undepreciated capital cost 10,373 8,065
Non-capital losses carried forward 9,179 4,246
Share issue costs 1,501 1,761
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Total tax pools $ 60,498 $ 51,311
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NETBACK, CASH FLOW AND NET INCOME

2006 2005
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Production
Natural gas (mcf/d) 2,870 1,902
Oil and Liquids (bbls/d) 241 286
Boe/d (6:1) 719 627
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Financial
($000's except per unit amounts) $ $/boe $ $/boe
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Oil and gas sales 12,928 49.27 13,326 58.19
Royalties (net of ARTC) (2,197) (8.37) (2,374) (10.36)
Operating expenses (4,134) (15.76) (2,970) (12.97)
Transportation (131) (0.50) (274) (1.20)
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Operating netback 6,466 24.64 7,708 33.66
General and administrative (1,479) (5.63) (1,369) (5.98)
Interest (713) (2.72) (15) (0.06)
Current tax - - (22) (0.10)
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Cash flow from operations 4,274 16.29 6,302 27.52
Depletion and depreciation (19,816) (75.52) (4,033) (17.61)
Impairment loss on goodwill (6,571) (25.04) - -
Stock-based compensation (330) (1.26) (678) (2.96)
Future tax recovery 2,416 9.21 600 2.62
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Net income (20,027) (76.32) 2,191 9.57
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Capital Expenditures

Capital expenditures for the year ended December 31, 2006 were $16.4 million (2005 - $28.3 million). Total capital expenditures were down $11.9 million or 42%. We reduced our drilling program during 2006 and drilled a total of 10 wells (4.2 net) compared to last year when we drilled 22 wells (14.8 net). We had an overall success rate of 60% (63% net) in 2006 compared to an 86% (80% net) success rate in 2005. We spent a higher proportion of our overall capital budget on equipment and facilities in 2006 in order to get new wells in our Blueberry area on production.



($000s) 2006 2005
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Drilling and completions $ 7,387 $ 17,571
Land 2,067 1,835
Equipment and facilities 4,939 4,151
Geological and geophysical 181 3,063
Asset retirement obligations 574 524
Capitalized general and administrative expenses 1,232 1,109
Other 7 32
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Total capital expenditures $ 16,387 $ 28,285
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LIQUIDITY AND CAPITAL RESOURCES

Financing Resources
The 2006 capital program was funded as follows:

$000s
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Cash flow from operations $ 4,274
Cash/bank debt utilized for capital expenditures 7,857
Asset dispositions 12
Increase in asset retirement obligations 574
Equity issued (net of issuance costs) 3,670
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Total capital expenditures $ 16,387
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Funding of Capital Program

The majority of the 2007 capital program is discretionary and is currently expected to be primarily funded by cash flow from operations and asset dispositions. The program has been restricted given our current working capital deficit.

The Board of Directors and management have chosen to embark on a process of evaluating the company's strategic alternatives in order to maximize shareholder value. The process will look at alternatives such as asset dispositions, a corporate merger or recapitalization to refinance the company so that maximum value can be obtained from the assets going forward.

Bank Facilities

C1 has $17.0 million of credit facilities available with a Canadian chartered bank. The facilities are composed of a $14.0 million revolving demand loan plus a $3.0 million non-revolving acquisition/development demand loan. The interest rate on outstanding debt is set at the bank's prime lending rate plus 0.25% and 0.50%, respectively. The facilities are secured by a floating charge over all of C1's assets. We had $11.1 million of bank debt outstanding at December 31, 2006 compared to $1.7 million in 2005. The facility is under review on or before April 30, 2007. Based on the results of the December 31, 2006 independent engineering evaluation, C1 expects that the bank lines will be reduced, and that the reduction could be material.

Share Capital

At December 31, 2006, C1 had 35,742,727 shares issued and outstanding with a weighted average and diluted number of shares outstanding of 34,207,544. Common shares outstanding at December 31, 2005 were 33,036,726 with a weighted average number of 30,514,138 (diluted - 31,568,920). As at March 9th, 2007, we had 35,742,727 shares issued and outstanding. At year end, we also had 1,324,377 options outstanding which, upon vesting, are exercisable into 1,324,377 common shares and 1,001,334 performance shares which are convertible into nil common shares based on the current share price.

During July 2006, we completed an equity offering whereby we issued 2,666,668 flow-through common shares at a price of $1.50 per share for gross proceeds of $4.0 million. $3.95 million of the flow-through commitment remains to be spent prior to December 31, 2007.



Contractual Obligations

$000s Total 2007 2008 2009 Thereafter
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Office lease obligations 1,410 321 328 337 424
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SELECTED ANNUAL AND QUARTERLY INFORMATION
2006
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Financial ($000s) 1Q 2Q 3Q 4Q Year
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Gross revenues before royalties 3,273 3,616 3,301 2,738 12,928
Cash flow from operations 1,376 1,323 1,253 322 4,274
Per share - Basic ($) 0.04 0.04 0.04 0.00 0.12
Per share - Diluted ($) 0.04 0.04 0.04 0.00 0.12
Net income (loss) 128 245 (107) (20,293) (20,027)
Per share - Basic ($) 0.00 0.01 0.00 (0.60) (0.59)
Per share - Diluted ($) 0.00 0.01 0.00 (0.60) (0.59)
Total assets 75,358 79,324 79,196 58,991 58,991
Capital expenditures 5,765 5,913 2,581 2,116 16,375
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Operational
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Production
Oil & NGL's (bbls/d) 257 231 238 236 241
Natural gas (mcf/d) 2,569 3,654 2,987 2,272 2,870
Boe/d (6:1) 685 840 736 615 719
Average selling price
Crude oil & NGL's ($/bbl) 66.77 73.52 79.51 58.90 69.62
Natural gas ($/mcf) 7.47 6.24 5.67 6.97 6.51
Operating netback ($/boe) 29.10 26.24 26.48 15.43 24.64
Cash flow netback 22.30 17.31 18.50 5.68 16.29
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2005
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Financial ($000s) 1Q 2Q 3Q 4Q Year
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Gross revenues before royalties 3,176 3,699 3,286 3,165 13,326
Cash flow from operations 1,316 1,864 1,790 1,332 6,302
Per share - Basic ($) 0.05 0.06 0.06 0.04 0.21
Per share - Diluted ($) 0.05 0.06 0.06 0.03 0.20
Net income (loss) (88) 331 446 1,502 2,191
Per share - Basic ($) 0.00 0.01 0.01 0.05 0.07
Per share - Diluted ($) 0.00 0.01 0.01 0.05 0.07
Total assets 54,600 61,868 67,302 71,039 71,039
Capital expenditures 11,812 5,060 6,655 4,758 28,285
Gross revenues before royalties 3,176 3,699 3,286 3,165 13,326
Cash flow from operations 1,316 1,864 1,790 1,332 6,302
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Operational
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Production
Oil & NGL's (bbls/d) 392 295 276 277 310
Natural gas (mcf/d) 1,758 2,852 1,769 1,261 1,906
Boe/d (6:1) 685 770 570 487 627
Average selling price
Crude oil & NGL's ($/bbl) 61.01 59.18 72.35 69.85 65.42
Natural gas ($/mcf) 6.47 8.13 8.65 11.94 8.52
Operating netback ($/boe) 29.10 31.57 37.95 38.17 33.66
Cash flow netback 21.36 26.60 34.11 29.71 27.52
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FOURTH QUARTER REVIEW

Three Months Ended Three Months Ended
December 31, 2006 December 31, 2005
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Production
Natural gas (mcf/d) 2,272 1,261
Oil and Liquids (bbls/d) 236 277
Boe/d (6:1) 615 487
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Financial
($000's except per unit amounts) $ $/boe $ $/boe
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Oil and gas sales 2,738 48.38 3,165 70.62
Royalties (net of ARTC) (411) (7.26) (532) (11.87)
Operating expenses (1,456) (25.73) (858) (19.15)
Transportation 2 0.04 (64) (1.43)
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Operating netback 873 15.43 1,711 38.17
General and administrative (393) (6.95) (308) (6.87)
Interest (179) (3.16) (64) (1.43)
Current tax 21 0.37 (7) (0.16)
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Cash flow from operations 322 5.69 1,332 29.71
Depletion and depreciation (16,030) (283.27) (1,031) (23.00)
Impairment loss on goodwill (6,571) (116.12) - -
Stock-based compensation (101) (1.78) (180) (4.03)
Future tax recovery 2,087 36.88 1,381 30.81
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Net income (20,293) (358.60) 1,502 33.49
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Petroleum and natural gas sales were $2.7 million in the quarter compared to $3.2 million last year. The fourth quarter of 2006 was marked by lower commodity prices but higher production volumes compared to the same period a year ago. The average natural gas price in the fourth quarter this year was $6.97/mcf which was 42% lower than the same period last year when we received $11.94/mcf. The average crude oil and NGL price of $58.90/bbl for the fourth quarter was 16% lower than the same period last year when we received an average price of $69.85/bbl.

Royalties were $0.4 million during the fourth quarter of 2006 compared to $0.5 million last year. Royalties decreased to $7.26/boe compared to $11.87/boe for the same period last year primarily due to higher ARTC received on 2005 royalties than was accrued last year. Lease operating expenses for the quarter were $1.5 million ($25.73/boe) compared to $0.9 million ($19.15/boe) for the same period last year. This resulted from a combination of higher industry operating costs than a year ago plus higher actual prior period costs than were previously accrued. Also, there is a relatively high fixed cost component in Chipmunk with low associated production volumes. The Chipmunk wells have subsequently been shut-in. There was a recovery of $2,000 ($0.04/boe) for transportation costs during the quarter compared to costs of $64,000 ($1.43/boe) last year due to over accruals in the prior quarters. The accruals were high due to a change in the production mix.

General and administrative costs of $0.4 million ($6.95/boe) for the fourth quarter were higher than the same period a year ago due to higher professional fees and lower capital recoveries compared to last year. Interest expense was $0.2 million ($3.16/boe) compared to $0.1 million ($1.43/boe) last year due to higher outstanding bank debt. Current and capital taxes that were accrued up to the third quarter were reversed during the fourth quarter due to new tax legislation eliminating capital taxes compared an accrual of $7,000 during the same period last year.

Lower commodity prices combined with increased costs resulted in a cash flow netback of $5.69/boe for the fourth quarter compared to the same period last year when we had a cash flow netback of $29.71/boe. Stock-based compensation of $101,000 ($1.78/boe) for the quarter was lower than $180,000 ($4.03/boe) incurred last year. Depletion and depreciation was $16.0 million ($283.27/boe) during the quarter compared to $1.0 million ($23.00/boe) during the fourth quarter last year. This was the result of the $13.6 million ceiling test impairment recognized during the quarter. As well, due to the reduction in the net asset value of the company, an impairment loss on goodwill of $6.6 million ($116.12/boe) was recognized during the quarter (2005 - $nil). The recovery of income taxes relates to the reduction of future tax liabilities primarily resulting from the reduction of the book value of petroleum and natural gas assets due to the results of the ceiling test. Net loss was $20.3 million for the quarter ($0.60 per share) compared to net income of $1.5 million ($0.05 per share) over the same period last year.

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 55 drilling locations on an undeveloped land base of approximately 133,000 net acres. C1 has exclusive access to an additional 168,000 acres of undeveloped land bringing the company's total undeveloped land inventory to over 300,000 acres. C1 has approximately 35.7 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 years ended December 31, 2006 and 2005 are attached.



C1 ENERGY LTD.

Balance Sheets
As at December 31
(dollars in thousands)

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

2006 2005
---------------------------
ASSETS

Current assets
Cash and cash equivalents $ - $ 864
Accounts receivable 3,816 4,975
Prepaid expenses 57 220
---------------------------
3,873 6,059

Property and equipment (note 2) 55,118 58,448

Goodwill (note 3) - 6,532
---------------------------
$ 58,991 $ 71,039
---------------------------
---------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities $ 5,296 $ 9,028
Bank loan (note 4) 11,161 1,650
---------------------------
16,457 10,678

Asset retirement obligations (note 7) 1,573 996

Future income tax (note 8) - 1,621
---------------------------
18,030 13,295
---------------------------
Commitments (Note 11)

SHAREHOLDERS' EQUITY

Share capital (note 5) 54,207 51,190
Contributed surplus (note 5) 1,599 1,372
Retained earnings (deficit) (14,845) 5,182
---------------------------
40,961 57,744
---------------------------
$ 58,991 $ 71,039
---------------------------
---------------------------

See accompanying notes to the financial statements.


C1 ENERGY LTD.

Statements of Operations and Retained Earnings (Deficit)
For the years ended December 31, 2006 and 2005
(dollars in thousands except per share amounts)
----------------------------------------------------------------------------

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

Revenue
Petroleum and natural gas sales $ 12,928 $ 13,326
Royalties, net of Alberta Royalty Tax Credit (2,197) (2,374)
---------------------------
10,731 10,952
---------------------------

Expenses
Operating 4,134 2,970
Transportation 131 274
General and administrative 1,479 1,369
Interest 713 15
Stock-based compensation (note 5) 330 678
Depletion, depreciation and accretion (note 2) 19,816 4,033
Goodwill impairment (note 3) 6,571 -
---------------------------
33,174 9,339
---------------------------

Income (loss) before income taxes (22,443) 1,613
---------------------------

Income tax
Current and capital - 22
Future recovery (note 8) (2,416) (600)
---------------------------
(2,416) (578)
---------------------------

Net income (loss) (20,027) 2,191

Retained earnings, beginning of year 5,182 2,991
---------------------------
Retained earnings (deficit), end of year $(14,845) $ 5,182
---------------------------
---------------------------
Net income (loss) per common share (note 6)
- Basic and Diluted $ (0.59) $ 0.07
---------------------------
---------------------------

See accompanying notes to the financial statements.


C1 ENERGY LTD.

Notes to the Financial Statements
For the years ended December 31, 2006 and 2005
(all tabular dollars in thousands except per unit amounts)

2006 2005
---------------------------
Cash provided by (used in)

Operating activities
Net income (loss) $(20,027) $ 2,191
Add (deduct):
Future income tax recovery (2,416) (600)
Depletion, depreciation and accretion 19,816 4,033
Goodwill impairment 6,571 -
Stock-based compensation 330 678
---------------------------
Funds from operations 4,274 6,302
Asset retirement expenditures (note 7) (108) (150)
Net change in non-cash working capital (note 10) (1,595) (443)
---------------------------
2,571 5,709
---------------------------
Investing activities
Property and equipment expenditures (15,813) (27,761)
Disposal of property and equipment 12 48
Net change in non-cash working capital (note 10) (815) 1,814
---------------------------
(16,616) (25,899)
---------------------------
Financing activities
Issuance of common shares 4,000 13,358
Share issue costs (330) (884)
Increase in bank indebtedness 9,511 1,650
---------------------------
13,181 14,124
---------------------------
Net decrease in cash and cash equivalents (864) (6,066)

Cash and cash equivalents, beginning of year 864 6,930
---------------------------

Cash and cash equivalents, end of year $ - $ 864
---------------------------
---------------------------

See accompanying notes to the financial statements.


C1 ENERGY LTD.

Notes to the Financial Statements
For the years ended December 31, 2006 and 2005
(all tabular dollars in thousands except per 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. C1 is a public company and commenced trading on the Toronto Stock Exchange on January 6, 2004 under the symbol "CTT".

The financial statements are prepared in accordance with accounting principles applicable to a going concern that are generally accepted in Canada. In 2006, the Company incurred a loss before income taxes of $22.4 million after recording impairment charges of $20.2 million, and at December 31, 2006 had a working capital deficiency of $12.6 million. In January 2007, the Company announced a material negative revision of its oil and gas reserves and the engagement of a financial advisor to assist in the process of shareholder value maximization. The continued viability of the Company is dependent in part upon the continued support of its lender. If such support were to be withdrawn, the Company would be required to arrange alternative financing or the disposition of assets in order to settle its liabilities, and the continued use of the going concern assumption may be inappropriate and adjustments to the amounts and classification of assets and liabilities may be necessary.

Management believes that the going concern assumption is appropriate while the Company considers value maximization alternatives, which could include the sale, merger or takeover of the Company, or the reorganization or restructuring of some or all of the Company's assets. 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 cost 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% 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 flows. 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 quoted benchmark prices in the futures market (adjusted for quality differences). 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 expected to be 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.

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



2. PROPERTY AND EQUIPMENT

2006 2005
----------------------------------------------------------------------------
Petroleum and natural gas properties and equipment $ 86,528 $ 70,153
Accumulated depletion and depreciation (31,410) (11,705)
----------------------------------------------------------------------------
Net book value $ 55,118 $ 58,448
----------------------------------------------------------------------------
----------------------------------------------------------------------------


At December 31, 2006, $18.3 million (2005 - $20.6 million) of costs relating to unproved properties and seismic were excluded from costs subject to depletion.

During 2006, $1,232,000 (2005 - $1,109,000) of general and administrative expenses relating to exploration and development activities were capitalized.



The ceiling test in 2006 was calculated using the following prices:

Light, Sweet Crude Oil AECO-C Spot
at Edmonton ($Cdn/bbl) ($Cdn/mcf) Exchange Rate $US/$Cdn
----------------------------------------------------------------------------
2007 74.10 7.72 0.87
2008 77.62 8.59 0.87
2009 70.25 7.74 0.87
2010 65.56 7.55 0.87
2011 61.90 7.72 0.87
2012 63.15 7.85 0.87
2013 onwards 2.0% escalation thereafter Constant at 0.87
----------------------------------------------------------------------------


There was $13.6 million of impairment to the carrying costs of our petroleum and natural gas properties in 2006 (2005 - $nil) included in depletion ,depreciation and accretion.

3. WRITE-DOWN OF GOODWILL

Each year, the Company completes an impairment test on goodwill by estimating the fair value of our oil and natural gas reserves, undeveloped land and seismic and comparing the resulting net asset value and market capitalization to the carrying value of goodwill. As a result of the decline in the market value of the Company's assets, an impairment of $6.6 million, representing the totality of the goodwill related to the acquisition of Extreme Energy Corporation, has been written off in these financial statements.



Goodwill Amount
----------------------------------------------------------------------------

Balance at December 31, 2004 $ 5,780
Increase from renunciation of flow-through shares of Extreme 752
----------------------------------------------------------------------------
Balance at December 31, 2005 6,532
Increase from renunciation of flow-through shares of Extreme 39
Impairment (6,571)
----------------------------------------------------------------------------
Balance at December 31, 2006 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


4. BANK LOAN

On December 31, 2006, the Company had $17,000,000 of credit facilities available with a Canadian chartered bank. The facilities are composed of a $14,000,000 revolving demand loan facility plus a $3,000,000 non-revolving acquisition / development demand loan. The interest rate on outstanding debt is set at the bank's prime lending rate plus 0.25% and 0.50%, respectively. The facilities are secured by a floating charge over all of C1's assets. $11,100,000 was outstanding under the revolving facility at December 31, 2006 (2005 - $1,650,000). The facility is under review on or before April 30, 2007. Based on the results of the December 31, 2006 independent engineering evaluation, C1 expects that the bank lines will be reduced, and that the reduction could be material.

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 at December 31, 2004 27,609,408 $ 42,059
Issued on conversion of Performance Shares 5,482 -
Issued on exercise of stock options 22,000 55
Issuance of common shares (i) 4,255,320 10,000
Issuance of flow-through shares (i) 833,334 2,500
Compensation expense related to options exercised and
Performance Shares converted - 22
Issuance of common shares on exercise of warrants 311,182 804
Ascribed value of warrants exercised - 74
Tax effect of renunciation of resource expenditures on
flow through shares (ii) - (3,762)
Share issue costs, net of future tax benefit of
$309,380 (i) - (574)
----------------------------------------------------------------------------
Balance at December 31, 2005 33,036,726 51,178
Issued on conversion of Performance Shares 39,333 2
Issuance of flow-through shares (iii) 2,666,668 4,000
Tax effect of renunciation of resource expenditures on
flow through shares (iv) - (862)
Compensation expense related to Performance Shares
converted - 103
Share issue costs, net of future tax benefit of
$106.221 - (224)
----------------------------------------------------------------------------
Balance at December 31, 2006 35,742,727 $ 54,197
----------------------------------------------------------------------------
----------------------------------------------------------------------------

i) On June 18, 2005 C1 completed a private placement equity financing to
issue 4,255,320 common shares plus 833,334 common shares on a
flow-through basis at a price of $2.35 and $3.00 per share,
respectively, for total proceeds of $12,500,000 prior to share
issuance costs of $884,000. The tax effect of the renouncement was
recorded in 2006 when the related expenditures are renounced.
ii) In accordance with the terms of C1's various flow-through share
offerings, and pursuant to certain provisions of the Income Tax Act
(Canada), the Company renounced, for income tax purposes, exploration
expenditures related to the purchases of its flow-through shares
issued in 2004 in the aggregate of $10,000,000.
iii) On July 28, 2006 C1 completed a private placement equity financing to
issue 2,666,668 common shares on a flow-through basis at a price of
$1.50 per share for total proceeds of $4,000,000 prior to share issue
costs of $0.2 million (net of future tax benefit of $0.1 million). The
tax effect of the renunciation will be recorded in 2007 when the
related expenditures are renounced. The funds must be expended by
December 31, 2007.
iv) In accordance with the terms of C1's various flow-through share
offerings, and pursuant to certain provisions of the Income Tax Act
(Canada), the Company renounced, for income tax purposes, exploration
expenditures related to the purchases of its flow-through shares
issued in 2005 in the aggregate of $2,500,000.


Number of
Performance Shares shares Amount
----------------------------------------------------------------------------
Balance at December 31, 2003 and 2004 (i) 1,344,000 $ 13
Conversion into common shares (25,335) -
Redemption upon termination of services agreement (ii) (140,665) (1)
----------------------------------------------------------------------------
Balance at December 31, 2005 1,178,000 12
Conversion into common shares (176,666) (2)
----------------------------------------------------------------------------
Balance at December 31, 2006 1,001,334 $ 10
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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).
ii) The Company terminated a services agreement with Navigo Energy Inc.
("Navigo") whereby certain administrative services were performed for
C1 by Navigo. As a result, certain performance shares that were issued
to Navigo employees did not vest and were redeemed by C1 as the
individuals were no longer service providers to C1.


Contributed surplus Amount
----------------------------------------------------------------------------

Balance at December 31, 2004 $ 699
Stock based compensation 678
Exercise of options and conversion of Performance Shares (22)
Expiry of warrants 17
----------------------------------------------------------------------------
Balance at December 31, 2005 1,372
Stock based compensation 330
Conversion of Performance Shares (103)
----------------------------------------------------------------------------
Balance at December 31, 2006 $ 1,599
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 included in stock-based compensation expense (2006 - $128,000, 2005 - $184,000).

The Company has a stock option plan (the "Plan") under which options to purchase common shares of the Company have been issued to employees, officers and directors. Under the Plan, all options awarded have a maximum term of five years, and vest over three years on the basis of one-third per year commencing with the first anniversary of the grant. The Plan, including the number of shares issuable upon the conversion of our Performance Shares, has a maximum number of shares reserved equal to 10% of the outstanding common shares. Total activity related to the Plan was as follows:





Weighted
Number of Average
Stock options Options Price
----------------------------------------------------------------------------

Balance at December 31, 2004 625,000 1.83
Granted 732,410 2.29
Exercised (22,000) 2.50
----------------------------------------------------------------------------
Balance at December 31, 2005 1,335,410 2.08
Granted 456,667 1.55
Expired (467,700) 2.08
----------------------------------------------------------------------------
Balance at December 31, 2006 1,324,377 1.89
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Additional details on the Company's stock options outstanding at
December 31, 2006 are as follows:

Exercise Price Contractual Life
($/share) Number of Options (years) Options Exercisable
----------------------------------------------------------------------------
1.40 157,000 4.47 years -
1.62 258,000 4.45 years -
1.70 41,667 4.61 years -
1.75 250,000 2.88 years 166,667
1.91 175,000 2.46 years 116,667
2.31 442,710 3.25 years 147,570
----------------------------------------------------------------------------
1.89 1,324,377 3.50 years 430,904
----------------------------------------------------------------------------
----------------------------------------------------------------------------



The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model. This value is amortized over the life of the options and is included in stock-based compensation expense (2006 - $202,000, 2005 - $494,000). The weighted average fair value and assumptions are as follows:




Stock options 2006 2005
----------------------------------------------------------------------------
Weighted average fair value of options granted $ 0.52 $ 0.85
Risk-free interest rate 4.5% 4.0%
Expected lives (years) 3.0 3.0
Expected volatility 55.2% 50.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------


6. NET INCOME (LOSS) PER SHARE

The number of shares used to calculate the diluted net income (loss) per share for the year ended December 31, 2006 included the weighted average number of C1 common shares outstanding of 34,207,544 plus nil shares related to the dilutive effect of the conversion of Performance Shares and stock options (2005 - 30,514,138 plus 1,054,782 shares, respectively).

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:



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

Asset retirement obligations, January 1 $ 996 $ 536
Liabilities incurred 294 350
Settlement of liabilities (108) (150)
Disposition of liabilities (20) (70)
Accretion expense 110 86
Change in estimates 301 244
----------------------------------------------------------------------------
Asset retirement obligations, December 31 $ 1,573 $ 996
----------------------------------------------------------------------------
----------------------------------------------------------------------------


At December 31, 2006, total future asset retirement obligations are estimated to be $6.2 million (2005 - $6.0 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 2015 to 2025 and those related to facilities are expected to be settled up to 2039 with all being funded from general corporate resources at the time of settlement.

8. INCOME TAXES

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



2006 2005
----------------------------------------------------------------------------
Future income tax asset (liability)
Property and equipment $ 1,125 $ (2,991)
Asset retirement obligations 456 335
Attributable Canadian Royalty Income benefit
("ACRI") - 436
Share issue costs 462 616
Other (46) (17)
----------------------------------------------------------------------------
1,997 (1,621)
Future tax benefits not recognized due to
uncertainty of utilization (1,997) -
----------------------------------------------------------------------------
Net future income tax asset (liability), December 31 $ - $ (1,621)
----------------------------------------------------------------------------
----------------------------------------------------------------------------



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:




2006 2005
----------------------------------------------------------------------------
Income (loss) before taxes $ (22,443) $ 1,613
Income tax rate 34.5% 37.6%
Expected income tax expense (recovery) (7,743) 606
Increase (decrease) in taxes resulting from:
Crown royalties (net of ARTC) 137 370
Resource allowance (118) (358)
Stock based compensation 113 255
Recognition of ACRI - (436)
Goodwill impairment 2,267
Other (210) 5
Future tax benefits not recognized (recognized) 3,138 (1,042)
----------------------------------------------------------------------------
Income tax expense (recovery) $ (2,416) $ (600)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

2006 2005
----------------------------------------------------------------------------
Canadian oil and gas property expense $ 13,334 $ 12,891
Canadian development expense 8,113 8,699
Canadian exploration expense 17,813 15,444
Foreign exploration and development expense 185 205
Undepreciated capital cost 10,373 8,065
Non-capital losses carried forward 9,179 4,246
Share issue costs 1,501 1,761
----------------------------------------------------------------------------
Total available tax pools $ 60,498 $ 51,311
----------------------------------------------------------------------------
----------------------------------------------------------------------------



9. FINANCIAL INSTRUMENTS

The carrying value of the Company's cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and bank loan approximates their fair value due to the short term nature of these balances and the floating rate of interest on the bank loan.

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:



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

Accounts receivable $ 1,159 $ (1,221)
Prepaid expenses 163 (140)
Accounts payable and accrued liabilities (3,732) 2,732
----------------------------------------------------------------------------
Change in non-cash working capital $ (2,410) $ 1,371
----------------------------------------------------------------------------

Operating activities $ (1,595) $ (443)
Investing activities (815) 1,814
----------------------------------------------------------------------------
Change in non-cash working capital $ (2,410) $ 1,371
----------------------------------------------------------------------------


There was $713,000 of interest paid during the year (2005 - $28,200). $21,000 of capital taxes were paid during 2006 (2005 -$nil).

11. COMMITMENTS

In February 2006, C1 entered into a lease agreement for office space. The lease begins in April 2006 and continues for a period of five years. C1 has the following obligations for rent and estimated operating costs:



2007 2008 2009 2010 2011
----------------------------------------------------------------------------
$ 321,000 $ 328,000 $ 337,000 $ 339,000 $ 85,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------


C1 closed a flow through share offering on July 28th, 2006 and is committed to spend $4.0 million before December 31st, 2007 on expenditures qualifying as Canadian exploration expenses.

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.

12. RELATED PARTY TRANSACTIONS

During 2006, $100,800 was paid to a director for consulting services provided to the Company.

13. SUBSEQUENT EVENT

In January 2007, C1 announced that it has engaged a financial advisor to assist the Company in exploring strategic alternatives to maximize shareholder value. Such alternatives may include the sale, merger or takeover of the Company, or the reorganization or restructuring of some or all of the Company's properties, or any other alternatives that are considered to be in the best interest of C1 shareholders.

Contact Information

  • C1 Energy Ltd.
    Donald Wood
    President & CEO
    (403) 232-1115 ext 105
    or
    C1 Energy Ltd.
    Gary Lobb
    Vice-President, Finance & CFO
    (403) 232-1115 ext 106
    Website: www.c1energy.ca